The Rudd government’s proposal to tighten up documentation requirements for the very generous tax concessions provided for people who receive motor cars as a fringe benefit has produced some striking examples of rent-seeking from the Australian right, notably including Catallaxy and the Australian Financial Review. Catallaxy has a string of posts defending this rort.
The Fin gives lots of space to bleating rent-seekers, while imputing to “academics” the opinion that this is a subsidy. I guess that’s fair enough, given that the Fin regards basic science as a matter of academic opinion, while treating the failed dogmas of the 1980s as proven facts. And, of course, the Opposition has promised to oppose the measure, while weaselling out on the question of whether it would reverse the changes if elected.
This really is a test for Rudd. If he wants to refute the oft-repeated claim that he is all spin and no substance, this is his first chance, and one of the best he is going to get.
John Quiggin 
I think it was Bernard Keane on twitter who suggested that if your business model is fundamentally based on tax rorts, there’s little to distinguish you from organised crime.
If requiring documentation of a tax exemption leads to an impact on car sales and job losses in the leasing sector, it either means rorting is happening, or the transaction costs make it not worth the benefit. If completing a log book for 12 weeks is too onerous to make a claim, the benefits to claimants must be pretty minor. Either way there shouldn’t be a fuss.
I can’t see a case against the change – have I missed something? I can’t see any room for manoeuvre -it will be a litmus test of truth-telling for every politician and commentator who opines on this.
There is a relevant though subsidiary issue – I do think that a government has a responsibility to manage the closure of the loophole in a way that doesn’t totally destroy the livelihood of a lot of people. I don’t have sympathy for the business owners of these small companies that were facilitating this rort, but I do have sympathy for their employees, who are pitched out on their ear without warning.
@wilful
Bear in mind that the change hasn’t even happened yet, and may not do so for some time to come. The publicly announced mass sackings look more like a media stunt than a business decision.
@wilful
Not sure how you would do that. I don’t know when the starting date will happen, but I suppose the opposition is after some sort of public inquiry to muddy the waters and allow the rent-seekers time to organise, but a few months delay doesn’t give certainty to employees.
While he’s at it Rudd can remove all fossil fuel subsidies, negative gearing and trust loopholes. I’d better not hold my breath though.
@kevin1 How would you do it? I guess the winding down for the home insulation scheme would be a model – I understand that there was support given for employees of companies that set up and then went belly-up. In the scale of a $1.8bn claw back, it wouldn’t be much to ask.
Moving on… I was heartened and surprised that the letters page of the Herald Sun today was surprisingly in favour of the move. Considering how the page editor chooses his or her sample of contributions, I was a little shocked.
I think that the free market is dead – killed by its alleged advocates.
It seems like a straightforward rort. Apparently, when far more new vehicles purchased were from local manufacturers, it was seen as underpinning the local car industry. These days though, the bulk of cars bought through this means are much smaller than the vehicles made here.
It seems to me that there is always a risk that salary packaging will amount to a rort of the tax system. One can make a case for work-based childcare to be part of a package. Actual expenses are incurred. Childcare facilitates inclusion. And of course, it’s easy to document the connection between the childcare and the work. In some jobs, a motor vehicle might well be critical to doing the job effectively, and if the person also gets to take the car home the ‘perk’ is fairly minor. If the vehicle had to be secured at the premises the costs might be higher.
These days, there are phone apps you can get — some even record your location using GPS — that can facilitate documentation. It’s not going to be onerous. Let those who need vehicles document 100% of their usage. If 90% of use is business-related and 10% is driving home and the shopping or similar — I’d say no problem. If not, let them or their employer pay out of after tax income.
@Fran Barlow
A political danger sign here is if the change affects adversely workers in FBT exempt hospital/charity/NGO/aged care/disability businesses.
Over a long standing period they have been able to salary package up to 30% of their gross income for all sorts of things (credit card, rent etc.), on the grounds that much of the non-profit sector is cashstrapped and disadvantaged in competing against profit sector enterprises in the labour market. These benefits are not required to be work-related and FBT is not paid by the employer as I understand it, so I’m probably going off at a tangent, but worth knowing it exists for large numbers of workers. I presume the packaging of cars is included.
Ken Henry said in his tax review it was a complicated scheme and should be abolished, but “The case for retaining the FBT concession for not for profit Hospitals” is made by Nick Gruen at his lateraleconomics website.
https://johnquiggin.com/2013/03/17/peace-breaks-out-in-ozblogistan/
@Sinclair Davidson What’s your point Sinclair? State your argument.
efficient taxes lead to higher taxes; inefficient taxes lead to a smaller public sector.
In light of the twaddle that Catallaxey routinely generates it’s no surprise that Sinclair is either unable or unwilling to construct a reasonable argument in his favour.
“Time to bring back Turnbull”
Back from where?
@Jim Rose
Thanks for highlighting the difference between libertarians who are wary of government because they genuinely care about people’s welfare, and libertarians who dislike government as a personal preference and oppose measures to make government more efficient because they know that this makes the optimal size of the government larger.
You do realise that this measure is designed to offset a reduction in revenue from another tax, right?
@rog
From his link:
Rather than making a point or argument, I imagine he’s invoking the “treaty”.
Just my guess.
The only rorts Sinclair supports are those which are acted on by the ALP government
@Sinclair Davidson
I don’t think I have gone against my word here. I’m critical of posts on a particular topic, which I regard as being totally inconsistent with the supposed free-market position claimed by Catallaxy (not to mention the Fin and others). I’m not making personal attacks on anyone. However, it was possible to read the original version as an a statement about Catallaxy as a blog (though this wasn’t the kind of thing I was thinking about when I proposed the treaty), so I’ve rewritten it to make it clear that I’m objecting to these particular posts.
While we are discussing treaty violatons, this post pretty clearly implies that, if I’ve endorsed a book, it must be bad – an implication taken up in comments
http://catallaxyfiles.com/2013/07/03/a-history-that-goes-back-about-twelve-months/
Having said that, I must say I was surprised to see this posts. I was expecting silence, or just possibly some criticism of the Libs, but not endorsement of the rort.
I have a friend who has taken advantage of salary packaging at his university. He considers it his duty, because it is such a rort, and the more people exploit it, the quicker it will be repealed. Looks like he got his way – although he never salary packaged a car.
But this is a seriously good move by Rudd. The people defending the rort don’t have much of a leg to stand on, and the vast majority of them vote Liberal anyway. Even more beautiful is that it is the cost of watering down the carbon tax, which is another thing the right wanted. So Kevin gives them what they ask for, and then tells them that they will be paying for it. Nice.
Well put. Is this Clinton’s triangulation?
Rudds PNG boat plan is his Righter than Right lurch to the Right .There is nowhere to the right of that for Tony to shout from . Now there is talk of Malcolm leading the Libs . Is this the two big parties coming together on the middle ground under the force of polling numbers ? Seems like a paranoid, uncaring (racist) middle ground . I would like to think the middle ground has not always been like that and that politics (Howard) actively moved it to the right .
@kevin1
I haven’t heard yet that this is affecting hospital/medical/charity workers where the employer can pay for around $9000 for a variety of things, including credit card bills if I remember correctly. It certainly has been conflated with it by one or two in the media, but to my knowledge they are separate issues.
I have been surprised that there has been such a backlash at this measure from the Government. I must say, I think a lot of the public are broadly supportive of it.
There are some here that insist that the carbon tax is not a tax but merely a price on carbon. If you take this line then switching to an ETS is an administrative adjustment to carbon pricing not a “tax cut”. So why would something that is not a tax cut need to be offset by something that is a tax increase?
Further to this point will later increases in the carbon price under the ETS be offset by reductions in other taxes. And then subsequent increases in carbon price be offset by tax increases. Doesn’t it become a rather ridiculous tail chasing exercise?
@TerjeP
Taxes are a necessary evil in a sense. They pay for government operations though not in the direct, simplistic sense posited by naive neoclassical economics.
It is very common for persons to be in favour of strict overall government budgeting but also in favour special government spending on them and their interests. They should remember they can’t have it both ways.
Given that taxes are a “necessary evil” it makes sense to levy straightforward, easy to administer pigovian taxes wherever possible. So at least you are taxing a “bad” not a “good”.
I’m surprised you see ‘endorsement’ of the rort too. I see a series of posts drawing attention to incompetent implementation and announcing policy on the run. The ALP, including Rudd, have form in this area. I haven’t noticed support for salary sacrificing at all. Indeed both Judith and Samuel have blogged in the past about salary sacrifice rorts. My own policy preference in this area would be to abolish the FBT in total.
Are you saying that ALP critics on this reform are people with novated leases. Let me declare that I do not now, nor have I ever had a novated lease.
@TerjeP
“So why would something that is not a tax cut need to be offset by something that is a tax increase?”
Um, because they’re both forms of government revenue? Although I personally have no problem using the word “tax”, the price/tax can legitimately be viewed as a charge for use of an environmental resource. Either way, it provides revenue for the government, a reduction in which is being made up for elsewhere.
“Further to this point will later increases in the carbon price under the ETS be offset by reductions in other taxes.”
Well, assuming those price increases translate to increased government revenue (in other words, if you’re talking about the re-auctioning of permits), it depends on whether the government at the time wants to increase spending or increase government saving/reduce government borrowing instead.
“Doesn’t it become a rather ridiculous tail chasing exercise?”
It’d be the same if the government was adjusting a carbon tax to target emissions levels. You’d prefer the government not to bother trying to coordinate its taxes and spending programs?
@TerjeP
Not you TerjeP but there are many well-off hypocritical conservatives who love their big rorts but hate seeing poor, unemployed people getting a basic benefit. The conservatives don’t mind welfare for the upper middle class, the rich and the corporations ie. for them. There’s more corporate welfare paid in this country then unemployment welfare. I was drawing attention to this general phenomenon which distorts our economy and makes it the hostage of the monied classes.
@Luke Elford the case against tax reforms are they lead to a larger public sector. the tax reforms so hated by the Left saved the modern welfare state.
studies starting from Sam Peltzman showed that government grew in line with the growth in the size and homogeneity of the middle class that was organised and politically articulate enough to implementing a version of Director’s law.
Director’s law is the bulk of public programs are designed primarily to benefit the middle classes but are financed by taxes paid primarily by the upper and lower classes. Based on the size of its population and its aggregate wealth, the middle class will always be the dominant interest group in a modern democracy.
After the 1970s stagnation, the taxed, regulated and subsidised groups had an increasing incentive to converge on new lower cost modes of redistribution.
Reforms ensued led by parties on the left and right, with some members of existing political and special interest groupings benefiting from joining new coalitions.
More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden on the taxed groups. Most subsidised groups benefited as well because their needs were met in ways that provoked less opposition.
Sweden and Denmark could be examples of Gary Becker’s idea that political systems converge on efficient modes of both regulation and income redistribution as their deadweight losses grow.
Unlike some of their brethren abroad, more of the Nordic Left and, more importantly, the Nordic median voter were more alive to the power of incentives and to not killing the goose that laid the golden egg.
The deadweight losses of taxes, transfers and regulation limit inefficient policies.
Policies that are found to significantly cut the total wealth available for redistribution by governments are avoided relative to the germane counter-factual, which are other even costlier modes of redistribution.
An improvement in the efficiency of either taxes or spending would reduce political pressure for suppressing the growth of government and thereby increase total tax revenue and spending.
reporting things that haven’t happened and quite possibly won’t happen as an unquestioned fact, is standard practice.
the person i spoke of recently, who believed labor was taking peoples’ super, had that info from public broadcasters.
@Jim Rose
For the life of me, I can’t understand what your point is. Economic theory says that the optimal size of government (provision of public goods, redistribution) increases as the efficiency with which the government operates increases. You seem to be saying that this desirable relationship is reflected in outcomes in the real world. Well, that’s great.
@Jim Rose
I’d like to see these assertions subjected to scrutiny and empirical data.
Assertion 1 – “Tax reforms … lead to a larger public sector.”
Response 1 – The Australian and US experience in the last 2 decades or so would seem call into question that assertion. Howard “reformed” taxes with the GST and cut the Australian Public Service. In the US taxes for the rich were cut and a large budget deficit ensued. I am not sure what happened to the US public service at the time though. Now, states and boroughs are seeing their revenue base collapse and many are going bankrupt, like Detroit with an $18 billion default. State and local civil servants are being laid off now.
I guess the assertion turns on what is meant by tax “reform”. More regressive and smaller taxes equal smaller government. Progressive and larger taxes mean bigger government. Jim refers to reforms hated by the left so he must mean regressive reforms. These lead, almost axiomatically, to small government.
Assertion 2. The link between the size of government and the middle class.
Respone 2. This might hold true. One would have to see the numbers. Since the middle class is collapsing in the US and shrinking in Australia (as more and more people are moved to unemployment, under-employment, part-time and low paid work) then government might well shrink too. The richest 1% see the job of government as solely looking after ther richest 1%. You don’t need a big government for that just a bribed and corrupt government.
Assertion 3: The middle class will always be the dominant interest group in a modern democracy.
Response 3: This might be true in most but not all cases. It would also depend on our definition of democracy. The middle classe is no longer the dominant class in the formulation of domestic and foreign policy in the US, if they ever were. The rich 1% are the dominant class. Of course, the way the US runs in practice calls into serious question the issue of whether it is a democracy or not. Much of the right wing in the US are adamant that the US is a republic not a democracy. I agree that it’s a plutocratic republic.
Also, if current trends continue the middle class will become a minor class soon in the US, dwarfed by the lower class. What will that do to US politics one wonders?
Assertion 4: “Policies that are found to significantly cut the total wealth available for redistribution by governments are avoided relative to the germane counter-factual, which are other even costlier modes of redistribution. ”
Response 4: This is not true, since the EU is pursuing policies (austerity or pro-cyclical budgeting) which are cutting the economy and the government take of the economy. These policies suit the richest 1% but cut the total production of the economy. Witness the increasing recession in Europe.
My Conclusion.
Western economies are now being dominated by financial capital not industrial or productive capital. The financial sector is not primarily interested in production only in transferring and appropriating existing wealth and new wealth so far as it is still produced. True production of real goods is being slowly but steadily transferred to the developing economies. Western economies are becoming hollowed out financial shell. Once the financial economy has no real productive economy to feed off, it will collapse spectacularly. Unless we do something to avert this process.
re – the tax break for packaged cars:
In fairness, most of the Catallaxy comments seemed to be about the sudden, unconsultative implementation, not the concept.
To soften the landing for the losers, surely a reasonable way to go would be to legislate an annual change to the statutory fraction over the next few years, ending up at a point where the statutory formula gives no advantage over a logbook.
The reason that people are getting sacked over this even though it isn’t legislated ought to be bleeding obvious but perhaps it needs to be spelt out. The first I heard of this announcement was via a friend in the leasing business making comment on social media. The comment was to the effect that the phones were running hot with people cancelling orders. It is natural that demand should drop if a policy announcement alters the likely benefit of entering such an arrangement. And it is natural that businesses would beginning reducing capacity if demand for their services was collapsing all around them.
In terms of the actual reform I think if you are going to do this sort of thing then there probably is no nice way. Stringing it out over time just prolongs the adjustment process. People still lose their jobs.
Was it a good change of policy? On one level I hate anything that involves the government getting it’s mits on more of our money. But in administrative terms the reform may have some merit. If I was a treasurer axing a carbon tax then I would have sought savings rather than a tax increase. Axing the climate commission would be a nice place to start symbolically but there are plenty of other government program’s that are ripe for abolition.
My main concern though is that future governments will go on tax grabs like this every time the carbon price slumps. A floating carbon price is bad for business but also bad for government. It just introduces volatility needlessly. CO2 emission should fluctuate not the price. After all it is the stock of CO2 in the atmosphere we care about not the flow rate from month to month.
@NathanA
I saw a TV interview with the boss of Selectus, who claimed he would sack 100 of his 200 employees as a result of FBT changes, which I think are purely enforcement rather than legislative changes.A m I wrong? Can someone correct me?
Perhaps the flow (of sal pack applications) is where they get their income, not the stock of existing arrangements. Inferring new applications cut by half (based on TerjeP’s post), this suggests a 50% marginal incidence of rorting.
Kevin1 – it could also be that people don’t like the hassle of keeping log books. The technical term for this is “compliance cost”.
Poor diddums! As a low tax advocate you will defend casual theft from the rest of us?
@TerjeP
Compliance cost here being fines payable, calculated just like any other criminal. Gimme a break.
@kevin1
Minimising tax is not theft.
By definition breaking the law is theft. Do you defend deceitful claims?
In the long term, its good to lose jobs like this. I’m sorry for the individuals, but quite frankly someone who helps you minimise your tax is less useful than the person who makes your macchiato.
Terje, so you have no problem with targeted tax exemptions as an instrument of policy?
Absolutely right, though the latter is even more useful if s/he doesn’t add milk to perfectly good coffee!
Perhaps we should agree on terminology.
Tax minimisation comprises the legal, accepted and generally expected practices for paying the minimum legal tax. Salary packaging (lamentable law and practice though it is IMO) is currently a legal tax minimisation strategy.
Tax avoidance is the practice of seeking loopholes to avoid tax. Whilst not strictly illegal, tax avoidance avoids the spirit and intent of the law.
Tax evasion occurs when taxes are evaded by illegal means.
So TerjeP is legally and even morally correct in the assertion that minimising tax is not theft. It would be over-moralistic to assert that a person is a moral thief for merely minimising tax by legal, common and accepted practice. On the other hand, with regard to tax avoiders, whilst they might escape legal sanction, it is arguable that they are thieves morally speaking. Tax evaders are thieves, legally speaking, once they are convicted.
@Ikonoclast
Fair enough, though I’m not sure I understand your distinction between ‘minimisation’ and avoidance. I believe the Tax Act allows some discretion to rule that some practices are indeed mere contrivances, so perhaps that is what you mean.
As things stand, according to Laura Tingle, the changes merely require documentation once every five years. That doesn’t sound that onerous.
Socialism, or labour activism and unrest, used to called “The British Disease”. The real, underlying cause of that disease was capitalist exploitation of the workers.
Now we have the “American Disease”. This is the disease that promotes low taxes and small government so that the capitalist 1% can get even richer whilst a large proportion of the 99% sink into poverty. This is the contemporary experience of the USA. If we import the American Disease we will crumble as America is crumbling.
Take a look at Detroit. That is where low taxes get you. Society and its infrastructure crumble and decay away. Here are some facts lifted from the internet (Washington Post).
1. The number of people living in Detroit in December 2012 was 684,799. In June 2000, the population was 951,270. The population was 1.8 million in June 1950.
2. In 2011, more than 136,000 crimes were reported in Detroit, according to a recent report.
3. Detriot had an 18.6 percent unemployment rate in 2012.
4. The city has 26 fire engines. It has 35 fire stations that are about 80 years old.
5. Detroit is home to about 80,000 abandoned and blighted structures.
6. Roughly 40 percent of Detroit’s street lights do not work.
7. 47% of Detriot’s adults are functionally illiterate.
8. Detriot has become the largest city in the US to file for bankruptcy. The long term debt is more than $US14 billion and could be between $US17 billion and $US20 billion.
Cities like Baltimore and Chicago appear to be, not next in line, but in line eventually for the same collapse. A number of things are happening here. Yes, changing economic and demographic patterns can lead to declines like that of Detriot but the poor management of it (an unstructured collapse rather than a managed decline and transition) is symptomatic of the American Disease; low taxes, low government spending, low government intervention and permitting the burgeoning poor to become a completely lost underclass. The US is simply breeding future problems for itself. Problems which left to fester only become more costly. I won’t say “to fix” because the US won’t fix these problems now. It will pay the costs in other ways; forgone production, crime, decay and collapse.
Watch the US. That is where low taxes and small government get you. The American success story from the end of the Great Depression was built on high taxes relative to today and big government relative to today.
Something else is also happening of course. The US collapse is also based on corruption, the financialisation of the economy, the export of industries and jobs overseas and on contracting energy and resource supplies. Only large, dirigist government programs could address and correct these issues. While the US avoids that path it has 0% chance of a recovery.
@Luke Elford
I too am having some difficulty grasping Jim Rose’s point, but the general impression I get (perhaps wrongly) is that there is an unstated postulate that in every circumstance it remains true that the government should be smaller than it is. From that postulate it is straightforward to conclude that anything that tends to make government bigger must be bad, but I am not inclined to adopt that postulate.
@J-D
Which would be evidently paradoxical, since you can’t advocate one size/scope of government and then immediately claim that that size is too great. What happens when there is no government at all? Is it still too big?
Perhaps he’s a nihilist.
Fran Barlow, the reforms of Reagan, Thatcher, Blair, Clinton, Hawke and Keating saved the welfare state from bankruptcy.
Improvements in the efficiency of taxes, regulation and spending reduce political pressure to suppress the growth of government and thus increased or prevented cuts to the welfare state.
countries must be rich to have a welfare state. for example, Assar Lindbeck has shown time and again that ‘Sweden became a rich country before its highly generous welfare-state arrangements were created’. See http://www.project-syndicate.org/commentary/the-three-swedish-models
Swedes had the third-highest OECD per capita income, almost equal to the USA in the late 1960s, but higher levels of income inequality.
Sweden moved toward a welfare state in the 1960s, when its government sector was then about equal to that in the United States in size. Sweden was one of the fastest growing countries between 1870 and 1960.
By the late 1980s, government spending grew from 30 percent of gross domestic product to more than 60 percent of GDP. Swedish marginal income tax rates hit 65-75% for most full-time employees as compared to about 40% in 1960.
Swedish economists encountered a new phenomenon they named Swedosclerosis:
1. Economic growth slowed to a crawl in the 1970s and 1980s.
2. Sweden dropped from near the top spot in the OECD rankings to 18th by 1998 – a drop from 120% to 90% of the OECD average inside three decades.
3. about 65 per cent of the electorate receive (nearly) all their income from the public sector—either as employees of government agencies (excluding government corporations and public utilities) or live off transfer payments.
Sweden is a classic example of Director’s Law. Once a country becomes rich because of capitalism, politicians look for ways to redistribute more of this new found wealth to the middle class.