Monday Message Board

Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please. If you would like to receive my (hopefully) regular email news, please sign up using the following link


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63 thoughts on “Monday Message Board

  1. Sometimes Homer….you infuriate, The problem you (and Smith9) mention is related to the failure to tax wealth or income from superannuation. We are discussing the tax treatment of dividends which is something else. If you don’t like unequal wealth that can be disposed of “as income” then tax superannuation, income from superannuation or wealth appropriately. But that is not being discussed here. Perhaps it should!

    For people earning around $18,200 annually the proposed change to imputation is regressive since those above this level get the full imputation benefit while those at or below it do not.

    The type of nonsense from Homer and the confused blustering from Svante, Smith9, chrishod et al mean this policy change will get through. It is dumb policy that does not target what is at the back of the minds of those supporting it. But even among the economics literate few will entertain a simple argument about the nature of company taxes if it offends their political loyalties. Invent any side issue – intent of policy, definition of profits whatever to conceal the simple fact that companies tax dividends at the marginal tax rate of shareholders and that the normal laws of a progressive tax system apply.

    Chris Bowen will introduce an unfair policy that survives policy debate because of the contrived smokescreen and complexity that Labor supporters and the unthinking push. Apart from being unfair policy it is dumb because the underlying inequality objectives that you can see underlie wrong views are not well addressed.

  2. It seems to me that if all the cases arise out of “people with low taxable incomes but substantial effective incomes”, that the problem is more to do with the definition of taxable income as such rather than the specific rebates here.

    [actually, my go-to case is a small incorporated contractor, who might have a real income of 50k, a substantial fraction of which might be dividends.]

  3. actually, my go-to case is a small incorporated contractor, who might have a real income of 50k, a substantial fraction of which might be dividends

    To put some numbers on, suppose an incorporated contractor has the choice of paying himself his last $100,000 of income as salary, or he can take it as a profit, pat company tax and pay himself a dividend out of the after tax profit.

    If he pays it to himself as salary, and is in the highest personal tax bracket he pays $47,000 in tax leaving him net with $53,000.

    If he takes it as profit and pays the after tax profit as dividends to his SMSF that owns the shares in his company, the SMSF gets $72,500 in dividends and $28,500 in franking credits, and gets cash back of $13,500, leaving him (his SMSF) net with $86,000.

    Under the Labor policy, he’ll be left net with $72,500, still far above what he’d have if he took the money as salary.

  4. Bob, if assesment of your $20k tax liability already included the $7,199 franking credits then your tax stands at $20k. If it didn’t, then the $20k is still to be reduced by the $7,199 franking credits: 20000 – 7199 = 12801. In either case all franking credits are used up, and nil excess franking credits remain.

    Much of the confusion arises from deliberately sown fear, uncertainty and doubt: FUD.
    https://en.wikipedia.org/wiki/Fear,_uncertainty_and_doubt

  5. Harry you are confusing taxable income with actual income.
    As I have shown even on very conservative assumptions you would have people having an annual income of $87k yet pay no tax in fact get a negative income tax.That is the epitome of a regressive tax.

    It is indeed welfare for the wealthy

  6. “welfare for the wealthy”…

    Whereas:
    “Over 2000 people died after receiving Centrelink robo-debt notice, figures reveal” https://www.abc.net.au/triplej/programs/hack/2030-people-have-died-after-receiving-centrelink-robodebt-notice/10821272

    http :// http://www.legalaid.vic.gov.au/about-us/news/i-have-duty-were-challenging-centrelinks-robo-debt-process
    “Victoria Legal Aid will argue that Centrelink’s approach to estimating whether someone has been overpaid falls well short of what the law requires. The basic Australian Taxation Office information [notably commencement and cessation of employment dates that the ATO is not mandated by any law to ask for just as employers are not obliged to provide, nor provide accurately] Centrelink uses and the crude calculations it does, do not provide a basis for assessing what a person actually earned, or whether they were overpaid. The legal argument is that a debt to Centrelink can’t lawfully be imposed based on such numbers and processes…”

  7. So, to answer Collin Street’s question, why is refunding excess franking credits a bad idea?
    Structurally, it’s generally a bad idea to refund excess tax offsets of any kind if they aren’t directly for costs of earning income; refunds attract artificial structuring, and middlemen clipping the coupon to take as much of the refund benefit as possible.
    With refunds of excess franking credits, we know they mostly go to wealthy people. That is, most who get refunds are wealthy, and most refunds in total go to the wealthy. They are another element in welfare disproportionately for the rich.
    And refunds of excess franking credits are part of really bad retirement policy. Across the whole area, we now give more in tax benefits supposedly for retirement income to people who aren’t taking that income than we give to pensioners who are actually retired.
    That isn’t because of the cheese paring of pension entitlements, or because the pension cost is dropping. It’s because of the continuing inflation of the tax benefits supposed to be for retirement incomes.
    Excess franking credits have some role in schemes to access the pension. But their main role is in avoiding ever paying out assets like SMSFs to provide retirement incomes. Excess franking credit refunds allow larger retirement advantaged savings to accumulate and grow, not for retirement income or pension replacement, but for large inheritances themselves structured to be paid out tax-advantaged.
    Excess franking credit refund is not the only way retirement tax benefits are directed away from retirement and towards accumulated wealth and inheritance. But the franking credit refund is a really important part of most strategies to that outcome. And it’s an important part of providing complex tax evasion strategies for middlemen to sell.

  8. Recently Glencore came out with a statement that they would be limiting production to meet with concerns over climate change. Others say this is merely a clever and cynical stunt to keep the $coal high.

    Michael West recounts the degree of spin and lobbying that Glencore employ to maintain market dominance;

    ‪https://www.michaelwest.com.au/glencore-media-battles-and-the-pitfalls-of-fighting-a-multinational/

  9. To reinforce the discussion about refund of excess franking credits, here’s a member of the Tax Institute commenting to its newsletter TaxVine:
    ‘Member 23 writes:

    In TaxVine 1 (18 January 2019), Bob Deutsch requested feedback in relation to LAbor’s proposals for the upcoming elections. Here is my feedback in relation to the imputation credits proposal.

    Originally imputation credits could only be used to reduce an individual’s tax.

    It was a non-refundable credit.

    In the midst of the greatest mining boom in Australia’s history the government of the day purchased popularity in a number of ways.

    One of these ways was to make imputation credits refundable.

    This was not a problem at the time as the coffers were overflowing with export dollars.

    No thought was given to a post boom (all booms end) scenario when excess becomes unsustainable.

    In 2001 the government did not owe $600 billion.

    The government is borrowing to pay many entitlements. By forfeiting tax on company profits it could be argued that we are borrowing to make up the shortfall caused by refunding company tax.

    Why the system WILL change

    Australia’s population is getting older.
    The birth rate is getting lower.
    Education goes for longer and longer
    The ratio of 21-year old’s to retirees is lowering
    Retirement is occurring earlier
    Super now compulsory
    Account based pension members are increasing
    People are living longer
    As more and more people acquire allocated pensions more and more company tax will be refunded to individuals.

    The country will simply not be able to continue its current spending with an every-increasing number of dollars being forfeited by way of imputation credits.

    Questions

    Q Can the withdrawal of refundable imputation credits be considered a new tax?

    A No as the investor can still use the refundable credits to reduce or eliminate tax.

    Q Will the legislation go through?

    A Definitely yes… it may be the next month or next year, or in 10 years’ time (whoever is in power). It is a mathematical certainty that it will have to come in eventually.

    Q What is the main aim of the imputation credits?

    A To stop the same dollar being taxed twice. The cash refund of imputation credits means that the dollar is not even taxed once.

    Q Are shareholders really affected?

    A Not as much as made out to be. When an investor buys shares in a company that pays unfranked dividends the purchase price will be $x. When an investor buys shares in a similar company that pays franked dividends the purchase price will be $x plus.

    In other words, one outlays more capital to acquire a higher income stream.

    A good government would bring in legislation irrespective of the consequences.

    The problem is that a good government needs to be an unpopular one.

    Unpopular governments do not get re-elected.

    Disclosure of interests

    I am currently working however being over 65 I have an account based pension that provides refundable imputation credits.

    It suits me for the proposed legislation not to be enacted but for the good of the country the proposed legislation should be enacted.’

  10. Modelling. Scary! When will we get this right? And get that crappy propaganda organisation to print facts or at least all sides.

    Prompted by the guardian today:
    “Secondly, the way economic modelling results are presented is very important. Industry groups in particular like to attach themselves to particular results and scream that thousands of jobs will be lost, or wages will be slashed. This is designed to scare people into not acting on climate change by making them feel insecure in their lives. The headlines in the Australian did just this. ”
    https://www.theguardian.com/commentisfree/2019/feb/21/australian-headlines-are-designed-to-to-scare-people-into-not-acting-on-climate-change

    We took until 2008 to do ‘real’ modelling. ** see below.

    We are a first**! And “more than one dimension! Anybody. Please. Tell me when this type of ‘modelling” was first used – when algebra was invented? JQ’s fingers must be down to the bone.

    D Gruen then procedes to pin a tail on a dead horse, although in fairness, it was being propped up by another horse called ‘Vested Interests’. And then  commits the sin of a straight line projection “growing at 4 per cent per year.” yet goes on to detail scenarios. I’m not a model maker but a good driver and I love scenarios. On to the dead horse…

    **”The Economic Costs of Reducing Greenhouse Gas Emissions: Understanding the Treasury Modelling1
    Presentation to a CEDA National Forum
    David Gruen
    Executive Director
    Macroeconomic Group
    The Treasury
    11 November 2008

    “This is a first for Australia. Previous studies have generally focused on one dimension in isolation from the others. But the links are crucial.”

    “Appendix: Carbon Capture and Storage (CCS) Technology Costs

    “The modelling finds that CCS for coal in Australia is deployed when the emission price reaches a value in the range $45-$80/t CO2-e (Australian dollars, 2005 prices), growing at 4 per cent per year. (The exact initial price within this range varies by scenario.)””
    http://archive.treasury.gov.au/documents/1439/HTML/docshell.asp?URL=David_Gruen_CEDA_Speech_11_November_2008.htm
    End **

    And our host:
    https://johnquiggin.com/2019/01/03/energy-in-2019-dead-horse-roundup/
    ““Clean coal” is a deliberately ambiguous term, encompassing carbon capture and storage, which would eliminate CO2 emissions, if only it worked, and ultrasupercritical or “High Efficiency Low Emissions (HELE) technology, a marginal improvement on existing technology.

    CCS was an obvious dead horse a year ago, and nothing has changed that. “

  11. So, to answer Collin Street’s question, why is refunding excess franking credits a bad idea?

    So. I’ve looked over your arguments and I find them extraordinarily weak. There are essentially three claims:

    + there is a general principal against refundable tax credits because they are rortable
    This is a credible position and I’ll give you credit for it. However… it’s significantly weakened by your failure to discuss GST input credit refunds, which suggests either that you hadn’t thought about them or didn’t want to apply this principal to them; this rather weakens the strength of your “principal”.
    + people who receive franking credits are wealthy and deserve to pay higher tax
    This is erroneous in two respects,
    firstly, the law applies to “all” rather than “most” and needs to be written so that it gives acceptable outcomes in all cases;
    secondly, according to general tax law their income is in fact low, not high, and if there’s a problem with the way taxable income is defined it’s — obviously — better to examine the definition of taxable income rather than carving out an exception that vaguely targets some of the people in the category you’re proposing to increase the tax on
    + too many tax benefits go to retirees and we should cut them back; many retirees use this rort and it’s
    to which pretty much the same objections apply as above.

    So: your second claim is Bad: it has severe logic gaps that cast doubt on your credibility [to retrieve it you need detailed modelling to show that overall the impact is positive; private citizens basically can’t get access to the information needed to do this. And you should have known this and hedged the claim [“I believe that modelling will show”] before you made the claim to show that you knew what the flaws were. It’s not just a matter of being ultimately correct; showing that your intermediate in-process claims don’t have obvious huge flaws is also a big part of credibility here]

    Same with the third; it may in fact be the same underlying claim as the second.

    Your first claim is logically sound, but because you haven’t showed the application of your principal in other, obvious, areas, it rings kind of hollow.

    About a C grade?

    Probably best to think about this for a few days; like any sort of negative feedback your initial reaction will probably be some variety of angershame, which is fine and understandable, but… not helpful if expressed?

    [thinking is a learned skill; that’s why they made you write all those essays in high school, to teach you by showing how you could do better.]

  12. Collin Street seeks to grade my comment, and to warn me from a response without taking time to cope with my anger and shame. I don’t think I need to wait for the day and a half it took him to respond.
    However, Street has disregarded the views of the chartered tax advisor I passed on above.
    And Street has not responded to what I said.
    “Structurally, it’s generally a bad idea to refund excess tax offsets of any kind if they aren’t directly for costs of earning income; refunds attract artificial structuring, and middlemen clipping the coupon to take as much of the refund benefit as possible.”
    Here I have stated a principle briefly – but in terms that make clear why it would not apply to refund of GST input credits. (These are available only for acquisitions that are for the purpose of making taxable supplies, and only to the extent that acquisitions are for that purpose.) I do not agree that it was necessary to catalogue every tax offset of every kind and discuss the application of the stated principle to it.
    I did not say “people who receive franking credits are wealthy and deserve to pay higher tax”. I did not say “too many tax benefits go to retirees and we should cut them back”.
    I did say, as an initial observation, first, that wealthy people get most refunds of excess franking credits and that most of the value of refunds goes to them, providing a tax benefit disproportionately to the rich. This matters because excess franking credits are an important and substantial mechanism by which our retirement income concessions are used, not to provide retirement income, but to provide tax-enlarged inheritances themselves collected tax-advantaged.
    Street objects that these wealthy people have low incomes. I don’t think that is necessarily so and I think it is largely irrelevant; certainly it wasn’t part of my comment. True, manufacturing very low taxable incomes for the wealthy is a common part of pension maximisation strategies, and excess franking credit refund is usually part of those strategies. That is objectionable. But that isn’t suggested by me as the main reason to end excess franking credit refund.
    “Excess franking credit refund is not the only way retirement tax benefits are directed away from retirement and towards accumulated wealth and inheritance. But the franking credit refund is a really important part of most strategies to that outcome. And it’s an important part of providing complex tax evasion strategies for middlemen to sell.”
    When I said that, I meant that these were reasons why ending excess franking credit refund is good policy and has good effects. I doubt there are any undesirable effects that cannot be dealt with easily and cheaply, compared to the adverse and very expensive effects of refunding excess franking credits.

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