Raja Junankar

Youth unemployment rates (for 15-24 year-olds) in Australia have been increasing steadily since the global financial crisis (GFC), reaching a new high of 13.9% in February 2015, the highest since 1998.

Business lobbies and some politicians argue youth unemployment is high and rising because of high wages.

But, as I argue in my forthcoming paper in the Economic and Labour Relations Review, if we look at the evidence we see that youth unemployment rates have been rising even though youth wages have been falling relative to adult wages.

Australian Bureau of Statistics (ABS) figures for the period 1978-2014 show that unemployment rates of young people have tended to rise in line with, but more rapidly than, adult unemployment rates.

Young people aged 15-19 have consistently had very high unemployment rates, compared with 20-24 year-olds, and compared with adults (25-64 year-olds).

The figures suggests that whatever is driving adult unemployment is also driving youth unemployment.

The main factor driving the growth of adult unemployment (especially since the GFC) has been a slowdown in the growth of aggregate demand. This has led to a growth of both adult and youth unemployment.

Youth unemployment is more sensitive to the business cycle since a high proportion of young people work in part-time and casual work and in industries such as manufacturing, construction and retail trades which are most affected by a fall in aggregate demand.

During a downturn young people often end up on the receiving end of the “last-in-first-out” rule. They are almost certainly recent employees and if they are casual or part-time, employers do not have to pay them redundancy payments.

When the economy picks up, young people find it difficult to find a job since they have little or no experience, and so they may be at the end of the hiring queue.

Almost one-quarter of youth unemployed have been so for one year or longer. Considering they have only been in the labour force for a very short period that is a very high proportion.

If we look at under-utilisation rates (the unemployed, plus the underemployed, plus the marginally attached to the labour force), we see that female youths (15-24) presently have under-utilisation rates of almost 32%, while males do marginally better at 28%.

But is this long-term rising trend in youth unemployment attributable to high youth wages?

To evaluate the claim of a causal link from youth wage levels to youth unemployment rates, it’s necessary to investigate the movement of youth wages relative to those of adults.

It’s also useful to examine the behaviour of the minimum wage relative to average weekly earnings (AWE), and the movement of the replacement rate (ratio of unemployment benefits to AWE).

Let’s focus on the male youth unemployment rates. Male youth unemployment rates are generally higher than female rates. Women have lower participation rates and employment rates, but they follow similar trends.

ABS figures for 1990-2012 show that youth wages relative to average weekly earnings have been stable or falling for most of the period while youth unemployment rates have been rising. So rising wages cannot really be the reason for rising youth unemployment.

Another often quoted argument for the high and increasing youth unemployment rates is that overall minimum wages in the community are too high.

But trend data from 1998 to 2012 shows real minimum wages have been almost constant for the past decade. Yet unemployment rates have been rising.

Similarly, the replacement rate (the ratio of unemployment benefits to AWE) for young people had been falling since 1997, however, youth unemployment rates post-GFC have been rising.

The proposed policy of the Abbott government to restrict unemployment benefits to young people (under 30 years of age) for the first six months of unemployment would have serious consequences for the young.

There is no evidence to support the view that youth unemployment is caused by high wages or by high unemployment benefits.

Raja Junankar is an honorary professor at the Industrial Relations Research Centre at UNSW Business School. A version of this post appeared on The Conversation.

Chris Styles

When I speak with business leaders they often express a great deal of frustration with the present political process. A plethora of reviews and inquiries, but not much effective action.

Short-termism is a key problem. Press release of the day, poll of the week, and annual budgets appear to be driving the political agenda. The focus on the federal budget in particular has had an almost paralysing impact.

But budgets aren’t strategies. Budgets may have been used as the key planning tool in the 1950s and 60s, but this is 2015 and we need to think more strategically about the next 10-20 years in a rapidly changing landscape.

Catherine Livingstone, president of the Business Council of Australia, has called for a decoupling of the strategic conversation about reform on the one hand and the budget on the other.

She was quoted in The Australian, saying: “We don’t have a long-term plan. And even if we had a long-term plan, the process we have now for implementing it means we are using the budget as a tool it was never designed to be.”

Confusing a budget with a strategy is not uncommon (particularly in the public sector), but this practice leaves an organisation without direction.

Indeed, the only thing a budget in a vacuum provides is guidance on how much to spend on what, with a best guestimate of how much revenue will be coming in. Hardly a long-term strategic plan.

An organisation’s approach to strategy can be likened to the evolution of strategic planning itself.

In the 1950s/60s, budgeting was in fact the key tool used in planning. Environments – both external and internal – were viewed as relatively stable. Last year’s financial position, plus a linear extrapolation based on past years’ trends, were a good estimate for next year. The resulting numbers became the plan, and off we went.

The 1970s/80s saw greater environmental turbulence, both at the macro (for example, oil price shocks) and at the industry level. Focusing internally and preparing mechanistic budgets based on past trends proved unhelpful in this new world.

Instead, the idea of “fit” between the external environment and the organisation became the focus. Key questions were around which environments (such as, industries) were most favourable for the organisation, and what should the organisation do to succeed in those environments.

The management consulting industry came into its element and with tools such as the BCG matrix and Porter’s Five Forces. Global corporations from GE to airlines embraced the new strategy world with vigour.

In the 1990s we saw another shift. The idea that the environment was a given, and that an organisation should adapt to it, was challenged. If an organisation could acquire, harness and develop the right capabilities and assets it could influence the environment – indeed, disrupt it.

Dell challenged the staid PC market, Häagen-Dazs shook up a rather bland ice-cream market, and new tech firms created new markets.

More recently, strategists have focused on dynamic capabilities and strategic agility.

Strategy academics Yves Doz and Mikko Kosonen in their book, Fast Strategy (Wharton School Publishing, 2007), refer to three levers for strategic leadership under this new paradigm.

First, strategic sensitivity: seeing and framing opportunities in new insightful ways.

Second, resource fluidity: mobilising and redeploying resources rapidly and efficiently.

And finally, leadership unity: whereby senior management teams make tough collective decisions that they stick to and which get implemented.

What would the political and national landscape look like if the government were more Doz and Kosonen than “budget = strategy”?

Rather than budget night being full of surprises and announcements, it would likely spark debate about whether the allocation of taxpayers’ money reflected in the budget was consistent with, and supported, the government’s long-term strategy.

And elections would focus on debates around leadership teams, tough decisions and the ability of each side of politics to see and create new long-term opportunities for the nation.

A far cry from the expediency of short-term governments and the recent trend of revolving leadership.

Professor Chris Styles is the dean of UNSW BusinessSchool.

Jeffrey Knapp

In the week after Easter, the Senate inquiry into corporate tax avoidance took evidence from a selected number of multinationals, including Google, Microsoft, Apple, Glencore, Adani and News Corp.

The inquiry didn’t pull these company names out of a hat. Rather, the companies have a reputation for engaging in aggressive corporate tax minimisation strategies. The inquiry asked them to explain the complex (legal) accounting and corporate structures they have used to minimise the tax they pay in Australia.

News Corp’s use of such strategies came to my attention after the Australian Taxation Office (ATO) took issue with related party transactions that created billions of dollars of foreign currency losses in Australia with offsetting foreign currency gains in Bermuda.

The ATO challenged the legitimacy of the deductions for these losses but was defeated in a final court case in July 2013. News Australia Holdings emerged with a tax refund of A$623.8 million together with interest of A$215 million.

In light of this case, I decided to calculate how much income tax the News Australia group has paid in the past decade. I obtained the annual financial reports of News Australia Holdings Pty Ltd for all years since its incorporation covering the 10-year period 30 June 2005 to 30 June 2014.

This publicly available information from our corporate regulator, the Australian Securities and Investments Commission, set me back A$380.

In Australia, checking the corporate accounting disclosures of billion dollar multinationals is a very costly exercise. It feels as if the government prefers the financial affairs of these companies not be publicly known.

According to my calculations, the net cash outflow of News Australia Holdings for corporate tax over 10 years amounted to A$326.4 million, or just 4.7% of operating cash flows before tax. On Easter Monday, my calculations appeared in Fairfax Media print and online publications.

Last week, News Australia CEO Julian Clarke sat at the Sydney Senate inquiry hearing and described my calculations as “absolute nonsense”, “hopelessly wrong” and “does not make any sense”.

I was publicly discredited before senators and afforded no right of reply – but that’s politics.

Given the choice of being transparent and chastened about its previous tax avoidance activities or discrediting an academic critic, News Australia can be expected to pursue the latter course of action.

My calculations covered a 10-year period, News Australia representatives presented their calculations which covered five years. They did not disclose the corporate taxes paid over 10 years. They did not explain why my calculations were wrong.

News Australia’s calculations appear to be internally inconsistent. Some amounts agree to the financial reports of the holding company while others do not. Their calculations also conflate corporate tax and withholding tax and omit the financial effect of the tax refund received in late 2013.

In the moment of my discrediting at the Senate hearing, it occurred to me that I shouldn’t have to be a lone voice on the corporate tax paid by News Australia.

If the information was genuinely available in the public domain, then anyone – including a senator – could do the sums and a public consensus view would inevitably arise.

At the same time of this revelation, I felt indirectly confronted by the effects of two persistent public messages about tax and responsibility.

The first is the “debt deficit disaster” slogan – a mantra that has been repeated in parliament for the past 12 months. This slogan has been the predominant political discourse intended to train individual taxpayers into accepting paying more tax or receiving fewer benefits in future.

The central tenet of the debt deficit disaster slogan is that mugs with wages and salaries but without access to Bermudan wealth transfers have to pay more for doctor visits, education, petrol or something else and expect less when they retire.

There has been a somewhat different echo coming from our federal parliament for businesses and corporations: “cut red tape”.

This slogan suggests that regulations stymie business activity, regulations are an unnecessary impost on companies, or regulations are for fools and don’t really matter.

The red tape slogan conveys the message that regulations are bad, therefore it is reasonable for businesses to avoid corporate tax, avoid public transparency and accountability, and avoid disclosures wherever possible. If it can somehow be construed as legal to avoid the regulations, then avoid them.

The central tenet of that slogan for business and companies is that corporate taxpayers can do less and take more. Only a corporate mug would not participate in this avoidance game.

The red tape slogan encourages loopholing, legal form over economic substance, and paying off an industry of avoidance advisers so as to get ahead in corporate tax and accounting affairs.

Unsurprisingly, the debt disaster slogan has failed to gain traction with the general public because the red tape slogan is its corollary. Most individuals I know have no problem helping out mates when times are tough but companies actively avoiding the country’s tax and accounting requirements are not mates.

The real problem is not the debt deficit disaster: it is disclosure. Individual wage and salary earners should not have to pay more or receive less until there is better disclosure of multinational financial and tax affairs.

How is it possible that parliamentarians have little idea about how much corporate tax multinationals are paying and need to call an inquiry to find out? It is beyond ridiculous.

These same multinationals have spent the past decade paying advisers to help them to avoid corporate tax and avoid accounting standards.

The requirements for related party disclosures and other tax relevant disclosures are treated with contempt. For example, paragraph 13 of AASB 1054 Additional Australian Disclosures is routinely ignored:

An entity shall disclose the amount of imputation credits available for use in subsequent reporting periods.

This is not rocket science. Everyone knows that sunlight is the best disinfectant. It is surely time to shine the light on the financial and tax-related information of multinationals.

These companies should be required to prepare general purpose financial statements every year that include details of all subsidiaries, full disclosures of related party transactions and balances, as well as a breakdown of the corporate taxes paid in Australia and other jurisdictions.

These general purpose financial statements should be freely available for public scrutiny rather than priced out of circulation through exorbitant government fees and charges.

The debt and deficit will continue until the worst of all the disasters is first attended to: the disclosure disaster.

Jeffrey Knapp is a lecturer in the school of accounting at UNSW Business School. A version of this post appeared on The Conversation.

John Taylor

The federal government has floated the idea of lowering the corporate tax rate – arguing the present rate of 30% is not internationally competitive.

The rationale is that globalisation makes capital perfectly mobile and the marginal non-resident investor in Australian companies will go where corporate tax rates are lowest.

At the same time, the government’s Re:Think tax discussion paper identifies some problems with Australia’s dividend imputation system (albeit recognising some of its advantages).

Under the present system, franking credits provide little or no benefit to non-resident investors in Australian companies – because the franked portion of a dividend paid to non-residents is exempt from Australian dividend withholding tax but does not generate a tax offset for them.

The relatively high corporate tax rate is said to deter foreign investors while the dividend imputation system does nothing to attract them.

Cutting the corporate tax rate across the board would be very expensive, although the cost may dissipate over time if the rate cut produced greater economic activity.

Importantly, the cut in the rate would apply to all companies, not just those with non-resident shareholders.

The revenue cost would be mitigated by a change back to a classical system of corporate-shareholder taxation – where corporate profits would be taxed twice.

For closely held domestic companies, a cut in the rate would encourage companies to retain profits as would a move away from dividend imputation towards a classical system or other forms of corporate-shareholder taxation.

Again, the revenue cost would be mitigated if we removed the 50% discount on capital gains, but this would also encourage profit retention unless capital gains were taxed more heavily than ordinary gains to compensate for the advantages of deferral.

If the problem lies in having a competitive tax rate for non-resident investors in Australian companies, why not have a solution targeted at those investors?

Why don’t we extend tax offsets on franked dividends to non-resident investors? The technical reason is that, for many resident taxpayers, tax offsets on franked dividends are refundable.

The prospect of giving refundable tax offsets to non-resident shareholders probably does not have a lot of political appeal – but it would be a less expensive way of giving these investors in Australian companies an internationally competitive corporate tax rate.

The extension of franking credits to non-resident shareholders would reduce the effective Australian corporate tax rate for non-resident investors in Australian companies in a targeted way.

Australia presently imposes withholding tax on the unfranked portion of dividends paid to non-resident investors.

Where the non-resident comes from a country with which Australia does not have a double tax treaty (DTA) the rate is 30%. Where the non-resident comes from a country with which Australia has a DTA the rate can vary between 0%, 5% and 15% depending on the level of investment and the particular DTA.

Currently, Australia exempts the franked portion of a dividend from withholding tax.

Where the non-resident shareholder resides in a DTA country, Australia could provide a targeted reduction in the effective Australian corporate tax rate that applied to the non-resident shareholder by imposing withholding tax on the franked portion of the dividend while allowing a proportion of the franking credit to generate a refundable tax offset for the shareholder.

Because of withholding tax rates in DTAs, to produce an even effective Australian corporate tax rate for investors from all DTA countries the proportion of the tax offset allowed would need to fall with the withholding tax rate.

For non DTA countries, we should continue our present policy of exempting the franked portion of the dividend from withholding tax and not allowing tax offsets. Generally we do not have DTAs with very low-taxed countries or with countries that are not significant trading and investment partners.

If the Australian corporate rate remained at 30%, extending tax offsets for franking credits to non-resident shareholders tapering down as the level of withholding tax decreased would reduce their effective Australian corporate tax rate.

For example, to produce a very competitive 15% effective corporate rate for non-resident investors Australia could, while maintaining its corporate rate at 30%, provide a full tax offset of where a 15% withholding tax applied, a two-thirds credit where 5% withholding tax applied and a half credit where a 0% withholding tax applied.

In all cases the effective Australian corporate tax rate for a non-resident shareholder would be a very competitive 15% at a lower revenue cost than under an across-the-board cut in the corporate tax rate and the benefits of dividend imputation would be preserved for resident shareholders.

John Taylor is a professor and head of the school of taxation and business law at UNSW Business School. A version of this post appeared on The Conversation.

Dale Boccabella and Kathrin Bain

The tax “conversation” Treasurer Joe Hockey is hoping to kick off has quickly moved on to a discussion about the goods and services tax (GST).

Last month’s tax discussion paper reminded us that Australia’s GST rate of 10% is one of the lowest among developing countries, and only just more than half of the OECD average.

It may therefore be tempting for government to take the “easy” approach of increasing the GST rate, which would require less legislative change than making various changes to the GST base.

However, it’s imperative Australia fully debates the GST base broadening issue before reaching for the relatively simpler option of increasing the GST rate on the present base.

A rate increase on the present base would put us in (or at least move us towards) the same category as countries such as the UK, which have a relatively narrow GST base with high rates. It would also run counter to the widely accepted tax mantra of “broaden the base and lower the rate”.

For many reasons, a “narrow base, high-rate GST” is poor tax design. For example, the distortions to production and consumption decisions are magnified because of the greater difference(s) between the taxed and non-taxed items.

In addition, inequities are compounded based on consumers’ spending patterns. It would also put us on the path to replicating the discredited wholesale sales tax, which was replaced by the “superior” GST.

GST systems are designed to tax private final consumption expenditure (PFCE). But if only a portion of PFCE is taxed, the whole point of a consumption tax is significantly undermined or compromised.

In 2012, Australia’s GST applied to 47% of PFCE. This is lower than the OECD average of 55%. New Zealand’s GST is a stand out, with 96% of PFCE taxed; it is seen as a model to aspire to.

The big untaxed items in Australia’s GST are basic food, financial services (financial services have a nominal amount of tax on them), health, medicines, education, aged care, childcare and water and sewerage.

Each of these has its own reasons as to why they originally were not fully included in the GST base. The inclusion of all these items would move Australia well up into the 90% bracket of PFCE coverage, a very desirable position.

Basic food was excluded due to equity grounds. While health and education have a small equity aspect, the main reason was the challenge of dealing with both private providers (where there is a price signal) and public providers (where there is no price signal).

Given the differing rationales for the original exclusion of each category, it is very unlikely one policy measure (outside or inside the GST) can address all concerns. That means that significant broadening of the GST base is likely to require a number of targeted solutions.

However, the regressive effect of a flat-rate tax applying to more categories of PFCE is a recurring theme. When items are exempted from the GST base, all consumers, regardless of income level, receive the benefit of the exemption.

The tax discussion paper highlights that while lower-income households spend a higher percentage of their income on GST-exempt items, in dollar terms, it is higher-income households that receive the most benefit from GST exemptions.

For this reason, subject to the comment below, compensation through the direct transfer (social security) system is the best method of delivering compensation for the regressive effect of broadening the GST base, rather than dealing with the regressive effect through concessional treatment within the GST base.

The problem with compensation is that many voters (and many politicians) do not have faith in future governments maintaining the level of compensation over the long term.

This distrust was at the heart of the Australian Democrats insistence that basic food be excluded from the GST.

Perhaps the solution lies in a “lock-in mechanism”. There is no doubt the GST rate and base lock-in mechanism has been very effective as a political check on the federal parliament acting contrary to it.

This is in spite of the fact the lock-in mechanism is legally meaningless.

A lock-in compensation mechanism would necessarily be very different to the GST rate and base mechanism. It is very likely a compensation mechanism would not be legally effective because our federal parliament cannot generally bind future parliaments.

But given the political sensitivities around the GST and the categories of PFCE listed above, there is every reason to think that a lock-in compensation mechanism could be politically effective.

Dale Boccabella is an associate professor and Kathrin Bain is a lecturer in the school of taxation and business law at UNSW Business School. A version of this post appeared on The Conversation.

Peter Swan

Last Tuesday, Treasury announced in its discussion paper that the Abbott government was considering amending or abolishing Australia’s tax imputation system.

Since 1987, Australian taxpayers have only been taxed once on corporate income, not the double taxation that investors in many other countries have had to put up with (New Zealand, Chile and Mexico remain the exceptions).

Our franking credit-based tax system has undoubtedly given Australia one of the best and fairest systems of corporate taxation in the world, despite our still very high tax rates.

New Zealand, for example, with the same system as ours has maximum tax rates at about 33%, compared with ours in excess of 47%.

In the same discussion paper, Treasury reports that $19 billion in franking credits is distributed annually to Australian shareholders, with another $10bn paid to companies for future distribution.

Annual dividends to the value of $44.33bn, with grossed up value of $63.33bn, precisely generates the reported franking credits of $19bn at the notional value of 42.86c per dollar of franked dividends.

If the relevant taxpayer is in the modest 37% marginal tax bracket ($80,000-$180,000), the incremental tax presently paid is $23.43bn on this income. Hence, for such taxpayers, the cost over and above franking is about $4.43bn.

If double taxation were reintroduced, the after corporate tax dividend income on which personal tax would be payable is $44.33bn, yielding $16.4bn in incremental tax revenue.

Thus, the total paid on dividend income rises from $23.43bn to $35.4bn ($16.4bn plus the $19bn of cancelled credits) which is an increase in the tax take of 51%. The effective marginal tax rate on dividend income rises from 37% to 56%, a staggering rise of 19 percentile points.

If a person were receiving $100,000 a year in franked dividends and 37% is their marginal tax rate, they would be paying $37,000 per year in personal tax, leaving a modest after-tax dividend income of $63,000.

After the change, personal tax is levied on the $70,000 of after-corporate-tax income, leaving only $44,100 in after-tax dividend income as the marginal tax rate is still 56%.

If the investor is in the 47% marginal tax bracket the devastation is even worse. Their present after-tax dividend income is $53,000 and with the loss of the corporate tax rebate of $30,000 on the gross income of $100,000, their after-tax income falls to only $37,100. The increase in tax is $15,900.

Since their total tax paid is $62,900, the effective marginal rate has risen from 47% to 63%, comparable to France with the world’s highest tax rate on distributions.

In present value terms at the average corporate return of 12.77% per annum, since July 2001 this $19bn annual loss to local shareholders amounts to a decline in value of $148.79bn for franking shares worth approximately $500bn, a potential massive hit to stock values.

The discussion paper points out, correctly, that imputation encourages Australian investors to invest more in Australian stocks and less in foreign stocks than they otherwise would in a world in which inefficient double taxation of dividends is universal.

Given that information is vital for successful investment and that most information is local, the home bias means that both Australian firm and investor returns are higher when more Australians invest locally. Imputation, like aspirin, brings many benefits.

The discussion paper is keen to bring about more foreign investment in Australia by lowering the corporate tax rate. Under imputation, Australian investors gain no benefit from any lowering and, in general, imputation does little to encourage foreign investment.

Here the discussion paper is quite schizophrenic – while wanting more corporate investment in Australia, it would like to remove imputation as this would lower Australian investment in ourselves.

If any tax savings were used to lower the corporate tax rate such that the overall level of investment were preserved, all it would achieve is a worsening of Australian tax efficiency while making most Australian investors worse off.

Unfortunately for all those advocating a massive tax grab of $19bn, revenue gains would soon prove illusory. Australian companies would soon shift their corporate activities and tax base to tax havens. Imputation provides a strong motive to pay tax locally.

When imputation was introduced in 1987, there was a sizeable increase in dividends distributed so as to harness imputation credits. This would soon be reversed if the tax grab lobbyists have their way. Companies with poor investment prospects would invest more in a wasteful fashion, weakening Australia’s investment performance.

Imputation means there is no tax benefit from taking on more debt. Reduced gearing that occurred with the introduction of imputation would be replaced by sizeable gearing-up.

If there is no, or limited, equity capital, there will be no or negligible dividends, but highly indebted companies become much more susceptible to collapse during recessions. Abolishing overtaxed dividends is perfectly legal, and we all pay the costs of corporate collapse.

That $19bn tax grab is soon converted into an additional $19bn in wasteful activities, while the entire corporate sector takes a significant hit from which recovery would be difficult indeed.

Peter Swan is a professor of finance at UNSW Business School. A version of this post appeared in The Australian. All figures are in Australian dollars.