Professor John Taylor                                                        

Two of the policy differences between the major political parties in the 2013 Federal Election are the Coalition’s commitments to a 1.5% cut in the corporate tax rate and to a more generous paid parental leave scheme than the Government’s – to be funded, in part, by a 1.5% additional levy on the approximately 3000 Australian companies with taxable incomes greater than $5 million.

The Coalition has also announced that the additional levy will not generate franking credits for the companies that are required to pay it. This raises the question of what is the likely effect of offsetting a 1.5% cut in company tax by a 1.5% additional levy on large business and is the combination of the two good policy?

Under the Australian dividend imputation system, payments of company tax generate franking credits which can be attached to dividends. For domestic investors, franking credits have the effect of reducing the net amount of tax payable at the shareholder level on dividends. Investors such as superannuation funds, which are taxed at a lower average rate than the corporate rate, reduce their overall tax bill by offsetting excess franking credits against their other tax liabilities. 

Individual self-funded retirees with average rates of tax below the corporate rate can actually receive refunds of excess franking credits. Thus, for domestic investors in listed companies, cutting the corporate tax rate should produce larger after-tax profits for companies, and hence larger dividends, but at same time will produce smaller franking credits.

The end result is that the domestic investor is in much the same position as before. They get a bigger dividend but a smaller franking credit with the result that they pay more tax on the dividend leaving them with the same after-tax dividend as they had previously. 

How does the additional levy of 1.5% on large businesses affect shareholders in those companies? As the tax on those companies will be higher, dividends paid by them might be expected to be smaller. Here the question of whether or not the additional levy generates franking credits for those companies becomes important.

As the additional levy doesn’t generate franking credits, domestic shareholders (such as superannuation funds and self-funded retirees) in larger companies will be worse off. They will be receiving smaller dividends than investors in other companies but will not be receiving larger franking credits.  

Many commentators favour reducing corporate tax rates generally to provide an incentive for foreign portfolio investment (for example, by foreign pension funds) in Australian companies. Australia does not allow most foreign investors franking credits on dividends paid to them but refrains from levying dividend withholding tax on the portion of the dividend funded from profits that have generated franking credits.

This is of little use to foreign portfolio investors which typically do not obtain credit in their home country for Australian corporate (as distinct from withholding) tax on the profits that funded dividends they receive. Hence, reducing the Australian corporate tax rate can provide real benefits for foreign portfolio investments. 

However, the effect of the Coalition’s paid parental leave levy on the 3000 largest companies will negate this benefit for foreign portfolio investors in these companies. As the largest companies are the ones most likely to have access to global financial markets, the likelihood is that the cut in the corporate tax rate will not increase the level of foreign portfolio investment very much, if at all. 

So who will benefit from the 1.5% cut in the company tax rate? The answer seems to be owners of small companies who, with a lower corporate tax rate, will have an increased incentive to retain income rather than distribute it once their average tax rates exceed the corporate rate. 

That does not seem to be a good policy outcome to me.

Professor John Taylor is head of the School of Taxation & Business Law at the Australian School of Business.

Peter Swan

Journalist, Alan Kohler, in The Business Spectator, 31st July, 2013, draws on a peculiar graph produced by investment bank, CLSA, plotting the executive pay of Australia’s top 200 companies against total shareholder return (TSR). The result:  “No relationship whatsoever. The scatter chart for executive pay and return on equity looks exactly the same.” Mr. Kohler concludes, “the time is approaching for industry funds to do something about the pillaging of companies by the executive classes in the name of performance that doesn’t exist.”

At the risk of being accused of exaggerating the danger, if one were to believe these findings, every business in Australia can sack its talented executives, and for that matter, journalists, and replace them by monkeys paid peanuts with no effect on company performance, or journalistic quality for that matter. Every top business in Australia will raid Taronga Park Zoo’s monkey enclosure to recruit CEOs paid peanuts.

Does the question that Kohler poses even make sense? Once the market has absorbed its view of the firm’s management team, including its talent and pay (excessive or otherwise), together with its board and governance system, all these imponderables are reflected in stock price.

Mr. Kohler would probably agree that Steve Jobs was a fantastic Apple CEO. Does this mean that Mr. Kohler earns a high TSR when he purchases Apple stock with Steve as CEO? No! The high stock price already anticipates Steve’s exceptional talent with an extreme market to book ratio.

Surely, both stock price, and TSR that depends on stock price, should fluctuate randomly in an efficient market? This is precisely what Kohler’s graph with no relationship indicates. A scatterplot of TSR and pay levels says nothing about the relationship between executive pay and performance but may indicate market efficiency.

A more meaningful approach to Mr. Kohler’s question is to ask:  are higher-paid executives associated with higher stock prices rather than necessarily higher stock returns? The answer to this question is a conditional “yes”.
Thus, if union-controlled funds remove high-paid executive who systematically “pillage” like marauding Vikings as Mr. Kohler asserts, then union members may well face collapsing stock prices. Would union members like to see retirement benefits plummet? Would they like to see Taronga Park Zoo denuded of its valuable monkey collection in the interests of “cheaper” firm management?

One of the few meaningful company performance measures dubbed Tobin’s Q, after Nobel Laureate James Tobin (he of the Tobin Tax), is the ratio of the market value of total assets to the book value of total assets. This measure overcomes the problems arising from Mr. Kohler’s misuse of TSR. If a management team adds nothing to the resources they outlay then this ratio will be 1. Typically, the more management adds value in excess of break-even unity, the higher the ratio. Steve Jobs, who was no monkey, performed exceedingly well on this talent measure, even though he slashed his own pay to zero.

There is a catch. There are only a limited number of managers available to recruit as the CEO that possess the talent of a Steve Jobs. Not every manager is capable of generating high Tobin’s Q when large companies need to invest billions of dollars of scarce shareholder funds.

Talent is multiplied or “cloned” by the size of the asset base and magnitude of the hierarchy. Hence, large companies in particular, which have the most to gain from talented managers, are rightly willing to pay the most for scarce talent. Mr. Kohler correctly observes this fact but, unlike myself, thinks that large firm managers should not be paid more. Perhaps a peanut each for the CEOs of BHP (market capitalisation $112 billion) and AusNico ($1.5 million), Mr. Kohler.

Boards’ approve high managerial payments, usually in advance of knowing their actual ability to generate Tobin’s Q. Unfortunately, the board’s talent expectations are not always realised, as is evident from Mr. Kohler’s comparison of CBA and NAB.

Large companies rightly pay the most in an effort to both identify and attract talent in limited supply. This makes it imperative to control for firm size when examining the relationship between CEO pay and Tobin’s Q performance.
My scatterplot [see below] for ASX 200 companies, 2001-2011, with data provided by SIRCA, shows a strong positive relationship between company Tobin’s Q performance and CEO pay after controlling for the logarithm of firm size. The positive association is thus conditional.

This scatterplot from the relationship between firm performance and the logarithm of total CEO pay shows clearly that, conditional on firm size, higher pay is associated with higher performance. Observations in the lower RHS corner may indicate that boards and compensation committees do not always get it right. Poor performance can also be a function of poor board design and the lack of director “skin in the game”.

Having the right board structure and designing managerial contracts that encourage talented managers to self-select into the CEO position are the subject of my ongoing research. In the meantime, I doubt that Taronga Zoo needs to double the number of guards protecting its monkey enclosure in preparation for the onslaught from Industry Funds egged on by Mr. Kohler.

Peter Swan AM FASSA is a Professor of Finance in the School of Banking & Finance at the Australian School of Business

Geoffrey Garrett

The latest interest rate cut to an all time low of 2.5% shows just how worried the Reserve Bank is about the slowing Australian economy.

Kevin Rudd says that he is the man to steer the country through the downturn because he saved us from the global financial crisis four years ago.

Tony Abbott says that the economy is weighed down by Labor’s post-GFC profligacy and that the cure is to cut spending and waste.

Voters should ask themselves two questions about these politically convenient narratives.

First, was it the Rudd government’s fiscal stimulus that saved us from the ravages of the GFC?

Second, is cutting spending the best way to reverse the current slowdown?

The one word answer to both questions is “no”, and the biggest reason is “China”.

Rudd is right to try to focus our attention to the profound impact of the Chinese economy on Australia.

The huge wave of investment in new Australian mining and energy projects over the past five plus years has peaked and is slowing. Commodity prices have fallen considerably from their post-GFC highs.

The Prime Minister is right to point out that the slowing Chinese economy is the culprit. But his “end of the China boom” slogan only tells half the story.

Chinese policy was the reason commodity prices and mining investment were so stratospherically and improbably high in the first place.

Visit the Middle Kingdom and you cannot help but marvel at all the skyscrapers and airports, high speed rail and underground transport systems, and highways, bridges and ports that have been built seemingly overnight in far flung mega cities few of us have ever heard of.

Chinese investment in infrastructure has long been large and impressive. But it was turbocharged after the fall of Lehman Brothers in late 2008—all built with steel made in China from mountains of Australian iron ore and coking coal. 

With the US and the west reeling into recession, global trade plummeted by 30% in 2009. This could have been curtains for China’s post-Mao economic miracle. In a desperate attempt to avert this potential disaster, the Chinese regime went on a lending and spending spree at least as big as what the US did at ground zero of the crisis.

Hu Jintao’s government succeeded spectacularly, and Australia was a major beneficiary. Our exports to China literally doubled from $39 billion in 2008-9 to $77 billion in 2011-12, with fully $50 billion in iron ore and coal alone. Over the same three-year period, Australia’s exports to the rest of the world actually fell, from $192 to $187 billion.

As the world swooned, Chinese infrastructure and Australian mining boomed. The Rudd government’s spending on cash giveaways, school halls, pink bats and the NBN didn’t save Australia from the worst of the GFC. Some of the stimulus may have helped at the margins. Much of it may have been squandered. But the Rudd stimulus was a side show compared with the China boom.

Fast forward to today and China is a very different country. New President Xi Jinping is worried about too much government investment, too many bad local government loans, and too high inflation and asset prices. He is in no mood to undertake another large scale infrastructure stimulus, because he want to let some air out of the Chinese balloon rather than ring the alarm bells like 2009..

So Chinese growth is slowing, its demand for minerals and energy is weakening, and the government seems committed to riding out the transition. Good news for China and the world economy in the long run. But bad news for Australia in the short run.

Abbott may well be right that the Rudd post-GFC stimulus was ineffective and wasteful. But we got away with it because of how China responded to the crisis.

Now that China looks much more accepting of its slowdown, and the Ben Bernanke bound to wean the US and the world economy off five years of zero interest rates. Glenn Stevens clearly believes Australia must try to stimulate at home.

Joe Hockey is right that more RBA action tells us in just how much trouble the Australian economy is. But he and Abbott are wrong to argue that cutting spending, the exact opposite of what the RBA is doing, is the right medicine for the economy.

This probably explains why the Coalition is reluctant to put a date certain on a return to surplus. It also explains why they are focusing on tax cuts that will stimulate investment, growth and job creation—killing the mining and carbon taxes, and cutting company tax—as much as spending cuts.

The bigger point is that the Australian economy is a cork bobbing in an ocean where many of the biggest waves come from China. How we should respond is the biggest question in the election. How the next government responds will be the biggest story for the economy.

Geoffrey Garrett is Dean of the Australian School of Business at UNSW. A version of this post appeared in the Australian Financial Review.

Tim Harcourt | The Airport Economist

We are not winning the Ashes or the rugby, but in terms of economic management Australians are world beaters. But you wouldn’t know it from all the gloomy economic talk in the press sapping business and consumer confidence.

In case you missed it, Australia, unlike many other industrialised countries, avoided the worst economic crisis to bedevil the global economy since the Great Depression (note the term they use in the US – “the Great Recession”,  rather than the more technical and even benign sounding “GFC” that we use in Australia).

So what? Well, if you want to think about what could have happened, go to a European country such as Greece or Spain or check out the more depressed areas of the UK or the US. Or even closer to home, take a look the excellent ABC show The Years That Made Us by Chris Masters about Australia’s own experience during the Great Depression. Masters uses his own family and community to explain the hardship that beset working Australians as result of the international economic crisis following the Wall Street crash of 1929.

In fact, the only thing missing in Masters’s excellent oral history is a discussion of economic policy in the 1930s – the very core of Australia’s recent success as a nation.

During the Great Depression of the 1930s there was massive unemployment (Australia had one of the highest levels in the industrialised world) and Australian governments, on the advice of Australia’s fledgling economics community, did the worst things possible in terms of policy.

In what we would call an austerity plan today, the commonwealth and state governments cut government spending, tightened credit, kept the exchange rate fixed, cut wages (the Arbitration Court actually tried to implement a 10% cut in the Basic Wage in 1931) and jacked up tariffs.

As a result, the slump in Australia was longer and deeper than it should have been and it eventually took putting the economy on a war footing during World War II to get out of it 

By contrast, in 2008, facing the financial turmoil of the sub-prime mortgage crisis, Australia’s economic management was world class.

Economic policy-makers did the exact opposite of what was tried in the 1930s. They increased government spending through well-timed and well-targeted stimulus packages in line with advice proffered by then Treasury secretary Ken Henry to “go hard, go early and go households”.

And it worked. Nobel laureate professor Joseph Stiglitz, when visiting Australia in 2010, said Australia was “lucky to have, probably the best designed stimulus package of any of the countries – advanced industrial countries – both in size and in design, timing and how it was spent and I think it served Australia well”.  (I interviewed Stiglitz on that trip to Australia and he said he was “widely impressed with the state of economic and social policy” and had taken a special interest in indigenous labour market policy “where most work clearly needs to be done in the long term”.)

As well as the fiscal stimulus, the Reserve Bank of Australia (RBA) did its bit by quickly loosening monetary policy. Wages were able to rise in line with productivity and minimum wages were adjusted upward rather than cut.

The flexible exchange regime introduced by the Hawke-Keating government meant the dollar could weaken and act as a shock absorber to contain the external impact of the crisis (as it also did during the Asian Financial Crisis of 1997-99 when Australian exports got badly bruised by events in Asia).

And tariffs were kept low and our commitment to an open economy was strengthened in the Doha World Trade Organisation talks. As then trade minister Simon Crean said at the time, “trade could act as an additional stimulus” globally when demand was depressed in the worst affected economies.

Our unsung heroes, the Australian exporter community, adjusted to changing global conditions by cutting hours rather than jobs to minimise the overall pain in the Australian labour market.

The whole package of the GFC period – fiscal, monetary, wages and international trade policy – worked a treat in contrast to the 1931 Premiers Plan and the associated austerity package implemented at the time by Australian governments, urged on by the economics profession.

In fact, the response to the GFC by Australia represents an innovative period in the history of Australian economic policy-making, and overcame past doubts about the efficacy of fiscal stimulus in a global crisis 

As Henry said in his keynote address to the symposium in honour of professor J.W. Nevile here at UNSW:

“…the government and its advisers are in no doubt that without the large fiscal stimulus, and its having been delivered in such a timely fashion, the Australian economy would have suffered a very deep recession.

“Yet the scepticism about the efficacy of the fiscal response is understandable: like many other countries, Australia has a poor history of fiscal activism; indeed, this recent period might be the only instance in Australia’s history of a fiscal stimulus having insulated the economy from an external shock that would otherwise have produced a deep domestic recession. That is to say, it could be a unique achievement.”

The success of this golden age of economic policy-making is outlined by Jim Chalmers in his excellent new book, Glory Daze (anyone who can work a Bruce Springsteen song into the title of an economics book gets my vote!)

In Glory Daze, Chalmers outlines how the politicians (despite well-documented interpersonal rivalries) kept their cool and worked together with the Treasury and RBA – as well as with officials in financial and political capitals around the world as international co-ordination of policy-making was transformed. As a by-product, we now have a restructuring of international economics institutions with the resultant rise of the G20 as a preeminent global policy-making body.

Chalmers’s narrative is lively and dramatic – a real West Wing of Australian economic policy-making as Australia bucked the global trend and avoided recession. And most importantly, all that frantic energy and drama was worth it because it worked.

As evident in a new paper by my colleague, professor Raja Junankar at the Australian School of Business, Australia avoided the contraction and mass unemployment that has plagued other advanced industrial economies since the 2008 crash.

According to Junankar, when you compare Australia with other advanced industrialised economies such as the US, UK, and both strong and weak economies in Europe (e.g. from Germany to the crisis-ridden economies in the south next to the Mediterranean) we score better in terms of GDP, employment, inflation, current account, budget deficits and debt ratios. As Junankar says: “Even the ‘Wunderkind’ Germany took three years before its GDP returned to the pre-2008 levels … All other countries had higher unemployment rates than Australia in the post-2008 period.”

Junankar notes praise for Australia in official international policy circles including the OECD which says: “With 21 years of uninterrupted growth, Australia stands out among OECD countries.”

So there you have it, when it comes to economic management in recent times, Australia is outstanding by international standards.

So why is the story not better known?

The answer is rats, rent-seekers and the rabid 24-hour news cycle.

There is clearly a disconnect between the evidence of our economic success and the plethora of survey and campaigns to illustrate hardship, pessimism, a lack of business and consumer confidence, or alleged government waste.

As market economist Adam Carr says in Glory Daze: “Pessimism is a disease in this country and like rats, lacklustre economists are playing a significant role in spreading it.”

And behind every rat plugging a business confidence survey is a rent-seeker. Rent-seekers aim to capture rents and redistribute income and wealth their way at the expense of others with no net welfare gain to society. You see it in changes to laws and taxes. You even see it in the exchange rate.

Retailers such as Gerry Harvey of Harvey Norman will bemoan a high dollar as his retail outlets can’t then compete with online imports from the US (especially with different tax treatment) and make claims on the government and the RBA to “do something about it”. The issue facing Harvey Norman may be structural – due to long-term industry trends in retail and the rise of the online global consumer – but it is still easier to blame the government and the RBA.

Put the rats and rent-seekers together with the rabid nature of the 24-hour news cycle with its hysteria about polls and surveys, a bit of a gotcha journalism, and some hyper-partisan opinion dressed up as ‘analysis’.

There is also a fair bit of irresponsible economic commentary around by people who should know better. Recently, shadow treasurer Joe Hockey said that the Australian economy is ‘volatile’ because of recent changes in the exchange rate. As demonstrated at a time of turmoil in most advanced industrialised economies, Australia has an enviable record in terms of economic growth and employment and the movements in the floating exchange rate have saved us from serious ruptures in the real economy.

The recent period of Australian economic management should be one of the proudest moments in our history. Over time, economic historians will find this to be the case and we will revel in it, just as we did with the Hawke Keating reforms and the like. But it’s a debate we have to have now because otherwise we’ll miss one of Australia’s greatest moments in history, a moment captured in our own lifetime (and outlined brilliantly by George Megalogenis in his book The Australian Moment).

If we miss it, or fail to realise it, we might fall into the same trap as the austerity-ridden economies such as the UK, which may have a new royal baby and the Ashes, but not the jobs to go to after the celebrations are over.

A shorter version of this blog post was previously published in The Conversation.

Tim Harcourt is the JW Nevile Fellow in Economics and an adjunct professor in International Business Strategy, at the Australian School of Business, the University of New South Wales (UNSW) & author of The Airport Economist:  www.theairporteconomist.com.

Michael Peters

Raja Junankar

Weak inflation figures have been seized on as an example of the slowing Australian economy. However if we listen to the politicians it appears that the Australian economy is suffering from a major crisis of ballooning government debt and an impending crash. This is patently not the case – the way the economy has continued to grow shows Australia really is the miracle economy.

Most of the countries of the OECD are still suffering from the Global Financial Crisis – or as the Americans call it the Great Recession. However the Australian economy is still very healthy. Admittedly in the past few months, it appears that the Australian economy is finally slowing down as the resources boom comes to an end, however unlike most of the OECD countries, Australia did not have a recession, and indeed finances remained very healthy.

Indeed, much rhetoric from Canberra seems to ignore this. For example, if you look at the unemployment rate it increased slightly after the GFC, but it came down again. All the other countries had much higher unemployment rates than Australia in the post-2008 period. The period of record low unemployment in Australia for the past five years seems to be frequently ignored in discussions about the economy.

Looking at how well the Australian economy has fared over the past few years, compared to other countries, it appears to score very highly.

Looking at the debt to GDP ratios, Australia has the lowest ratio. Even Germany, the country that is imposing austerity on the eurozone countries, has higher debt ratios. And yet if you listen to some politicians they believe that Australia is in debt crisis – but actually, Australia is in a far better situation than pretty much every other country. Until the population start listening to some of the facts, rather than myths about the economy, the negative stories will dominate rather than the facts.

Honorary Professor Raja Junankar is from the Industrial Relations Research Centre at the Australian School of Business.

Dale Boccabella

If we needed another example of just how difficult meaningful and principled tax reform is in Australia, we got it recently in the reaction to the Government’s announcement that it would abolish the “statutory formula” method for valuing fringe benefits representing employer-provided cars. The reaction at times was hysterical.

Some of the claims were extreme and they are obviously calculated to put as much pressure on the Government to back down fully, or at least in part. These are the facts in regard to the relevant tax law.

Where an employer provides a car for the use of an employee, a fringe benefits tax liability might arise. There are two methods of valuing this type of car usage benefit. One is the “cost method” and the other is the“statutory formula” method.

The cost method works out the cost of operating the car for the year (for example, petrol, servicing, insurance). From there, the employer (with the employees help) establishes the percentage of private use (such as a weekend drive to country) and percentage of income producing use (travelling from work premises to clients) of the car by the employee.

This is done on the basis of kilometres travelled on each activity by the employee. This is ascertained by the employee, for the employer, by keeping a log book of income producing trips for 12 weeks in the first year in which the employee had use of the car.

Once the percentage of private use is established, it is applied to the cost of the car to establish the taxable value of the benefit (for instance, the operating cost of $8,000 with 40% private use would mean a taxable value of $3,200).

Putting aside some transitional rules, the statutory formula method applies a flat 20% to the cost of purchase of the car. (If the car is more than four years old, the cost of the car is reduced to 66.6% of the cost of purchase). Under the statutory formula method, there is no requirement on the employer to establish the percentage of private use of the car by the employee.

That is, the statutory formula is not valuing the car fringe benefit by reference to the employee’s private use of the car. For example, if the car has a purchase cost of $32,000, the taxable value of the car benefit is $6,400 under the statutory formula method (that is, $32,000 x 20%).

The employer can choose whichever method suits them, including the one that gives the lowest taxable value. It is clear that the statutory formula method, like other presumptive tax mechanisms, is a simplification measure; it means an employer (or employee) can avoid the tax compliance obligations associated with keeping a log book under the cost method.

Generally, the statutory formula method will give a lower taxable value than the cost method when the car has a high percentage of private use, and the cost method will give a lower taxable value when there is a low percentage of private use. One could question the costs that are included in calculating costs(and therefore, taxable value) under the cost method (e.g. deemed interest, deemed depreciation). However, it is only the cost method that accurately ascertains the private use element of the car benefit.

This is what a principled, equitable and efficient income tax system should be taxing. Fringe benefits tax (FBT) is a surrogate income tax on employees who receive benefits for private consumption, but one unfair aspect of the FBT regime is that it taxes all benefits at the top marginal rate of tax applicable to natural persons (currently 46.5%) even though the recipient of the benefit may be on a lower tax rate than 46.5%).

This means that where the statutory formula method gives a lower taxable value than the cost method, the taxpayer is getting a tax concession.

This is recognised in the annual Tax Expenditure Statements issued by Treasury. The Tax Expenditure Statements contain a list of items where taxpayers are getting a tax concession, along with an estimate of the aggregate of the tax concession.

The statutory formula method is listed as a significant tax expenditure. On the other hand, where the statutory formula method gives a higher taxable value than the cost method and the employer fails to elect into the lower cost method (this will rarely happen), the employer is being (unfairly) overtaxed. This would be a negative tax expenditure.

The removal of the statutory formula method simply moves this part of the tax system back to a principled position by removing a tax concession. These facts have been completely lost in the “debate”.

In spite of the above, there is a legitimate issue about the start date of the new rules. The removal of the statutory formula method only applies to all new contracts entered into after 16 July 2013, but even then, the statutory formula can be used for the rest of the current FBT year (that is, until 31 March, 2014). After that year, only the cost method will be available.

All existing employee car usage arrangements can continue to use the statutory formula until the car is changed over. In this sense, these new rules are not retrospective. But, many employers and employees would have been in the process of arranging a new car on the announcement date but that arrangement may fall short of having a concluded contract.

In this sense, it is arguable that the Government measure does operate retrospectively for these employers and employees. To deal with the “immediate start date” issue and “retrospective” issue, the Government could have provided for a more generous deferred phase out of the statutory formula method (for instance, until March 2015).

In 2011, when the Government amended the multiple rates under the statutory formula method to move towards one rate (i.e. 20%), which increased the taxable value on most cars, the Government provided a transitional period whereby tax increases were progressively introduced over three years.

More important to the national interest, does this episode (which may not be over yet) say anything about the prospects for meaningful and principled tax reform? It is certainly not encouraging. It does send the message that those with tax concessions, and the industry serving those tax concession recipients, will not give up their concessions without a fight. It probably does not help where there is a lack of bipartisanship, which is the case with the removal of the statutory formula as the Coalition have indicated they will oppose this measure.

Similar to many areas of human conduct, the longer tax concessions remain in place aspart of the tax system, the higher the level of normality that isachieved. Normality and entrenchment can reach the point where usersof the tax concession start believing that the concession is a normalpart of a benchmark tax system.

Some of those complaining about the removal of the statutory formula method may genuinely believe that the government is imposing a tax increase on them over and above what a benchmark income tax would impose, rather than seeing the government’s announcement as the removal of a tax concession.

Many complainants though will be moved by pure self-interest and these people know full well they have been accessing a tax concession. Sadly, our tax system is riddled with many significant tax concessions that depart from a benchmark tax system – such as the 50% tax concession on capital gains of natural persons, 100% exemption on all the gain made on the family home, generous tax concessions on superannuation, failure to tax all land under state land tax regimes.

Some not-so-apparent concessions involve negative gearing, or the current generous treatment of discretionary trusts and the lack of death duties. The longer tax concessions remain in our tax system, the more normality they will achieve. In turn, the harder it will be for future politicians to remove or scale back the concessions.

In a future where Australians demand more services from Government and at the same time resist higher taxes, scaling back tax concessions may be the least displeasing option to meet desired revenue needs. One heartening thing for future governments is that there are still many tax concessions worth a lot of lost revenue that could be wound back.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business. This opinion piece was previously published on The Conversation under “The truth about FBT on cars: meaningful tax reform is hard“.

Vic Edwards

There are reports that China could be about to witness a sharp economic contraction.

Figures show China’s annual economic growth has slowed to 7.5 per cent in the second quarter of 2013 from 7.7 per cent – the second straight quarter of slower growth. In the past month the Australian dollar has fallen sharply on fears about the Chinese economy.

Never the less, I would like to play down fears of a hard landing in China. Growth at 7.5 percent really isn’t that bad, and certainly not for the world’s second-largest economy. Certainly there are some downward projections for China but these aren’t too severe.

However last week China reported an unexpected fall in its exports and imports, adding to concerns of a slowdown in its economy. Exports fell 3.1% in June from a year earlier, indicating weak global demand for Chinese goods, and this contradicted forecasts of a sharp increase in shipments.

China’s growth this year is below last year’s level as weakening external demand has hurt investment and exports. China has been keen to rebalance its economy, after a decline in global demand hurt its export-led growth, and that is causing pressure on Australia.

This raises concerns about the country’s future economic growth, raising questions about whether the country’s economy is tailing off more rapidly than anticipated. However at least inflation has slackened more rapidly than expected.

China is also the world’s biggest energy consumer and steelmaker, however steel production is slowing. The World Bank has forecast that inflation will fall further, as its economy comes down from the peaks seen last year.

Certainly the markets treat the Aussie dollar as a proxy for China so that slowdown in exports in China is perceived by the market as being a bad sign for Australia. Australia will need to improve its trade standing with China in order to preserve its position as a major supplier of raw materials, as China is actively pursuing other sources particularly through its new BRICS arrangements, particularly with South Africa and Brazil.

Vic Edwards is a Visiting Fellow in Banking and Finance at the Australian School of Business.

Nigel Stapledon

From its lows of just over 4% in early 2008, unemployment  rose sharply to close to a peak of 5.9% in June 2009 before resumption of the resources boom and fiscal stimulus saw it decline back just below 5% in early 2011. Since then there has been a clear trend rise to its current level of 5.7%.

The Treasury estimates have the ‘full employment’ unemployment rate in the range 4.5-5%. Against that benchmark, there is an increasing amount of slack in the economy.

The leading indicators, e.g. ANZ job ads, point to unemployment continuing to rise. It is likely to break over 6% in the second half of the year.

Employment growth is positive but has been and remains at well below the rate needed to match the influx of new workers into the job market. The best measure here is hours worked which is currently showing a (slightly flattering) trend growth rate of 0.8% against long-term trend or required growth of 1.7%.

Mining investment might still be high but it is now declining and causing a decline in construction activity which is just starting to emerge in the employment numbers. With prices squeezing profitability, cost-cutting is the name of the game now.

With the news from China not at all encouraging, if anything there is prospect of a sharper pull-back in mining investment.

Another factor at play is the lagged effect of structural decline in manufacturing which has accelerated in the past 12 months. It will not be reversed by the recent fall in the $A. Firms will need to see it lower and sustained at a lower level before their expected level of the $A will change sufficiently to reverse the trend to closing operations in Australia. On the other hand, tourism might benefit in the short term as particularly some domestic travellers shift to local market.

It is not clear at all that the slack in mining and mining construction will be taken up by housing construction. While interest rates are low, the offset is that the increased risk of unemployment will cause some potential home-buyers to defer a large investment in housing.

Dr Nigel Stapledon, Australian School of Business

Frank Zumbo

With the departure of senator Stephen Conroy after Labor’s recent switch to Kevin Rudd, it is opportune to consider what might now happen to the national broadband network.

There is no doubt the NBN was Conroy’s ”baby” with the Victorian politician having nurtured, protected and driven the project with the zeal of a religious leader determined to recruit as many new followers as possible. For Conroy, the NBN was a vision to be pursued at seemingly any cost.

Conroy’s line was simple. We were asked repeatedly: How could anyone doubt the superiority of fibre to the premises?

The super speed of fibre and the view that fibre would enable endless amounts of content to be streamed into almost every Australian home were the cornerstone arguments in Conroy’s passionate pursuit of his version of the NBN.

It has been a devastating line of attack and Conroy has been relentless in pursuing any critic of the NBN who dared to speak out. The problem was always going to be that Conroy’s NBN was just one possible path to high-speed broadband. Much like different religious leaders having different paths to the ultimate goal, there was always going to be a difference of opinion as to the most appropriate path to a national high-speed broadband network.

Fixed versus wireless was going to be the obvious first point of contention. This is closely followed by the debate about fibre to the premises or fibre to the node. Ultimately, however, the real debate would always centre on the relative time and cost of pursuing the different paths to a national high speed broadband network.

Here the point is simply that Conroy’s NBN is by far the most expensive version of a national high-speed broadband network.

Trying to connect almost every home with fibre was always going to the stumbling block and the ever-present threat to the NBN. That is assuming there would be a sufficient, ongoing amount of skilled labour and technical expertise at an affordable price to sustain a project of an increasingly unknown duration.

Just think about it. Walk down any street of Australia and you will see many houses that would need to be individually connected under Conroy’s NBN. Multiply the number of houses by the thousands upon thousands of streets across Australia and you start to get some idea of the magnitude of the task ahead for Conroy’s NBN.

The danger of a large cost blow-out will constantly hang over Conroy’s NBN. A nice-sounding vision of connecting almost every home to fibre can soon become an economic nightmare. Ongoing delays in deploying Conroy’s NBN will add considerable costs to an already very expensive project.

These cost blow-outs eventually get passed on to consumers one way or another. More problematic for consumers is that construction delays in the NBN would mean that it would take longer for consumers to get access to the promised higher broadband speeds.

So, while Conroy pursued his NBN with zeal, it was always going to be a race against time. The NBN was only guaranteed while he remained the the Broadband and Communications Minister and so long as Labor stayed in power. Any change in minister or government would inevitably cause a rethink, or at least a risk of a new minister wanting to put his or her mark on the project.

If there’s one thing that is certain in politics, it is that each minister wants to cast a project in his or her image. A new minister often means a new approach or nuances on the previous minister’s approach.

Will Conroy’s NBN survive in its present form? Time will tell if the new Minister for Broadband and Communications, Anthony Albanese, has any new ideas of his own. With the NBN still in the relatively early construction stage it is clearly vulnerable to change now that Conroy has gone.

The workforce and engineering challenges that have delayed the construction of the NBN are likely to cause a reassessment sometime soon. Then there is the lingering debate as to whether fibre to the premises is ”superior” as claimed. Yes, fibre may be superior if you want to be connected to a landline and download lots of content on a regular basis, but it may not be superior if you want the mobility and convenience that wireless provides.

Any assessment of ”superiority” depends on the requirements of each individual consumer and a ”one-solution-fits-all” view was the inherent flaw in Conroy’s NBN.

At the end of the day, a national high-speed broadband network is really all about access, convenience and affordability. What’s the point of building the most expensive fixed broadband network if it can only be accessed from your home?

It makes more economic sense to provide a fixed broadband network that provides a basic high-speed service with fibre to the node, with the potential for high-end users of broadband to be able to upgrade to fibre from the node to the premises. And let’s not forget that wireless will become the preference for all but the people who prolifically download content.

Frank Zumbo is an associate professor at the school of business law and taxation at the Australian School of Business.

A shorter version of this opinion piece appeared in the SMH.