Corporate Welfare Dr Margaret McKenzie

Deakin University

The Future of Welfare

30-31 October 2014

1

Nature and scope of Corporate Welfare

in Australia

1. What is corporate welfare?

2. The case for corporate welfare: market failure

3. Industry assistance

4. Technological advance

5. Public provision and regulation

6. Labour market and macroeconomic policy

7. Tax

8. Directions for reform

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1. What is corporate welfare?

Not the above – ‘Some of the mountains of cash recovered in raids by the

Australian Crime Commission (ACC).’ Source: Supplied

http://www.news.com.au/national/australian-crime-commission-breaks-complex-network-of-money-laundering-

seizes-580-million/story-fncynjr2-1226808433813 23 Jan 2014

‘government support or subsidy of private business, such as by tax incentives’

(Oxford US English D), contributing to profits in short or long run

welfare: ‘the state of faring well; wellbeing: one's welfare; the physical or

moral welfare of society’ (Macquarie D).

social welfare, widely: government support or safety net in society: ‘a

system of services provided by a government or other organisation to meet

the needs of the community in areas such as health, housing, pensions for the

aged or unemployed, etc.’ (Macquarie D)

treated as analogous to social welfare, often pejoratively, an ideological issue

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1. What is corporate welfare? (cont)

notion of distribution, favouring some over others [=>unfairly]:

social welfare: towards some individuals and groups over others,

vs

corporate welfare: some companies, sectors or countries over

others (in terms of profits) e g US subsidises agricultural exports.

notoriously difficult to measure outcomes for the economy, and

economic growth overall, even income distribution.

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1. What is corporate welfare? (cont)

Corporate welfare includes

taxes and subsidies to business

Industry assistance including trade protection and support for innovation

public infrastructure and subsidy to private infrastructure

regulatory arrangements

contribution to human capital and technological advance through

education and training, science and R&D

labour market and macroeconomic (fiscal and monetary) policy

deeper, legal institutions protecting property rights, corporate law

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2. Case for corporate welfare: market failure

Market is good for many goods in a capitalist economy.

dry view, government intervention in markets leads to inefficiency and

rentseeking by interest groups, vs

Market failure: the market fails to supply the good or service at the

quantity and price which would offer the greatest possible benefit, or at all.

private firms cannot capture sufficient or any profit from production,

benefits are gained by other than the producer or direct user in the

market

then government intervention is warranted and has developed

historically through the ballot box or other political mechanism.

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2. Market failure (cont.)

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Type of market

failure:

Definition: Example: Solution:

Externality Spillovers from activity to

third parties

negative pollution Carbon tax

positive education Public education,

regulate

Public good (or

bad)

Doesn’t get used up, and

no one can be excluded

Public good Telecommunications,

the arts

NBN,

Australia Council

Public bad Climate change Carbon tax, CSIRO

Imperfect

information

Typically, producers know

more than users

Research, education CSIRO, higher ed

Imperfect

markets

Few or single seller (or

buyer)

air transport, banks ACCC, public

provision,

regulation (Qantas)

3. Industry Assistance in Australia

narrow interpretation (PC Trade & Assistance Reviews): combination

of tax breaks, subsidies and trade protection (tariffs and export

subsidies) (PC 2013 http://www.pc.gov.au/annual-reports/trade-

assistance/2011-12 ).

Not transparent.

measurement issues, allocated through agencies in Budget or off

Budget

tax breaks need to be individually identified, not in Annual Reports

Federal system, Federal and state support

Trade protection: subsidies for exports, import tariffs or administrative

costs, aid

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3. Industry Assistance in Australia (cont.) Industry assistance is lower than it has ever been in real terms (PC 2013)

PC estimates: Total assistance from the government budget in 2011-12 (of

$371 billion, 25% of GDP of $1.47 trillion ) (most recent):

=$5.1 billion expenditure + $4.3 billion tax concessions,

= $9.4 billion

i e 2.5% of government expenditure, 0.6% of GDP

slightly lower share of government expenditure than the previous five

years, note fall over a period of Labor government.

e g mining sector: estimated Federal subsidies of $4.5 billion in 2013

and $3.2 billion in state subsidies in 2013-14 (Peel et al, AI, 2014),

(mining is about 9% of GDP)

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3. Industry Assistance (cont.) from Budget: Source of chart: The Conversation, derived by author from PC data. Excludes tariff assistance.

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3. Industry Assistance in Australia (cont.) Figures generally small in relation to industries, millions not billions.

2011-2012, subsidy or tax >$200m, millions

total > $200m = $5.6 billion

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Industry Subsidy Tax concession

sheep, beef cattle and grain farming 213↓ (end of drought) 355

mining 400↑ 300

metal and metal products 220↑

motor vehicles and parts 580↑

Financial and insurance 845

Property professional and admin 418

Arts and recreation 234

3. Industry Assistance in Australia (cont.) Tariff assistance (PC estimates):

has fallen tenfold over 40 years, from around 30% of industry output in

1970-71 to around 3% in 2011-12 (Whitlam cut by 25%).

tariff assistance = $7.9 billion in 2011-12, less the cost of tariffs on

imported inputs of $6.8 billion, = a mere net $1.1 billion.

Budget: loss in trade resulting from the withdrawal of ≈ $7.6 billion in

foreign aid over next 5 years.

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3. Industry Assistance in Australia (cont.) Budget spending on infrastructure

most already factored in from previous government

cuts to rail infrastructure expenditure, including the $3 billion

earmarked for the Melbourne metro rail link, $500 million for the Perth

rail system and and $715 million for the Brisbane cross-river link.

small and targeted amount of $5 billion for infrastructure – a quasi-bribe

for the states to privatise – dependent on matching by private provision,

energy – carbon tax abolished (>$6 b in revenue so far), subsidies to

companies for renewable energy development withdrawn

water – support withdrawn for water saving technological development

including rural

telecommunications – NBN abandoned

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4. Technological advance

improves human capital and productivity, private funding limited

Australia has the third lowest rate of government support for innovation

of the OECD countries in 2013 at 0.44% of GDP, or nearly A$7 billion,

compared with the OECD average of 0.68%

even lower rates of invention! (Webster 2014 http://melbourneinstitute.com/downloads/policy_briefs_series/pb2014n01.pdf .

Australia ranked 18th out of 20 advanced economies, ahead of only

Greece and Slovakia, for government R&D spending as a share of GDP (Nicky Phillips and Inga Ting Fairfax http://www.smh.com.au/technology/sci-

tech/australian-government-investment-in-science-reaches-30year-low-20140929-

10lbwk.html accessed 16/10/14).

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4. Technological advance (cont.) Historically, government support for

R&D: CSIRO, universities (and other higher ed, ≈$9 b), in 2011-12

over $850 million in funding to the National Health and Medical

Research Council (NHMRC),

recently, high tech projects: NBN, energy and environment saving

(wind, solar and geothermal energy) projects, water conservation,

freight transport and logistics

picking winners

technological hubs (multifunction polis of the 1980s)

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4. Technological advance (cont.)

However spending on science and innovation

fell to 2.2% of Budget expenditure this year, the lowest since 1984-85.

grew at only 2% in real terms compared with 4.4% growth in Budget,

Budget aims to double medical research expenditure of about $1 billion p

a by 2023, but funded from GP ‘co payment’

Government’s Industry innovation and Competitiveness Agenda just

promised $188.5 million over 4 years for Industry Growth Centres

to promote science and business collaboration to raise commercial

return including exports

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5. Public provision and regulation competition policy, ACCC

industry level – natural monopolies or oligopolies, networks

airports, Qantas, national electricity grid, telecommunications, media ownership, publishing, rail access arrangements, banks, four pillars

privatisation has shifted income from wages toward profits

6. Labour market and macroeconomic policy Labour market:

reductions in conditions can shift income away from wages toward profit

affects size of whole cake, as low income spend more out of income

Fiscal: budget expansion promotes business profitability in a recession (stimulus package),

Monetary: ME, monetary easing - lower interest rates aimed at making the funding of capital investment more attractive

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7. Tax rates, payment, avoidance and evasion

Lack of transparency is a major issue:

tax paid not apparent in Annual Reports, IMF and World Bank, and

Australia’s Federal structure.

Implies tax avoidance

statutory corporate tax rate out of profits lower at 30% in Australia, OECD

average 32.5% (Tax Foundation 2014)

Australia’s total tax payments share of GDP in 2011 fifth lowest in OECD at

26.5% (OECD average 34.1%, Norway 42.5%, small rich resource exporter).

corporate tax is a bigger share of total tax in Australia in 2011 at 19.7% than

any other OECD (average 8.7%) except Norway at 25.2% (OECD), but

Australia’s corporate taxes share of GDP at 5.2% is less than half that of

Norway’s at 10.7% of GDP (author estimate), OECD average 3%, but higher

income taxes paid across the income distribution

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7. Tax rates, payment, avoidance and evasion (cont.) Strategies to reduce taxable income generally

MNCs with subsidiaries in secrecy jurisdictions

transfer pricing – shift costs (including interest payments on borrowing)

into high taxing jurisdictions, profits into low taxing jurisdictions, false

invoicing esp natural resource exports

In Australia, Thin capitalisation :

the wide use of trusts, especially in real estate (REITs), and

stapled securities: debt concentrated in taxable groups, profits shifted

into trusts. Almost unique to Australia, restricted or illegal in most other

OECD. Annual Reports don’t report by jurisdiction

Related party transactions include ‘thin financing’: loans between

subsidiaries to fund investment, allowing the creditor a tax credit for the

loan as a cost to the business. If the debtor fails to repay there is no tax

due to them either.

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7. Tax rates, payment, avoidance and evasion (cont.)

Tax minimisation in Australia:

fuel tax credits, depreciation and R&D are key (ACTU).

fuel tax credit > $5 billion, including over $2 billion in mining,

accelerated depreciation in mining

negative gearing favours residential property over other industries

the ETR out of profits 22% in 2011 ACTU est < ATO, ETR 26%:

= tax foregone of $9.3 billion (ATO, TJUV 2014).

$7.9 billion, 85%, due to 1180 MVLC (income > $10 m).

25% (2755) of MVLCs in 3 industries (manufacturing, financial and

insurance, and mining), > 27% of GVA, responsible for 75% of the tax

avoided by MVLCs in 2011-12

230 mining companies, 2% of total MVLCs, 8% of GVA, were responsible

for 29.7% of the tax avoided by MVLCs

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7. Tax rates, payment, avoidance and evasion (cont.)

compare EBIT (earnings before interest and taxes) with total profits before

tax (TJUV 2014):

$236 billion written off to financing costs for all 326,665 companies in

2011-12, estimated.

41% of that, $191 billion, written off by 11,180 MVLCs

$47 billion tax lost from MVLCs out of a total of $49.3 billion lost. Add to

the $7.9 billion ATO figure.

But if interest payments were not tax deductible, creates hardship for firms

that genuinely do need to borrow. But no transparency.

globally, tax authorities have instituted measures to limit debt written

off against taxable income (TJUV).

financial and insurance sector alone lost 68% of profits, $54.3 billion, to

financing costs in 2011-12. Paid only 8% tax on ebit, least of any sector.

includes real estate developers known to elevate debt levels.

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7. Tax rates, payment, avoidance and evasion (cont.) Secrecy jurisdictions:

One quarter (524) of Australian companies on ASX had subsidiaries in 40 secrecy jurisdictions, often Singapore, Hong Kong and Malaysia.

The ASX 200 are 9% of all companies

but account for 48% of total subsidiaries in secrecy jurisdictions

112, 57% of 200, disclose subsidiaries in secrecy jurisdictions.

Twenty-First Century Fox, Toll Holdings, Rio Tinto and BHP Billiton have the most (TJUV).

Of the ASX 200

29% pay an effective tax rate of <10%,

14% pay zero tax or get a tax rebate.

Together they pay $8.4 billion less than if they each paid at the 30% tax rate.

60% had debt levels > 75% of equity. 58% reported losing > 10% of profits to financing costs.

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7. Tax rates, payment, avoidance and evasion (cont.) ETRs in the ASX 200

Companies may have high ETRs and still forego a lot of tax.

23 companies make up 75% of the tax foregone, and

just 7 companies - 21st Century Fox, Singapore Telecommunications,

BHP Billiton, Rio Tinto, Westfield, NAB, and CBA - account for 50% of

tax foregone (TJUV).

The biggest share of tax foregone by industry sectors is in

real estate (18%),

media (20%),

transportation (4%),

telecommunications (9%),

materials including mining (22%) and

banks (8%),

other sectors no more than 1 or 2% each (TJUV).

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8. Directions for policy Industry policy

coherent industry policy, lacking over decades,

move away from relying on mining and energy extraction.

carbon tax

look for Australia’s endowment strengths (plenty or scarcity).

raise spend on infrastructure including education, research and R&D

high tech generally

ITC

environmentally sensitive renewable energy technologies

environmental resource conservation and management

environmentally sensitive agriculture and food processing practices

environmentally sensitive long distance transport, freight and passenger

preventative health

the arts

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8. Directions for policy (cont.)

Tax

adequately fund and staff ATO (now cut), more resources for pursuing tax

evaders

require more disclosure and transparency from large corporations

increase fines for tax evasion and extend laws to cover range of strategies

eliminate or restrict stapled securities as per global norms

support BEPS (Base erosion and Profit Shifting) OECD Action Plan,

pressure secrecy jurisdictions to end status

automatic exchange of information between tax jurisdictions, with safeguards,

start with Australian law

require further transparency from multinationals, country by country,

including purpose and function of subsidiaries in secrecy jurisdictions

detail in annual reports of revenues, profits, staff and taxes paid in each

jurisdiction, voluntary until law, some mining companies are doing

raise corporate tax rate from 30% at least to OECD average of 32.5%

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