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Dr Margaret McKenzie delivered the presentation at the 2014 Future of Welfare Conference. The 2014 Future of Welfare Conference examined the welfare system and the policy and reform directions for welfare in Australia. The two day event looked at the concept of social welfare, the evolution of thinking worldwide around welfare, and also the current realities and policy directions in Australia. For more information about the event, please visit: http://bit.ly/futureofwelfare14
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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
2
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
3
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.
4
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
5
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.
6
2. Market failure (cont.)
7
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
8
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)
9
3. Industry Assistance (cont.) from Budget: Source of chart: The Conversation, derived by author from PC data. Excludes tariff assistance.
10
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
11
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.
12
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
13
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).
14
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)
15
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
16
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
17
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
18
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.
19
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
20
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.
21
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.
22
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).
23
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
24
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%
25