By Sue Boland
Corporate profits are booming at record levels. According to Australian Bureau of Statistics figures published on November 18, company profits before tax increased by 6.5% over the last three months (17.3% over the last 12 months) to a record $14.945 billion in the September quarter. Over the same 12 months, wages increased by a paltry 1.8%.
Chief executive officers employed by these big corporations are paid handsomely, their income increasing by 22% over the year to June. Top-earning CEO is Peter Chernin from News Corp, who "earns" $18.8 million per year.
With business booming and wages barely keeping pace with inflation, it seems bizarre that anybody would argue that big corporations deserve a big tax cut, especially when the corporation which pays the official 36% company tax rate is a very rare beast indeed, if it exists at all.
However, in federal parliament the Liberal Party, the National Party, the Labor Party and the Australian Democrats all support the bizarre argument that the company tax rate should be reduced.
When the government released its package of proposed business tax changes in September, both the ALP and the Democrats stated their support for lower company taxes but expressed doubts about the size of the proposed capital gains tax cut, the vagueness of the tax avoidance proposals and the possibility that the package would be a drain on the budget, that is, that it would not be "revenue neutral".
With both the ALP and the Democrats offering to negotiate with the government in order for the package to pass the Senate before Christmas, the government was in a strong position.
On November 24 Costello announced that the Labor Party had agreed to support the business tax package in full. The only "major concession" demanded by the Labor Party was that the government "promise" to implement the announced tax avoidance measures in full.
Despite glaring evidence that the package will leave a huge hole in the budget (the cut in company tax alone costing the budget $3.5 billion per year), the ALP and the Democrats both modified their positions substantially during the negotiations. The ALP dropped even token opposition to the package, and the Democrats watered down their position to one of only calling for a slight reduction in the capital gains tax cut.
Once the ALP had indicated its willingness to pass the business tax cuts in full, big business pressured the government to do a deal with Labor rather than the Democrats. The Business Coalition for Tax Reform chairperson, Dick Warburton, said that it was important that the cuts be agreed to by the alternative government so that it did not become an election issue or subject to change if there was a change of government.
The rewards for business are big: a cut in company tax from 36% to 30%; a halving of the capital gains tax; large numbers of generous tax concessions; and still no serious attempt to close tax loopholes for big capitalists like Kerry Packer.
Why did the ALP agree to a massive cut in business taxes when it still tries to advertise itself (misleadingly) as the party that looks after the interests of workers?
The ALP's support for the government's business tax cuts is consistent with ALP policy. It has always supported cutting business taxes and cut them massively when it was last in government.
However, there was an extra reason for the ALP supporting the cuts on this occasion.
During last year's federal election, Labor campaigned against the goods and services tax because that was the only way in which it could differentiate itself from the Coalition. This led big business to worry that the ALP was abandoning the economic rationalist policies that it had implemented in government.
The ALP is keen to demonstrate to big business that it is still its agent; hence its willingness to support the government's business tax proposals unamended.
During the course of the Senate inquiry into the tax package, it became public that Kerry Packer's Consolidated Press Holdings Ltd made a profit of almost $1.25 billion in 1998-99 and paid no tax.
None of the tax avoidance measures being talked about by the government, the ALP or the Democrats would stop Packer and other wealthy capitalists from avoiding tax.
While some rich individuals will get caught in the proposed tax avoidance measures that will tax trusts like companies, this proposal will tend to affect smaller capitalists and the middle class rather than the big corporations.
The other major tax avoidance measure in the package is the proposal to stop higher paid workers forming companies and setting themselves up as contractors in order to avoid the PAYE income tax on wage workers.
While this practice may result in a lot of lower level tax rorting, stopping it will not net any big capitalists, but will penalise workers who have been forced to become contractors by company outsourcing.
There are many jobs which were formerly done by in-house employees that have been contracted out. For example, it is very hard to get a job as a courier or a cleaner without working for a contractor on extremely low pay, or setting up as a contractor yourself.
The tax avoidance measures that target contractors penalise the worker without making the "employer" that has outsourced the work subject to any penalty whatsoever.
If the ALP and the Democrats were serious about helping workers and cracking down on tax avoidance, they would advocate penalties for employers who attempt to outsource.
The business tax package also introduces new rorts and makes old ones more lucrative — for those who have capital to invest.
For all the CEOs with multimillion-dollar salary packages, the cut in the capital gains tax rate give them an incentive to convert larger chunks of their salary into shares. In this way they can cut their marginal income tax rate by half, or by even more if they delay realising their capital gains.
Because the package does not place any restrictions on negative gearing, those with money to invest in shares or property will be able to write off interest rate payments and losses on their investments against other income at their full marginal income tax rate, while paying a reduced tax on their capital gain.
Any political party serious about stopping tax avoidance by the big corporations would need to adopt the following measures:
- force companies to pay company tax based on the publicly reported net profit, rather than another much lower figure as is the case now;
- introduce transfer pricing regulations (this tax avoidance method of multinational companies involves charging inflated prices for goods and services between subsidiaries in different parts of the world in order to minimise profits in high-tax countries and maximise profits in tax havens);
- abolish negative gearing;
- abolish dividend imputation (also known as franked dividends), which makes income from dividends tax free if the company paying the dividend has already paid tax (this is the lurk which enabled Kerry Packer's company to pay no tax in 1998-99, despite the $1.25 billion profit);
- abolish the ability of owners of companies to write off profits against "losses" in other companies;
- replace the current generous depreciation allowances with lower rates;
- introduce inheritance tax and gift duties.
However, if we want a truly equitable taxation system based on the principle that those with greater wealth should pay more, then it's not enough just to take measures to stop tax avoidance.
Companies should be taxed at a higher rate than workers, especially because their profits are derived from workers.
It is unacceptable that the Liberal/Labor business tax package will mean that companies will pay tax at a lower rate than many workers.
A two pronged approach is needed: a higher rate for company and capital gains taxes, and a full-blooded assault on tax evasion by the seriously wealthy.
Treasurer Peter Costello is already hinting that there will be big spending cuts in the next budget. The cuts won't be needed if the corporate tax cuts are cancelled.