Tax Forum 1: Kill the GST, company tax & the MRRT
And kill the PRRT for listed companies, but let CGT survive for the time being, says Gavin R. Putland.*
In July, I drafted a proposal whereby “property” owners (under an unusually broad definition of “property”) could opt out of the income-tax/GST system. The proposal was designed not to make any enemies. In that respect, it worked a treat. Unfortunately it didn't make any friends either. Apparently its defining features — optionality and the consequent absence of losers — made it incomprehensible to a population reduced to serfdom by its tax obligations, notably including unpaid assessment and collection of other people's taxes. Accordingly I have started work on a new proposal which minimizes the element of choice, so that a nation of tax-slaves can better understand it.
This first instalment deals with business activity taxes — with a view to getting rid of them.
Although this package is intended to be the first of several instalments, it can stand alone if necessary. Its components are as follows:
- The GST is abolished.
- Company profits other than capital gains are no longer taxed at source, but are still taxed in the hands of the owners/beneficiaries/shareholders. That is, there is no tax on undistributed profits other than capital gains. That is, for the purpose of income tax other than capital-gains tax (CGT), companies are treated as trusts.
- The petroleum resource-rent tax (PRRT) and the mineral
resource-rent tax (MRRT) are scrapped. In their stead:
(a) A listed company pays a tax-exemption rent (TER) at a rate of 2% per annum on the above-par component of the total market value of its shares. If the company is multinational, its Australian operation must be separately floated.
(b) An unlisted company pays a super-normal profits tax (SNPT) modelled on the existing PRRT, with a threshold of $50 million per annum in super-normal profit, and a rate of 40% on the above-threshold component. Obviously the SNPT can be avoided by floating the company.
- All incorporated entities that were (or would have been) liable to
pay income tax or collect GST must instead pay TER at 2% per annum
on the values of assessable assets that they own.
Assessable assets include:
(a) Loans by professional lenders, assessed on the principal, provided that any write-down of the principal is not accompanied by an increase in the interest rate;
(b) Land, assessed on the site value — that is, the value of the land and airspace, excluding buildings and other artificial structures (to avoid penalizing construction, extension or renovation of buildings);
(c) Perpetual licences and privileges that are readily valued (e.g. because they are tradeable — like taxi plates).
- Sales of intellectual property (IP) and income from IP royalties are treated as capital gains.
Balancing the budget
In 2009-10, according to ABS 5506.0, GST raised about $47 billion, and company tax and PRRT raised about $61 billion. Of the latter, let us assume that $30 billion was redeemed through franking credits and that $3 billion was capital-gains tax paid by companies (total CGT receipts for that year were $7.3 billion). That leaves about $75 billion of revenue to be replaced or saved.
Equities listed on the ASX were worth about $1.4 trillion. If $1 trillion of that was above par, the revenue yield at a rate of 2% would have been $20 billion. This does not allow for the movement of capital to Australia in response to the simpler tax environment, especially the removal of “double taxation” of dividends distributed to foreign shareholders.
According to the RBA's Lending and Credit Aggregates, the total value of outstanding loans by professional lenders was at least $1900 billion, which at a rate of 2% would have yielded $38 billion. This is an underestimate because it does not account for professional lenders that are not financial institutions. The RBA can adjust official interest rates in order to compensate for any effect on mortgage rates.
In June 2009, according to ABS 5204.0 (Table 61), the total value of commercial and rural land was $560 billion. This is probably an underestimate of the total value of land owned through companies, which of course were free to own some of the $2260 billion worth of residential land. But a base of $560 billion at a rate of 2% would have yielded about $11 billion.
The abolition of the GST takes away the rationale for the First Home Owners' Grant, whose abolition would save another $1 billion.
So far, we have replaced or saved at least $70 billion. And we still haven't allowed for:
- the SNPT;
- the revenue from the value of perpetual licences and privileges;
- the growth dividend, e.g. higher share prices and credit due to more business activity;
- the associated saving in welfare payments.
So there is cause for confidence that a TER rate of 2% per annum will suffice.
Preventing future bubbles, bursts and recessions
The TER on land would function as an auto-stabilizer on the affected segment of property market: if land prices rise, the TER bills rise, encouraging selling and therefore tending to moderate prices; and if land prices fall, the TER bills fall, encouraging buying and therefore tending to support prices. Thus the growth of prices is stabilized around the long-term trend, avoiding speculative bubbles and the ensuing bursts and recessions.
Similarly, the TER on shares would prevent bubbles and bursts in the stock market.
* This document is subject to revision.