Earlier this year, the Australian Greens proposed a wealth tax on billionaires directly from the (former US presidential candidate) Elizabeth Warren playbook.
This week it added a “tycoon tax” that would tax so-called super-profits made by companies with annual turnover of more than $100 million.
Looks like it can’t be a winner.
If Australian taxpayers want to receive more taxes from super-profits, there may be better ways to do so.
Under the Greens proposal, some companies, even large ones, would avoid the additional annual tax. This would apply to only that part of their after-tax profit which was more than the “allowance for corporate equity”.
The allowance will be 5% of the company’s value plus the long-term bond rate, which currently stands at 1.2%, meaning there will be an after-tax return on capital of 6.2% over this time frame.
The excess profit – the so-called super-profit above the threshold – would be taxed at 40%, meaning about half of it would be lost.
an idea with a backstory
The Greens system is the system (and rate) recommended by the Henry Tax Review for taxing larger-than-usual profits from mining, and it has been the system used since 1988 for higher-than-normal profits from offshore petroleum.
The Greens proposal would apply not only to the earnings of Australian companies but also to part of a multinational company’s operations in Australia.
The mining sector will be dealt with on a project-by-project basis on a company-by-company basis, with Labor’s short-term mineral resource rental tax (also 40%) between 2012 and 2014.
The Business Council of Australia put forward the idea a few years ago as part of a plan to remove the tax on ordinary company profits (something the Greens are not proposing to do).
In a 2009 submission to the Henry Tax Review, the Business Council stated that taxing only returns higher than “normal” returns had “the potential to stimulate investment for both locally based companies and inbound investors”.
But there are problems with the idea, as acknowledged by the Business Council.
it’s hard to be right
One problem is that it is hard to know when to determine the boundary between “normal” profit and “super” profit (what economists call “economic rent”, which is a higher return than is necessary to justify the activity).
Bond rates are unlikely to exceed the threshold 5% in the entire economy.
If we tax not only excessive economic rents but also actual required returns, we can damage the engine of the economy. We will be like an athlete who is burning fat as well as muscle.
Read more: Resource tax: Back to the future?
Investors take risk when they invest money in a business.
Sometimes the investment is good, sometimes it fails. Grabbing 40% of the excess profit, but leaving investors to wear out all downside or accumulate losses against future profits, would create an asymmetry.
It sounds like “the head Adam Bandt wins, the tail I lose”.
Many companies making so-called super-profits will reluctantly stay here. Five big banks make profits above this limit. Some multinational franchise operations probably make them as well.
We can’t be sure companies will stay
But other companies may decide to wind down their operations in Australia, redirecting investment elsewhere. There may be loss in job and salary.
Also it would be difficult to gauge the capital base of the company how to measure the returns and calculate how much of it was above 6.2%.
The Greens did the right thing by asking the Independent Parliamentary Budget Office to assess how much the tax would increase.
The PBO’s best estimate is that the mining component will raise $124.78 billion and the non-mining component $213.9 billion over 10 years.
Read more: Coalition to ax mining taxes, but will keep giving petroleum
The cost of one of those components (the non-mining component) includes so-called “behavioral repercussions,” meaning it assumes that companies pay 20% less tax than is calculated as they restructure their affairs. Will be done.
This assumption may be too light for such a big tax change.
The cost of the mining component has not been adjusted. Anyone who remembers Kevin Rudd’s mining super-profit tax remembers the dangers of big behavioral repercussions. He helped end Rudd’s prime ministership.
have more promising ideas
At the ANU Crawford Leadership Forum on Monday, former Australian Finance Minister Mathias Corman, now Secretary General of the Organization for Economic Co-operation and Development, outlined a more promising proposal.
The OECD has developed a worldwide plan to get multinational companies with annual revenues of more than €750 million (about $1.2 billion) to pay a minimum tax rate of at least 15%.
US Treasury Secretary Janet Yellen wants to go further. It operates at a global minimum corporate rate of 21%.
They are ambitious plans, but they have real potential for success.