It looks like the government and the mining industry have hammered out a compromise on the RSPT. Hard to see how that’s going to pan out, both the Greens and the Liberals have more or less promised to oppose it. Time will tell. In the meantime, how is Gillard going to get the budget in surplus? Clearly she’ll have to cut promised spending or promised tax cuts elsewhere.
The most obvious thing would be to abandon the promised corporate tax cut. This’ll be hard on the Henry Review credibility with both the RSPT and now corporate tax cut abandoned within weeks of the Review being released. But it’s hard to see how Gillard and Swan could abandon the corporate tax cuts. A lurker recently drew my attention to a few paragraphs in Budget Paper 2.
The Government’s tax plan will promote growth across the entire economy. Independent modelling of the plan indicates that it will deliver a reform dividend of a 0.7 per cent increase in GDP long run, which can, over time, be expected to flow through into taxation revenue.
The reduction in the company tax rate is expected to increase GDP by 0.4 per cent in the long run with a further 0.3 per cent increase from the resource tax reforms.
This growth will also include a $94 million increase in GST collections which will flow through to payments to the States and Territories.
The government / Treasury have done a bit of dynamic scoring. (See Mankiw on the topic here). Now we can quibble over the ‘independent modelling’ and the assumptions and what-not. The government believes that a reduction in the corporate tax rate will grow the economy and will rise additional revenue. Not cutting the corporate tax in the face of results like that in the budget papers would be immoral and require a lot of explanation.
so what about this compromise – what sort of deal would the miners be happy with?
And surely it’s bad for Tony Abbott that such a deal is imminent.
daddy dave
1 Jul 10 at 7:49 pm
I think the deal Twiggy mentioned is the deal that will be announced.
Faster deprecation allowance, resource specific, value captured at the mine shaft, the risk free rate raised to 15% and the 40% downside removed entire.
I think that’s what Twiggy said he’d hashed out with Rudd and will be the deal announced.
As usual though Australian firms show themselves to be completely de-balled as hey should have gone for eliminating it completely.
JC
1 Jul 10 at 7:55 pm
Without the 2% tax cut, the 3% super increase becomes an even more material burden for business. There is no chance that Gillard will backdown on the super to save business any pain. Throw Swan into the decision making process and this could go anywhere. Say goodbye to the GDP and/or budget predictions.
DavidJ
1 Jul 10 at 8:03 pm
except last time and each time the SGC occurred it came off wages and salaries not overall expenses for companies!
Why when labour has even less clout is it going to be as well as wages and salaries?
Butterfield, Bloomfiled & Bishop
1 Jul 10 at 8:24 pm
Obviously Homer you have never made a payroll. Unless government pays it or the employee pay it, the employer pays it. Private enterprise is not a a magic pudding where missing dollars have a never ending replenishment. And save the bullshit, as there is no chance Fair Work will seriously discount this employer contribution in the future. FFS during the GFC they just gave $26 to a union driven $27 wage claim.
DavidJ
1 Jul 10 at 8:42 pm
Don’t start him off , David. He’ll be posting incoherent gibberish for the next 24 hours if you pay attention to anything he says.
There are only two ways in treating the idiot. Contempt and then maximum contempt.
JC
1 Jul 10 at 8:46 pm
First they came for the miners!
If Australia’s mining companies are earning “super” profits then surely the banks must now be included as their resource is a licence granted by Government.
Denis of Perth
1 Jul 10 at 8:53 pm
With the new mental health dollars coming Homer may get the help he deserves.
DavidJ
1 Jul 10 at 8:57 pm
They need to spend the entire amount on him.
He should be studied rather than treated.
JC
1 Jul 10 at 9:01 pm
Apparently Rudd gets 3 staff members for life upon retirement. I nominate Homer, Possum and Ken Henry. They can spend their days running regressions to show how the stimulus saved the economy and the home insulation scheme made houses safer. Everyone else can ignore them.
asf
1 Jul 10 at 9:27 pm
I think Homer may be right – surely labour bore some of the cost of the SGC in foregone wage rises. Also, the employer contribution is tax deductible to the employer. That means the government pays 30%.
Also the contribution is taxable as income of the super fund, which means the government gets half back (15% – ignoring imputation credits): the employee definitely loses this last part to the government.
In all the talk about corporate tax cuts and super rises, I’m not sure if it was recognised that a portion of the tax cut would be recouped by the government on additional super contributions.
Taylor
1 Jul 10 at 9:59 pm
Interesting that the government plans to portray this humiliation as a victory. iI am curious to see what the lower level of tax appropriations that result, and what they plan to cut to still remain on track for a surplus in a few years’ time. Maybe nothing.
And will twiggy continue to claim that this was negotiated with Rudd?
How does the goose, the architect of the RSPT, feel?
Claiming victory is putting themselves at the same level as the former iraqi foreign minister.
entropy
2 Jul 10 at 6:13 am
I don’t think a 2 percentage point reduction in the company tax rate is anything to write home about.
A much bigger reform would be to reduce the top marginal tax rate.
With dividend imputation, company tax is merely a withholding tax (except for foreign owners of equity) – the actual rate of tax paid on corporate profits is the relevant tax paid by domestic owners of equity.
The company tax rate is also irrelevant to sole traders and partners.
I don’t think widening the gap between the company tax rate and the top marginal tax rate is desirable. It will also encourage certain people to invest in tax avoidance by classifying personal expenditure as company expenditure.
Samuel J
2 Jul 10 at 6:38 am
Interesting that the government plans to portray this humiliation as a victory.
Quite, Entropy. Just heard ABC2 News Breakfast refer to the forthcoming announcement as “monumental”. Words fail.
dover_beach
2 Jul 10 at 8:09 am
David, employees paid for it in lower wages and salary packages.
This is what I said previously.
if there was an increase in labour costs because of this it NEVER appeared in the figures but Catallaxy has never been about using evidence to back their barmy ideas
Butterfield, Bloomfiled & Bishop
2 Jul 10 at 8:15 am
Homer is definitely correct, but only in the long run. The same point gets made in the US about employer provided healthcare. If the levy increase is introduced it will lead to a short term increase in the wage bill and you can expect Higher Pay Australia to ignore it in their wage case deliberations, but it will eventually come off wages.
“I don’t think widening the gap between the company tax rate and the top marginal tax rate is desirable. It will also encourage certain people to invest in tax avoidance by classifying personal expenditure as company expenditure.”
Maybe, but there are benefits as well to reducing company tax, the biggest businesses are companies.
pedro
2 Jul 10 at 8:17 am
“Just heard ABC2 News Breakfast refer to the forthcoming announcement as “monumental”.”
Dover you dummy, this is the biggest reform since we climbed down out of the trees!
pedro
2 Jul 10 at 8:18 am
Comment on modelling:
“The trouble is, we have no way of knowing for sure if the model was in fact correct. To react to a model’s failure to predict events accurately by insisting that the model was nonetheless right — as Obama’s economic advisors have done — is hardly the most obvious course. Careful economists should instead respond with humility. When their predictions fail — as they often do — they should not dig in their heels, but should instead be willing to go back to their starting assumptions and question their validity.”
http://nationalaffairs.com/publications/detail/crisis-economics
pedro
2 Jul 10 at 8:32 am
Wrong thread I guess, but this in fact a good article from Mankiw
“Private individuals don’t usually spend their money on things they don’t want or need. So when money is kept in the hands of citizens, and transactions take place in the private sector, there is less cause to worry about inefficient spending. The same cannot always be said of government. This means that government spending designed to stimulate the economy must first be subjected to serious cost-benefit analysis, which is hard to do in a big rush. Not all government spending is created equal — and rushed spending is, in many important ways, likely to be less efficient and less useful than spending that is carefully planned.
The administration’s second assumption, meanwhile, is a matter of academic theories about the sizes of the relevant economic multipliers. Textbook Keynesian economics tells us that government-purchases multipliers are larger than tax-cut multipliers. And, as we have seen, the Obama administration’s economic team consulted these standard models in deciding that spending would be significantly more effective than tax cuts.
But a great deal of recent economic evidence calls that conclusion into question. In an ironic twist, one key piece comes from Christina Romer, who is now chair of Obama’s Council of Economic Advisers. About six months before she took the job, Romer teamed up with her husband and fellow Berkeley economist David Romer to write a paper (“The Macroeconomic Effects of Tax Changes”) that sought to measure the influence of tax policy on GDP. Crucial to the Romers’ method was their effort to identify changes in tax policy made during times of relative economic stability, and driven by a desire to influence economic behavior or activity (to encourage growth, say, or reduce a deficit), rather than those changes made in response to a recession or crisis. By studying such “exogenous” tax-policy changes, the Romers could be more confident that they were in fact measuring the effects of taxes and not those of extraneous conditions.”
pedro
2 Jul 10 at 8:34 am
You’d think he was writing just for Ken Henry:
“But economists are social scientists, not politicians. And whether they work for the government or have the luxury of merely observing the scene from an ivory tower, the integrity of the profession and the importance of the work involved demand that they be subjected to critical judgment; they must be compelled always to submit their assumptions, data, models, and conclusions to careful scrutiny. The foremost job of economists is not to make the lives of politicians easier, but to think through problems, to examine all the available information about the problems’ causes and potential treatments, and to propose the solutions most likely to work.”
pedro
2 Jul 10 at 8:37 am
Pedro ,
recent evidence is irrelevant.
What you need is is work on where there is a liquidity trap, unemployment is 10% not 5% etc.
There is quite a bit of evidence to suggest that tax cuts are pro-cyclical in good times i.e they are spent and pro-cyclical in bad times i.e. they are saved.
both the OECD and IMF wrote about this and this is why they recommended government spending and NO tax cuts.
Of course tax cuts permanently change the budget bottom line but Government spending doesn’t.
Butterfield, Bloomfiled & Bishop
2 Jul 10 at 8:50 am
Good idea Homer, let’s throw away the work C Romer did before she joined the Obama Admin, it will certainly be wrong.
pedro
2 Jul 10 at 9:27 am
Homer is right that super ultimately comes from wages. I’m not sure why the government has suggested that it needs to cut the corporate tax rate to allow businesses to pay for super, espceially given it is only 3% over ten years and there is lots of adjustment room in ten years. However if it wants to cut taxes I’m all for it. I’d be cutting personal income taxes instead however as that would compensate wage earners for the extra super being take.
TerjeP (say Taya)
2 Jul 10 at 9:31 am
My idea:
Get rid of the 15% super surcharge.
Scrap the super levy.
Get rid of payroll tax.
Keep the GST at 10%.
Make the TFT $20K.
Treat wages, dividends, profit and capital gains as income and tax it at a flat 20%.
Repeal the new conveyancing charge.
Levy a deferrable LVT and one off application equal to one year’s LVT on mineral leases to replace royalties and the resource rent taxes.
Cut or abolish excise tax.
The Government can survive on what is left over. The only loser is Treasury coffers.
.
2 Jul 10 at 10:30 am
Pedro,
it ain’t relevant as I showed.
Marky is only conditional person worried about deficits.
if you cut taxes deficits don’t matter!
what most people have missed because they lack the expertise is that if the underlying assumptions of commodity prices hold up the government will be swimming in revenue for the quite some time.
IF commodity prices are as strong as they are assuming, CGT, Company tax and the ‘new’ resource rent tax, will bring in a lot more money.
The major question if this eventuates is whether they will waste it like howard or bank it.
Butterfield, Bloomfiled & Bishop
2 Jul 10 at 10:36 am
What is the point of saving if it does not contribute to growth?
Arguably more infrastrucutre spending can be made but the income tax system has inefficiencies along the whole tax scale. Fedlstein also found that in lower tax America, estimates of DWL from income taxes were greatly undeerstimated.
.
2 Jul 10 at 10:40 am
BBB,
If we were to require Government spending to pass a CBA, by how much do you think the budget would shrink?
.
2 Jul 10 at 10:41 am
They have made a tactical decision, methinks. The vast weight of capital projects in the pipeline makes further delay almost unthinkable. I’d be surprised if Gillard hadn’t casually mentioned that she was thinking of going to an election later. Early next year perhaps.
Stragically it’s silly. Personally I think the miners still had the upper hand. I would have insisted on no RSPT negotiations until after the election.
Jacques Chester
2 Jul 10 at 10:58 am
why does the government have to pass the Commonwealth Bank?
Butterfield, Bloomfiled & Bishop
2 Jul 10 at 11:06 am
Classic Homer, but answer the question.
.
2 Jul 10 at 11:16 am
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