Editorial – Watering the Leaves

If you had a limited amount of water and could use it on a tree’s roots or leaves, which would you choose?

Even Forrest Gump could probably tell you that his mamma always said that we put sprinklers on the ground for good reason. Yet, despite this, our Federal opposition is determined to commandeer precious resources away from the roots of our economy and sprinkle them over the leaves.

How else could one describe Bill Shorten’s latest proposal to:

  • double tax share dividends (more on this coming);
  • put the ill-gotten gains through the government’s administrative ringer (creating more needless and unproductive government jobs); and
  • send scraps back to people in the form of personal income tax cuts, the amounts of which have not yet been disclosed?

Concerningly, large swaths of the free-market and economically conservative media have gone missing in hounding this absurdity into the communistic and totalitarian wasteland it belongs. Some are even incredibly suggesting that it could be a ‘political winner’ for Labor.

I can only assume that vigorously debating the inconsequential merits of Barnaby Joyce’s loins for weeks on end must have been conceptually easier and far more thrilling for our chattering classes.

What a joke.

Double-taxing 

This is the most egregious and sinful aspect of Labor’s policy and completely ignores the reality of how companies function – a reality that precious few of the political, media, journalistic and Canberra press gallery classes appear to have any understanding of.

Here’s a crash course guys – come and sit closer and listen carefully to uncle TMR. I’ll try to speak in some of your language while I’m at it…

Companies are separate legal entities, just like real people. However, unlike real people, companies have this ‘game changing’ feature life-hack called separation of ownership and control. For your information, this revolutionary ‘paradigm-shift’ happened about 200 years ago. What it generally means is that:

  • directors control and make decisions regarding a company’s operations; and
  • the company’s owners receive the company’s profits, or ‘booty’ if you will, via this radical thing called ‘shares’. These ‘shares’ are ‘social contracts’ and are needed for ‘equality’ so that we can know how much of the company is owned by each particular owner. We wouldn’t want someone taking something that they are not entitled to now, would we?

What these awesome game-changers mean is that company profits belong to the owners of the company. Yes, that’s right: the shareholders (Well done!).

Now here’s where things get a little a little bit tricky – because you’ll need to be able to count to two (2). You may need to take an ADHD pill…

(It’s ok, I’ll wait…)

(Please, take your time…)

Generally speaking, a company’s profits will either be retained for the company’s continued operations, distributed to the company’s shareholders… or used for controlling the words that the company’s workers are allowed to use (you know, just like China!). However, before any of this happens, the federal government taxes those profits. Afterwards, some of the leftovers can then go to the company’s owners (yes, that’s the shareholders – give yourself a gold star) in the form of this out-of-the-box disrupter called ‘dividends’.

Under the current system, the law recognises the Gump-obvious fact that:

  • the company’s owners have already been taxed on their profits; and
  • it would be unfair to tax those owners yet again on the EXACT SAME MONEY without anything having been done to or with that money before it goes to the owners.

We call this ‘fairness’ – and we do it because we’re not South Sudan.

Labor, on the other hand, thinks that it’s high time we taxed people twice on the same money:

  • once at the time of declaring the profit; and
  • again if people have the audacity to want to transfer some of that declared profit their bank accounts.

This is more than just a ‘new’ tax. It’s a tax on tax and it shouldn’t be legal.

Protection racket

In typical socialistic fashion, Labor doesn’t simply want to appropriate money it should have no right to: it then wants to double down in terms of what it does with it.

This is where things get particularly frightening and it follows the well-worn socialistic pattern of:

  • Create a problem or a tax that will make the country suffer.
  • Watch people suffer.
  • Tell the people that you are the answer to the problem.
  • Give the people some of their money back as ‘compensation’ (after a chunk of it has disappeared through your administration).
  • Say that the rich need to be taxed even more so that we can continue to solve this horrible inequality.
  • Rinse, lather, repeat.

As for Shorten, he’s already shown a pretty solid aptitude for this method:

He (Bill Shorten) thinks that it’s solely the Liberal government’s fault that asylum seekers are spending longer times in detention, even though his team needlessly put ridiculous numbers of them there in the first place when it was in government.

Best of all, Bill feels sorry for Essendon’s banned football players who he claims have been ‘let down by others’, even though:

* they were all grown men who were in charge of what went into their own bodies; and

* it was Bill’s team of political stunt makers who egregiously started this whole train wreck when they were in government, with their ‘blackest day in sport’ farce headed by then Ministers Jason Clare and Kate Lundy. In a complete lack of due process and fairness, they hastily convened a press conference to publicly announce to the alleged perpetrators: ‘Don’t underestimate how much we know, and if you are involved in this come forward before you get a knock at the door’ (yes, this was really said). Needless to say, Clare and Lundy didn’t give a rat’s gluteus maximus about the players or the issue: they were simply following orders to divert the public’s attention away from the ongoing leadership dramas in Gillard’s last days in February 2013 – and a fat load of good it did in the end, other than to create a public circus around a group of professionals, their reputations, incomes and livelihoods. Just imagine if you were subjected to this form of ‘justice’ before ever being charged.

The last two examples represent typical modern Laborthink: pick a mainstream or popular victim and then blame someone else for their ‘plight’ to make it seem like you care, regardless of who is actually right or wrong. Creating the victim’s problem yourself in the first place – so that you can be there to put your hand on their shoulder later on – is also a frequently exercised option in this strategy.

If the mafia did something like this, it would be called a protection racket and people would rightly be put in jail for it.

How some of the most intelligent people in our society can’t see that this is precisely what Labor regularly does ON AN OUTRAGEOUSLY LARGER SCALE simply astounds me.

Drying the roots and watering the leaves

Business and enterprise are the roots of an economy. Without them, there are no jobs and there is no economy – just ask the people of Venezuela.

Unsurprisingly, if a government double-taxes the profits of the overwhelming bulk of our economy’s businesses (i.e. companies) overnight:

  • less people will invest in those businesses going forward;
  • those businesses will make less money, scale back their operations and necessarily let go of staff to remain viable (anyone who has been made redundant knows how this works); and
  • the economy will grind to a halt.

As for giving scraps of that double-taxed money to ‘workers’ in the form of personal income tax cuts, this represents little more than watering the leaves.

If people don’t have jobs, then they have already achieved the best personal tax cut possible. What good is to offer personal income tax cuts to people after you’ve caused them to lose their jobs and join the government’s ever-growing clan of people paying no net tax?

But wait, we know you want more!

Sealing the whole sorry affair is the fact that, under a Shorten Labor government, there will be no alternatives left for people to invest their time and money in:

  • Property? Not a chance – as Shorten and Labor have made it clear that they will scrap routine tax deductions on property investments and halve the capital gains tax discount on assets held for over a year.

Even sticking it under the bed is on borrowed time.

So where to?

Then again, when you’re trying to get the best out of something, I suppose it makes sense to back it into a corner, give it no options whatsoever, grab some popcorn and enjoy the inevitable efficiency. Right?

Lastly, if you’re one of those people think that we need to be taxing those ‘greedy companies’ so that they pay even more than the $68 billion in direct taxes that they already pay (see page 16), then please consider the following charts – and ask yourself: should we really be feeding this beast even more?

Budget 2017 Government Receipts and Spending Graph

(Figures sourced from the Australian Government’s official budget papers – see pages 11-6 and 11-7).

PS: don’t be fooled by those green receipt (taxation) troughs under Labor. They occurred as a result of the recession ‘we had to have’ and the global financial crisis – and most certainly not because Labor wanted to be low-taxing. The only thing of substance to note here is how Labor utterly wrecked the federal budget on both occasions by spending what we didn’t have.

PS(2): if you want to know why people cannot stand the Turnbull government, then look no further than those last four or five bars in the second chart – and wallow in the fact that we have a federal Liberal government that walks, talks, taxes and spends like a Rudd/Gillard Labor government.

PS(3): If you want to know why Gough Whitlam was such an economic vandal and one of the worst Prime Ministers we have ever had, then look at the revenue and spending bars for 1973-74, 1974-75 and 1975-76. In just three years, Whitlam managed to increase spending by 32% (with tax receipts increasing by around 15% over the same time). As you can see, the Federal Budget has never been the same since.

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9 thoughts on “Editorial – Watering the Leaves”

  1. typo, sorry: should read “This is a further concept built in to the personal income tax rate scale and defined in law by Parliament, to embody community judgements about redistributive fairness.”

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  2. Very good, Marcus.
    The point of Shorten’s ‘justification’ that you do not address is that the dividend recipients targeted in this shakedown are not themselves liable for any tax, and therefore receive the ‘withholding tax’ that the companies paid on their behalf as a refund (in effect). This is hardly the ‘double taxation’ that you mention, but it is apparently an insult to any social justice warrior.
    The reason these targeted dividend recipients don’t pay tax, of course, is because they have a ‘taxable income’ – a measure of their capacity to pay defined in law by Parliament – that is below the ‘tax free threshold’. This is a further concept but not the personal income tax rate scale and defined in law by Parliament, to embody community judgement about redistributive fairness.
    So what Shorten is really saying is that he wants to upend the legislated personal income tax scale (selectively, for a few receiving dividends) and upend the concept of taxable income (again, selectively, for just one category of income).
    You can see this is an application of the Emma Alberici school of economics: tax should be what Emma imagines it should be, as computed by applying a nominal tax rate to a wholly imaginary and arbitrary tax base Emma pulls out of the air.
    As you say, the incompetence of journalists in not cutting to the core of this nonsense, and instead buying the Shorten spin that it has everything to do with rich retirees, is truely depressing.

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    1. Thanks for comment Tezza. I’ve posted this up on the Cat already, but have replicated it here for good measure. While I certainly appreciate the ‘official’ line on the policy and it’s purported limits, the fact is that the policy is still very much in the thought bubble phase and I don’t believe for one second that Shorten will only apply it to the lowest income earners. It’s simply fanciful to think this would be the actual legislated outcome. And the moment it hits anyone earning a sufficient enough personal income it will be a double taxing affair.

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    2. Tezza – I put this up in response to another comment over at the Cat. I hope you find it interesting on the point you have made:

      I reckon they’d be unpleasantly surprised at how much the final tax raised would be! People aren’t mugs. When the overall economy-wide tax rate starts to hit the 25% mark, people find ways.

      I also still think what Shorten is proposing is still a form of double taxing (albeit not as full blown as if his policy were to apply to all dividend imputation). See this leftist economist admitting it for example:

      http://www.afr.com/news/policy/tax/labors-dividend-tax-change-good-policy-shame-about-the-politics-20180315-h0xj3c

      For somebody with a 15 per cent rate, half of the credit should go to extinguishing that tax liability and the rest be converted to a cash refund. If a shareholder has a zero tax rate, the full credit should be converted into a refund. Why should those with a nil tax rate be penalised, purists would ask.

      Because, economist Saul Eslake argues, it costs the country a lot of money. “It is true that the cash refund makes Australia’s imputation system absolutely pure and completely eliminates the double taxation of dividends,” he says.

      “Without cash refunds it does mean that someone whose taxable income was less than the company tax rate would still experience some double taxation of their dividends. The thing is how pure do you need to be, bearing in mind that we are already closer to purity than most of the world. Some of the proponents of cutting the company tax rate have as their principle argument that we need to be more like other countries. It comes down to whether this is something we can and should afford to do.”

      The first table here also shows people in every tax bracket as being effected to some degree:

      http://www.afr.com/news/policy/tax/taxable-income-means-nothing-in-this-tax-war-experts-20180315-h0xiea

      It boggles the mind as to how the left see not taxing someone (what they shouldn’t be taxing them) as a ‘cost’ and how Shorten’s policy will ‘save’ the budget some money. Morons the lot of them.

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      1. thanks for this Marcus – I don’t subscribe to the AFR, so don’t easily access the articles you cite.

        That second AFR article you link to is a wild one! It speaks almost interchangeably of income, wealth, taxable income and capacity to pay, in a way that would do Emma Alberici proud! As you suspect, I’m sure leftists do want to abolish franking entirely, as a expression of an absolutely predictable leftist belief that companies pay taxes as if they were people, rather than agents for shareholders, managers and employees! (That is, the economic incidence of company tax can never be on companies.)

        Although myself an economist, I tend to a simply legal view of income tax liability: the Income Tax Assessment Act specifies the tax base (taxable income) and the tax rates.

        Why would anyone imagine an income tax liability ought be influenced by wealth? Taxing wealth is a tricky business deserving its own consideration (because eg people can be asset rich but illiquid, as many retirees are). Let the leftists advocate French-style inheritance taxes if they want to go there.

        Why would anyone imagine that gross income might be a better indicator of capacity to pay an annual collected income tax than taxable income, which is laboriously specified in law, firstly to allow deductions for costs necessarily incurred in gaining or producing taxable income? Taxable income has been defined at law precisely to enact Parliament’s conception of taxable capacity (plus random encouragements to the fetish of the day, such as Shorten’s proposal to allow immediate deduction of the full cost of some capital stock, rather than appropriate depreciation of it over its economic life). If you really thought ‘living standards’ are the best indicator of capacity to pay tax, you’d just have a consumption tax. Gross income wouldn’t work as a base, as the costs of producing income vary wildly across occupations.

        My original comment was trying to highlight that if leftists think the income tax base is wrong, let them openly propose to redefine taxable income systematically, rather than arbitrarily limiting franking refunds for some, but not all. If they want to raise income tax rates, let them openly propose it, not arbitrarily impose a random tax on some of those within the tax free threshold.

        Shorten has tried to avoid this clarity by arm-waving and (historic) anecdotes (probably apocryphal) about rich guys in SMSFs getting big franking credits. But the pattern of actual losers from his measures would catch him out, if we had a competent Government or media.

        cheers – and keep up your great blog, which I always enjoy!

        Terry O’Brien

        Ps don’t you love the quote > > Because, economist Saul Eslake argues, it costs the country a lot of money. >

        It doesn’t cost the country anything to leave money in the hands of the people who generate it. Any tax less than 100% of everything costs the government money, but that is a different matter!

        >

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        1. Hi Terry, thank you for your very insightful comment and kind words. You’re not wrong regarding that second Fin article – it’s out there alright! (PS: I don’t subscribe to the Fin either. If you load up a page and then hit the cancel load button before the whole page and its ads can load, then you’ll get the article).

          I also assume you meant to say ‘Abbott’s’ immediate deduction re: some capital stock? (and not Shorten’s).

          This nonsense that it’s all the government’s until you are told you can have it makes dogs out of us all. I wouldn’t worry so much if it was just Labor – but many on the Liberal side think the same:

          https://themarcusreview.com/2016/03/14/kelly-odwyer-on-thin-ice/

          PS: are you the same Terry O’Brien that is/was from Australian Treasury?

          https://www.rba.gov.au/publications/confs/2002/pdf/bios-2002.pdf

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          1. thanks Marcus – re the Aus Treasury question, guilty as charged! “Was” is the operative tense – now retired.

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