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12
COMMENTARY
THE AUSTRALIAN,
MONDAY, APRIL 20, 2015
theaustralian.com.au/opinion
AUSE01Z50MA - V1
TAX SYSTEM ISN’T BROKEN, AND ‘FIXING’ IT MAY NOT PAY OFF
Multinationals make a convenient target
but closing loopholes could backfire
HENRY ERGAS
The trouble, it seems, is not that we
spend too much: it’s that we tax too
little. And the Senate inquiry into
corporate tax avoidance, chaired
by Labor senator Sam Dastyari,
is unlikely to leave much uncertainty about the culprits: those taxdodging,
revenue-shifting
multinationals.
Now, conversions to virtue
should always be celebrated. Bells
will therefore have pealed in heaven when Dastyari, who was secretary of the NSW ALP during
Eddie Obeid’s final years, emerged
as a poster boy for fiscal probity.
And the fact the Abbott government has leapt on to his inquiry’s
bandwagon, foreshadowing drastic action against tax avoidance by
multinationals, only underscores
Dastyari’s achievement.
After all, in these polarised
times, it would take a heart of
stone not be moved by the prospect of Joe Hockey, Bill Shorten
and Christine Milne linking arms
on a frosty Canberra morning as
they chant “Tax the Fortune 500!”
But awkward questions remain.
If company tax is purely voluntary,
as Milne suggests, why are ruthless
bean counters signing cheques
worth nearly $70 billion to the tax
commissioner? Surely the chief financial officers of the 10 companies that shell out a third of that
total should be transported, pre-
sumably by private plane, to the
Cayman Islands where, the inquiry was told, money slides into
tax-free hideaways as smoothly as
aged rum?
As for BHP Billiton and Rio —
who in 2011-12 donated close to
$12bn to the taxman, so contributing more than the 230,000 businesses in Australia’s four largest
industry sectors — what explains
their folly? Was it merely that the
rush to dig ore out of the ground
left them no time to doctor their
tax returns? And while we’re on to
puzzles, why are our corporates
becoming increasingly tenderhearted, with the ratio of company
tax “voluntarily’’ paid to the market sector’s net capital stock some
50 per cent higher in recent years
than it was in earlier decades?
Perhaps love is in the air. But
there is an alternative hypothesis:
that as David Bradbury, then assistant treasurer in the Gillard
government, said in September
2013, “our company tax system is
far from broken”. And plenty of
reasons suggest Bradbury’s assessment is the more plausible.
Company tax revenue/net capital stock
%
2.0
1.8
Average ratio, 1997-2012 = 1.4%
1.6
1.4
1.2
Average ratio, 1980-96 = 0.9%
1.0
0.8
0.6
0.4
0.2
0
1980
82
84
86
88
90
92
94
To begin with, our laws give the
tax commissioner a general antiavoidance power that, compared
with the other advanced economies, stands out for its breadth and
depth.
Nor do our laws leave many
tools in the tax avoider’s armoury:
we have stringent controls on
transfer pricing, tight limitations
on intra-company interest payments and sweeping restrictions
on financial transfers between related entities.
Yes, the “double Irish Dutch
96
98
00
02
04
06 08 10 12
Source: ABS, ATO
sandwich”, that complex tax minimisation ploy which endlessly titillates the Fairfax press, may or
may not have been legal in the US;
what is certain, however, is that
our “controlled foreign company”
rules proscribe it.
The result is that avoiding,
much less evading, company tax is
costly, complex and risky. Dastyari’s inquiry can therefore “roar
its terrible roars and gnash its terrible teeth and roll its terrible eyes
and show its terrible claws”: the
notion that billions of dollars are
escaping the tax net will still make
no sense.
That is not to deny some profit
shifting occurs; as Cervantes’ Don
Quixote put it centuries ago, “what
errant knight ever paid taxes?” But
truckloads of doctoral theses give
us a reasonable idea about the
magnitudes involved. And not
only are those magnitudes small,
but the evidence suggests they
have become smaller.
In the 1990s, for example, the
textbook consensus was that the
“semi-elasticity” of multinationals’ pre-tax income to the company tax rate was about 0.8.
Translated into English, that
means a 10 percentage point difference between the Australian
company tax rate and the average
rate overseas would reduce multinationals’ reported pre-tax income by about 8 per cent.
However, as tax laws have become more restrictive, the “semielasticity” has fallen to between 0.2
and 0.4. On those estimates, even
if multinationals paid half of all
Australian company tax, profit
shifting would reduce the com-
pany tax take by one-half of 1 per
cent, which is less than one-tenth
of 1 per cent of Commonwealth
revenues.
There are, of course, many uncertainties around those estimates. But even were the revenue
losses larger, it is by no means obvious they make us worse off.
On the contrary, as the Henry
report argued, and recent Treasury studies have confirmed, our
high tax rates on globally mobile
capital reduce investment and
productivity, lowering Australian
wages. By lessening that impact,
profit shifting presumably creates
benefits that Australian workers
capture as higher incomes in the
longer term.
And for the same reason, closing any remaining loopholes will
ultimately reduce our wellbeing,
not that of foreign shareholders,
especially as the mining boom
subsides.
Would outcomes be better
were the clampdown co-ordinated
internationally, eliminating the
bolt-holes into which capital could
flee? The experience of the 1920s
and 30s, when the first great wave
of double tax treaties occurred,
suggests the opposite. With each
country convinced it could fleece
the sheep without skinning it, tax
rates climbed, magnifying investment risk.
Rather, the best way to boost
revenues is to increase productivity, not reduce it.
Lifting our gross domestic
product by 1 per cent through
higher productivity and labour
force participation would, Treasury’s modelling finds, raise tax receipts by nearly $4bn in its first
year alone, 10 times any plausible
gains from curbing profit shifting.
Unfortunately, that requires reforming industrial relations, as
well as tackling wasteful programs
such as the renewable energy targets: all of which would be anything but “dull and boring”. And
while Dastyari may have found
virtue, sainthood is still some distance away.
Far easier then, to bash the
multinationals. And if investment,
productivity and living standards
suffer, who’s to know?
BANKING ON A
THE BOLD MEN WHO WROTE THE LEGEND OF THE ANZACS
FORCE FOR GOOD War correspondents
Australia must ask tough questions about
the Asian Infrastructure Investment Bank
were much closer
to the action in 1915
than they are today
EMIL BOLONGAITA
TROY BRAMSTON
Last Friday, Joe Hockey
announced the appointment of
Iain Watt, former head of the
Department of Prime Minister
and Cabinet, to lead the
government’s negotiating team
with respect to the founding of
the China-led Asian
Infrastructure Investment Bank.
The Treasurer made it clear
Australia wants to participate in
the AIIB’s mission to address
Asia’s massive infrastructure
deficit, estimated to be as high as
$US8 trillion ($10.2 trillion) over
the next decade. At the same
time, he acknowledged there
were concerns about the AIIB
that would be tackled by Watt
and his team in their
negotiations with the Chinese
government.
These concerns were
expressed by Tony Abbott when
he announced Australia would
join the AIIB even as his
government would conduct
consultations with China on “the
bank’s design, governance and
transparency”.
At the core of these concerns
is the question of fiduciary
responsibility. How can
Australia be assured the funds it
contributes to the AIIB will be
spent as intended? Can the AIIB
be structured, organised and
managed so its infrastructure
projects will be true public goods
and produce developmental
benefits that are good for the
bank — and good for Australia?
For the US government,
which opposes the AIIB, this is a
question the new bank will be
hard pressed to answer. The
White House issued a statement
that AIIB should follow “the
high standards of the World
Bank and the regional
development banks”.
But these standards do not
guarantee the AIIB will be
immune to problems that plague
infrastructure projects funded by
multilateral development banks,
chiefly corruption.
Take Bangladesh’s Padma
Bridge project. In June 2012, the
World Bank cancelled its $US1.2
billion loan to Bangladesh for the
project. The Asian Development
Bank, which had committed to
provide a $US610 million loan,
followed suit.
The corruption, waste and
poor impacts that undermine
infrastructure projects stem from
both government and market
failures in the various countries.
But they are also failures by
MDBs to effectively translate
their high standards into
operation to respond to the
complexities of the political
economy of developing
countries.
To be effective, the AIIB
needs to be designed differently
and learn from problems faced
by the MBDs. Australia should
negotiate the adoption not just of
high standards and best
practices, but of better
approaches that build on lessons
from the MDBs’ experiences.
These approaches should
address the central question:
how will the AIIB ensure that its
lending does go to produce
public — not private — goods?
This question deals with the
three serious risks faced by AIIB.
The first is controlling
corruption. Infrastructure is
inherently high-risk because of
its big budgets. The funds flow
attracts unscrupulous elements
like bees to honey, especially if
the projects are undertaken in
poor governance environments
with insufficient safeguards. Will
AIIB be prepared to cancel or
suspend financing if there are
credible reports of corruption?
Will the AIIB join other MDBs
in the cross-debarment of
problematic firms? Will the AIIB
have agreements with member
governments for co-operation in
investigation and prosecution for
corruption?
The second is tackling moral
hazard. MDBs are different from
commercial banks because they
lend mainly to its member
governments, which rarely go
bankrupt. Sovereign guarantees
are prized by MDBs because
governments are bound to pay,
and pay them first ahead of other
creditors in the event of disputes.
This limited risk of default leads
to weak incentives for rigorous
due diligence.
The moral hazard in MDBs is
matched by moral hazard in
borrowing governments, whose
accountability for corrupted
infrastructure can be left to
succeeding governments to
handle. How can the AIIB be
structured so that the
organisation and staff are
disciplined for its mistakes?
What incentives can the AIIB
provide to ensure its staff
conduct rigorous due diligence
— and that governments borrow
only for what is needed and
spend as intended?
The third is addressing
disbursement bias. MDBs face
built-in pressures to lend quickly
and lend hugely. To be viable,
MDBs establish lending targets,
and these targets are distributed
across regional departments that
in turn are allocated to countries.
Staff performance in MDBs is
associated in meeting these
targets; hence, the drive to
disburse can trump the call for
careful design and delivery.
How can the AIIB be
managed so that it lends
prudently and effectively?
Similarly, how can the AIIB
ensure that it can also act quickly
to cancel or suspend? Also, how
can AIIB staff be managed to
ensure that they properly design
projects, less focused on speedy
project approval and more on
project effectiveness?
As Australia seeks to firm up
the terms of its engagement with
the AIIB, its negotiators need to
make the most of the
opportunity to establish a
multilateral development bank
that can help tackle Asia’s
massive infrastructure deficits
and produce the public goods
that will contribute to greater
growth opportunities in the
region. Australia must ask the
tough questions to ensure that
the infrastructure projects of the
AIIB will resolve infrastructure
problems, not create them.
AIIB must not just be about
best practices and high
standards. It must be about
solving these problems and
producing public goods.
Emil Bolongaita is executive
director of Carnegie Mellon
University Australia. He was
formerly a staff member of the
Asian Development Bank.
This week sees the most important public commemoration of a
historical event since the Bicentennial of British settlement in
1988. The 100th anniversary of the
Gallipoli campaign during World
War I, which gave birth to the
Anzac legend, continues to shape
the Australian story more than
anything else.
No other event — social, economic or political — continues to
infuse the public consciousness
and inspire a greater emotional
connection to the past than the
landing of Australian troops on
the shores of Gallipoli in the predawn of April 25, 1915, and the illfated eight-month conflict that
followed.
In remembering the struggle of
these soldiers, and those who
made the ultimate sacrifice, no
words have been more important
than those penned by the war correspondents who kept Australians
informed about what was happening on the front lines of battle.
Australia’s official war correspondent and historian, Charles
(CEW) Bean, did more than any
other to create the Anzac legend
and sustain it in the years after
WWI by helping to establish the
Australian War Memorial.
Among the plethora of new
books about the war, none are
more important than those chronicling the extraordinary contribution Bean made to our
understanding of the conflict and
the cultivation of the Anzac story.
Two excellent biographies —
Ross Coulthart’s Charles Bean
(HarperCollins) and Peter Rees’s
Bearing Witness (Allen & Unwin)
— provide a fresh look at his life
and legacy. They each offer a balanced portrait that recognises the
flaws and strengths of his writings.
Bean’s diaries, republished in Phillip Bradley’s Charles Bean’s Gallipoli (Allen & Unwin), make a
magnificent companion volume.
A new miniseries, Deadline
Gallipoli, began on Foxtel’s Showcase channel last night and continues tonight. It powerfully
dramatises the story of Gallipoli
through the eyes of war correspondents Ellis Ashmead-Bartlett, Keith Murdoch, Phillip
Schuler and Bean. Their writings
are chronicled in Mark Dapin’s
terrific collection, From The Trenches (Viking).
I found the miniseries to be utterly compelling viewing, although not entirely accurate. It is
as much a personal portrayal of
these extraordinary men as it is
about the war they witnessed and
reported.
They faced incredible dangers,
waged battles with censors and
military chiefs, and were not always welcomed by the troops they
wrote about.
Deadline Gallipoli opens with
Bean embedded with the Australian troops wading ashore at Galli-
poli under Turkish fire. Bean
became the official war correspondent in late 1914, after narrowly winning a ballot run by the
Australian Journalists’ Association. He remained at Gallipoli
until the evacuation in December
1915 and later reported the war on
the Western Front.
Our understanding of Gallipoli
is owed in large part to Bean’s voluminous newspaper dispatches,
diaries and notebooks, six volumes of official history he wrote
and six more that he edited.
These writings are rendered
with his belief in Australian courage, mateship and egalitarianism.
Some of his writings were exaggerated, he made omissions and
his conclusions have been questioned. His reports often contradict his diary entries. But nobody
saw more of Gallipoli or wrote
more about it. We remain in his
debt for his contribution to history.
Last year, I met Bean’s grand-
daughter, Anne Carroll. Last
week, I spoke to his grandson, Ted
(Edward Bean) Le Couteur. They
remember a modest, kind and
gentle man who rarely spoke
about the war at home but was immensely proud of his writings and
the role he played in creating the
Australian War Memorial.
“I picture him as erect, tall and
slim and remember him as kind
and gentle in manner and word,
and as having a gentle sense of humour,” Anne recalled. “I remember his moderate and measured
way of speaking and his looking
you straight in the eye.”
Ted said he occasionally asked
his grandfather to reflect on his
wartime experiences. “I used to go
walking with him while I was a
university student studying history. I would ask him to talk about
the war but he would always say
he preferred to talk about something else.”
No contemporary war correspondents are given the access
Bean and others had at Gallipoli.
As Richard Trembath writes in
Bridget Griffen-Foley’s splendid
edited collection, A Companion to
the Australian Media (Scholarly),
today’s correspondents are bombarded with information from
governments but rarely get access
to the battlefield, and if they do,
their reporting is constrained.
“Australian governments of all
persuasions have been quite
happy for the media to be sidelined in our Middle Eastern engagements,” Trembath writes.
There are Australian journalists
abroad who file valuable reports
from war zones. But new technology, the rise of “citizen journalists” and the closure of foreign
bureaus may suggest the days of
“traditional” war correspondents
are numbered.
Coulthart, who has reported
from East Timor, Iraq and Afghanistan, is envious of Bean’s
“access and relative journalistic
freedom”. He notes Australia’s re-
cent military engagements “have
often been inadequately reported”
as “the military only helps the
press tell the story it wants the
public to hear”.
A century ago, Australians
knew more about what was happening during WWI than this
generation has known about wars
in Iraq and Afghanistan. Perhaps
if the government allowed correspondents greater access to the
frontline for immediate reporting,
or allowed them to keep detailed
accounts for history, our understanding of modern conflicts
would be greater than it is.
It goes a long way to explain
why Gallipoli, and the larger commemoration of WWI, continues
to provoke a strong emotional response from Australians. The
work of war correspondents provides an enduring link to a conflict
that took place long ago and helps
us to understand why a modern
nation continues to draw so much
from it.
MURDOCH’S GALLIPOLI LETTER A PREAMBLE TO SOVEREIGNTY
The journalist’s scathing dispatch prompted
Australia to act as an independent nation
CARL BRIDGE
After the failure of the August
offensive at Gallipoli, the Australian prime minster, Andrew
Fisher, sent his friend and fellow
West Melbourne Presbyterian
parishioner, the 30-year-old
journalist Keith Murdoch, to the
peninsula on a fact-finding
mission. Murdoch was shocked
by what he found.
Murdoch interviewed all the
Australian generals and some of
the British general staff. He also
saw things with his own eyes.
Journeying on to London, he was
entrusted with a letter for the
British prime minister, Herbert
Asquith, by the British Gallipoli
correspondent, Ellis AshmeadBartlett, which argued strongly for
an end to the futile campaign.
But a rival British journalist
tipped off the military censors in
Marseilles, the letter was con-
fiscated, and Ashmead-Bartlett
lost his accreditation.
Undaunted, Murdoch took it
upon himself to make the case for
withdrawal to the authorities. On
September 22 and 23, in The
Times’ offices in London, he typed
an excoriating 8000-word philippic addressed to Fisher. He told
the PM his “fears had been justified” and the “slender perch on the
cliffs” was an unwarranted risk at
the price that was being paid.
“You would have wept ... if you
had gone with us over the ground
[at the Nek] where two of our finest Light Horse regiments were
wiped out in ten minutes in a brave
attempt to advance a few yards to
Dead Man’s Ridge. We lost 500
men, squatters’ sons and farmers’
sons, on that terrible spot. Such is
the cost of so much as looking out
over the top of our trenches.”
He went on: “The spirit at Suvla
(where the British had more-orless stayed put on the plain below)
is simply deplorable ... Our men
have found it impossible to form a
high opinion of the British K(itchener) men and territorials. They
are merely a lot of child-like
youths ... Sedition is talked around
every tin of bully beef on the peninsula ... and it is only loyalty that
holds the forces together.
“It is not for me to judge (Sir
Ian) Hamilton (the commanderin-chief), but it is plain when an
army has lost complete faith in its
general ... He has very seldom
been at Anzac. He lives at (the offshore island of) Imbros. The
French call him the General who
lives on an Island ... This unfortunate expedition has never been
given a chance.”
The letter, partisan and highly
coloured as it was — and gratuitously omitting the achievements
of the regular British soldiers at
Helles — contained irrefutable
evidence about the plummeting
morale of the Australians, among
others. Geoffrey Dawson, editor of
The Times, encouraged Murdoch
to make his views known to the
British cabinet. He suggested
Murdoch, with Fisher’s permission, give a copy in confidence
to David Lloyd George, then
munitions minister, who in turn
handed it on to Asquith. The wily
Asquith, sensing its explosive
nature, muzzled it somewhat by
having it printed as a confidential
British cabinet document.
Hamilton was dismissed barely
a fortnight later and the decision
to evacuate recommended by his
successor soon afterwards. Murdoch’s letter, along with a report
from the South Australia-born
Maurice Hankey, the British cabinet secretary, who visited Gallipoli at the same time, and other
evidence, was instrumental in the
British cabinet’s decision. Most
important, however, was that
Kitchener, then British defence
supremo, was already casting his
eyes irrevocably to the Western
Front.
In February 1917, crossexamined before the British Parliament’s Dardanelles Commission,
Murdoch was accused by the British of flouting censorship rules and
courting treason. Andrew Fisher,
by now high commissioner in London and a member of the inquiry,
defended his man.
Fisher: “You ... considered
yourself in a privileged position as
carrying a mandate from one selfgoverning dominion (Australia)
which was directly concerned
with the operation of their forces
in Gallipoli and elsewhere, to give
your best impression of what you
saw?”
Murdoch: “I considered that I
was charged with a duty of reporting to my government in Australia
to the best of my ability.”
Fisher: “And you naturally felt
that you would like to do the best
not only for your country but for
the empire’s forces now and
always?”
Murdoch: “I think I risked my
whole career. I am always prepared to offer everything I have to
Australia.”
And so he had.
Fisher had sensed that the Gallipoli campaign was a strategic disaster and felt responsible to the
Australian people for committing
the AIF there. Murdoch, perhaps
the most distinguished journalist
of his generation, was sent there as
Fisher’s ‘‘eyes and ears’’ and his incendiary report found its mark in
the governing seat of empire.
This was not a case of Australia
tugging its forelock to the dominant imperial power, as some
today believe. Rather Fisher’s
Australia acted as an independent
nation stating its terms for participating in an alliance. Both Fisher
and Murdoch were convinced the
war had to be won, but that this
would only happen on the Western Front. Prime minister Billy
Hughes’s much-trumpeted assertions of Australian sovereignty at
Versailles in 1919 were made on
the back of Fisher’s and Murdoch’s behind-the-scenes hard
work three years earlier.
Carl Bridge is Professor of
Australian History at the Menzies
Centre for Australian Studies,
King’s College London, and coeditor of Australia and Britain in
War and Peace, 1914-1919, the
Department of Foreign Affairs
and Trade’s First World War
Centenary documentary volume.