tag:theconversation.com,2011:/us/topics/government-revenue-14505/articlesgovernment revenue – The Conversation2018-05-01T20:16:11Ztag:theconversation.com,2011:article/957822018-05-01T20:16:11Z2018-05-01T20:16:11ZThe government could be boosting the budget bottom line with a change to how it taxes gas<p>Resources usually give the budget a healthy boost in economic boom times but the government could be reaping more revenue if it changed the way it taxes gas projects, my new modelling shows. </p>
<p>A small change in <a href="https://www.legislation.gov.au/Details/F2015L02054">the method for valuing gas</a> would increase revenue from the petroleum resource rent tax by US$15.5 billion to 2030, compared to the current US$5 billion to 2030. </p>
<p>I modelled what would happen with an alternative but accepted method to tax the revenue from Australia’s four largest gas projects in Western Australia - Inpex’s Ichthys, Woodside Petroleum’s Pluto and Chevron’s Wheatstone and Gorgon. The method is called “net back” and it calculates back from a gas market price to get the gas transfer price, in a similar approach to that currently used for state gas royalties. It netted an average of <a href="https://cdn.tspace.gov.au/uploads/sites/72/2017/04/PRRT.pdf">A$1 billion per annum</a> in Queensland and Western Australia from 2012 to 2016.</p>
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Read more:
<a href="https://theconversation.com/prrt-explained-why-arent-we-benefitting-from-the-resource-tax-66907">PRRT explained: why aren't we benefitting from the resource tax?</a>
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<p>The production capacity of the four largest projects is <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3042967">38.3 million</a> tonnes of gas per annum (about 44% of Australia’s natural gas). But these projects currently raise no petroleum resource rent tax and <a href="https://www.businessinsider.com.au/chevron-dropped-its-high-court-appeal-over-a-340-million-tax-bill-2017-8?r=US&IR=T">scant income tax</a>. This gas is earmarked for export and little is reserved for domestic consumption.</p>
<h2>A small tax regulation change is required</h2>
<p>When businesses shifts or transfers gas between different stages (upstream to downstream) of a project they are required by petroleum resource rent tax regulation to use a combination of methods (“cost plus” and “net back”) to value gas at the transfer point. My alternative of the net back method alone, uses the LNG market price from which costs are deducted back to the point, prior to gas being processed into liquid form. </p>
<p>My submissions to both <a href="https://treasury.gov.au/consultation/options-to-address-the-design-issues-identified-in-the-petroleum-resource-rent-tax-review/">Treasury</a>, and the <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporatetax45th/Submissions">Senate</a> inquiry into tax avoidance for the offshore gas industry, explain how the current gas transfer pricing method can be legally manipulated by gas operators. For instance, timing differences in recognising capital or operating costs. </p>
<p>The <a href="https://www.legislation.gov.au/Details/F2015L02054">petroleum resource rent tax regulations</a> prescribe an arbitrary gas valuation method for integrated gas projects, which devalues the transfer price of gas, meaning less revenue for the government. </p>
<p>The current method is not a transparent approach for businesses to use to value gas on its transfer from upstream to downstream. It incentivises tax minimisation through easily manipulated calculations. </p>
<p>Since September 2017 the Turnbull government has yet to respond to the <a href="https://cdn.tspace.gov.au/uploads/sites/72/2017/06/Interim-Government-Response-to-the-Petroleum-Resource-Rent-Tax-Review.pdf">Treasury inquiry’s interim report</a> on gas. The <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporatetax45th">Senate inquiry</a> report has also been delayed. </p>
<p>Another variation to increase revenue along with the “net back” method would be to shift the gas taxing point from just before liquefaction, to after the gas-to-liquid process, at what’s called the “custody transfer meter”. <a href="https://pgjonline.com/magazine/2009/july-2009-vol-236-no-7/features/custody-transfer-the-value-of-good-measurement-and-the-search-for-the-truth">The price per the metered volumes is</a> accepted by the buyer and the seller of gas as the basis for a transaction.</p>
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Read more:
<a href="https://theconversation.com/senate-inquiry-told-zero-tax-or-royalties-paid-on-australias-biggest-new-gas-projects-77479">Senate inquiry told zero tax or royalties paid on Australia's biggest new gas projects</a>
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<p>Australia needs to follow in the footsteps of countries like the Netherlands, <a href="https://www.sciencedirect.com/science/article/pii/S0301421513004916?via%3Dihub">which has already reformed</a> its inequitable, regulated gas pricing to market-linked pricing. The Netherlands government changes, which increased tax revenues, mainly targeted their current (not future) <a href="http://www.nlog.nl/en/groningen-gasfield">Groningen gas field</a>, partly owned by Shell and Exxon.</p>
<p>Any change to resource taxing will bring the usual chorus of concern about <a href="https://theconversation.com/why-australia-doesnt-face-sovereign-risk-in-the-gas-markets-84686">sovereign risk</a> so often heard in Australia when tax reform is raised. However sovereign risk concerns overt changes, such as nationalisation of resources, certainly not regulatory changes to promote transparency in taxation.</p>
<p>Changes to the petroleum resource rent tax have <a href="https://www.smh.com.au/politics/federal/energy-companies-will-pay-more-under-budget-changes-that-could-also-secure-company-tax-win-20180426-p4zbui.html">been part of pre-budget negotiations</a> between the Turnbull government and certain independent senators. However these changes will only affect new projects that will not start for at least 10 to 15 years, so the expected revenue will have no impact on next week’s budget. </p>
<p>The current petroleum resource rent tax regulations prescribe an arbitrary gas valuation method for integrated gas projects. It devalues the transfer price of gas, meaning less revenue for government. </p>
<p>As a first step, the government should reform tax regulation to the net back method for existing projects. This change could easily be part of next week’s federal budget.</p><img src="https://counter.theconversation.com/content/95782/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Diane Kraal does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A small change in the method for valuing gas would increase revenue from the petroleum resource rent tax by US$15.5 billion to 2030, compared to the current US$5 billion to 2030.Diane Kraal, Senior Lecturer, Business Law and Taxation Dept, Monash Business School, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/705852016-12-19T05:35:58Z2016-12-19T05:35:58Z2016-17 MYEFO experts’ response: more of the same is not good enough<p><em>Treasurer Scott Morrison described the federal government’s Mid Year Economic and Fiscal Outlook (MYEFO) as “optimistic but very realistic” as it holds onto the forecast of returning the budget to balance in 2020-21.</em></p>
<p><em>Our expert panel of economists take apart the MYEFO figures to see how the forecasts hold up and what has changed since the budget.</em></p>
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<p><strong>Ben Phillips, Principal Research Fellow, Australian National University</strong></p>
<p>The 2016 MYEFO shows that the budget balance is in the red to the tune of A$36.5 billion for this financial year and is not projected to return to surplus until 2020-21. This year will be the federal government’s ninth straight budget deficit and projections suggest we’ll get to 12 deficits. Deficits are the norm for Australia’s government as they are for most governments around the world. </p>
<p>Government budgets are not like household or business budgets. Long runs of deficits are typical and don’t necessarily imply that the economy is in a dire position. </p>
<p>What should be of more importance is government spending in investment in programs that offer Australian society a longer-term dividend and quality taxation rather than balancing the budget. Unfortunately, it’s much simpler to focus on one number – the budget deficit or surplus. </p>
<p>Current policy settings are largely based on the continuation of what should have been viewed as a temporary income boom for Australia. Successive governments lowered average rates of personal income taxation and to a lesser extent increasing government spending. There is little evidence that these tax cuts inspired economic growth through increased workforce participation. Most of the beneficiaries either continued working their existing hours or were retired anyway. </p>
<p>Weaker income growth across the economy, and specifically modest wage growth limiting bracket creep, means it’s taking much longer to recoup revenue losses. Extremely generous tax treatment for superannuation accounts and older Australians means that lower revenue streams are locked in for years to come. </p>
<p>To return the budget to surplus the government needs either to unwind the significant tax breaks or make very significant cuts to government expenditure. With a weak economic outlook, such bold measures are both politically difficult and arguably poor economics for the moment. In the longer term, reducing superannuation tax concessions for higher-wealth individuals would appear the most logical area to gain tax revenue with minimal economic disruption. </p>
<p>The reality is, barring Australia catching another lucky economic wave, we are set for continued budget deficits for many years into the future. While Australia does face serious fiscal challenges with an ageing population, with likely growth in health and disability costs, good economic management by government should be judged by the quality of spending and policy reform first and foremost. </p>
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<p><strong>Janine Dixon, Economist at Centre of Policy Studies, Victoria University</strong></p>
<p>To return to surplus by 2020-21 will require a perfect storm of strong economic growth, strong terms of trade and fiscal restraint. The factors driving economic growth are far from assured over the next four years. </p>
<p>MYEFO relies on a massive 4.5% increase in non-mining investment in 2017-18, driving capital stocks that will underpin economic growth and wage growth over the forecast period. If this doesn’t eventuate, wage growth will continue to be weak as it has been over the last three years, holding back nominal economic growth and, importantly, the tax base.</p>
<p>MYEFO also relies on unemployment trending downwards, and expects to make use of underemployed workers who presently constitute “spare capacity” in the labour market. Underemployment has risen steadily since about 2011, which certainly points to some capacity for growth if those people can be employed in the economy. </p>
<p>However, to realise economic gains the government will need strategies for reducing underemployment: the National Disability Insurance Scheme (NDIS) is an example of a policy that may enable some parents and family carers of disabled people to increase their participation in the workforce. The federal government will also need to rely a lot on state governments to facilitate the reduction in underemployment. For example, improving transport infrastructure and urban planning to improve access to work is key to reducing underemployment.</p>
<p>The terms of trade increased by 4.4% (seasonally adjusted) in the first quarter of 2016-17, driven by recent improvements in prices for iron ore and coal. </p>
<p>This improvement will need to continue to meet MYEFO’s forecast terms of trade growth of 14%, substantially revised from 1.25% growth in this year’s budget. This will provide the lion’s share of the extra revenue that reduces this year’s forecast budget deficit from A$37.1 billion to A$36.5 billion. The rally in commodity prices is expected to be temporary and much of the increase is undone in the following year.</p>
<p>Even if the stars align so that investment and employment growth are strong and – after a temporary spike in the terms of trade – commodity prices don’t fall too far, restraint will still be required on the part of the government. </p>
<p>Starting from a position of deficit, the budget needs to improve relative to the economy: just treading water will not return the budget to surplus. Spending is already stretched and should not be reduced further. </p>
<p>The government should instead consider reforms on the revenue side, starting with superannuation and negative gearing. The budget cannot be allowed to blow out any further, with risk to our AAA rating already apparent. </p>
<p>The return to surplus is not the be-all and end-all of budget management. Deficit-funded infrastructure investment will and should continue to play an important role in our economy.</p>
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<p><strong>John Daley, Chief Executive Officer and Brendan Coates, Fellow, Grattan Institute</strong></p>
<p>The first step on any path to solving a problem is to recognise the scale of it. Successive Commonwealth governments have <a href="https://grattan.edu.au/news/budget-2016-both-parties-budget-plans-are-simply-hoping-for-the-best/">projected a happy return</a> to budget surplus on the back of projected revenue increases. But each year the government acts surprised when the reality of these higher revenues recedes further into the future. Today’s MYEFO is more of the same.</p>
<p>The updated MYEFO projects revenues downgraded by A$39 billion over the four years to 2019-20, compared to the pre-election fiscal update released just seven months ago. An unexpected boost to commodity prices lifted corporate tax receipts and spending was A$17 billion less than previous projections. </p>
<p>These were more than offset by slower wages growth and lower corporate tax revenues from the non-mining sector. But the government is still claiming the budget will be back in the black by 2020-21, again driven by projected revenue increases.</p>
<p>Optimistic budget projections have allowed successive governments to avoid facing up to the challenge of budget repair. And that’s clearly worrying the credit ratings agencies. </p>
<p>The Commonwealth has now run budget deficits of 2-3% of GDP for eight years. Eventually that becomes a real problem: while Australia’s public debt to GDP remains low, it is increasing faster than most other countries in the OECD.</p>
<p>Genuine budget repair will <a href="https://grattan.edu.au/news/fixing-our-budget-emergency-means-making-the-case-for-change/">require tough choices</a>. Yet there is no point offering up budget savings initiatives with <a href="https://theconversation.com/a-realistic-strategy-for-federal-budget-repair-62554">no prospect of passing the parliament</a>. The government could buy parliamentary support by supporting the wish lists of the Senate crossbench, but as the <a href="https://theconversation.com/turnbull-is-happy-to-horse-trade-if-it-gets-the-nags-over-the-line-69667">recent experience of the ABCC shows</a>, such horse-trading can be expensive. </p>
<p>Instead, it may be easier to reach across the aisle to Labor, or the Greens, who recently supported the government’s reforms to super tax breaks. Some of the Turnbull government’s most realistic chances to improve the budget will be to increase taxes – <a href="https://theconversation.com/why-special-tax-breaks-for-seniors-should-go-69034">such as by winding back age-based tax breaks</a>, or reducing the capital gains tax discount. </p>
<p>It will also need to tighten spending – and to spread the burden so that it’s not seen to target those worst off. It won’t be politically easy, but eight straight years of budget deficits should be enough to convince anyone that more of the same is not enough.</p>
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<p><strong>Sinclair Davidson, Professor of Institutional Economics, RMIT University</strong></p>
<p>Despite four prime ministers and four treasurers since 2013, Australia’s budget situation has not improved. Only Chris Bowen has no case to answer as his time as treasurer was too short for any serious budget repair work to have been attempted. </p>
<p>It was the then prime minister Kevin Rudd who initially unleashed the spending and Julia Gillard who added fuel. Their treasurer, Wayne Swan, seemed to think that given enough time the economy would grow the budget out of deficit. To be fair, every treasurer since has adopted the same strategy. </p>
<p>That allowed for the introduction of high-spending programs such as the National Broadband Network (NBN), Gonski education funding model and the National Disability Insurance Scheme (NDIS). Treasurer Swan wasn’t averse to silly tax proposals that either raised no revenue, or added substantial costs to the economy and households for little gain. </p>
<p>A change in government in 2013 should have brought a return to sensible economic management. But no. The Abbott government did get around to repealing the mining tax and carbon tax but didn’t seem to feel any urgency in doing so. </p>
<p>The debt ceiling was abolished too. That was one mechanism introduced by the Rudd government that could have delayed the enviable blow-out in debt (from A$319.5 billion in the 2013-14 federal budget to A$498 billion <a href="http://www.budget.gov.au/2016-17/content/myefo/download/15-Appendix-D.pdf">in the MYEFO</a>). </p>
<p>A constant drip feed of reports of the government having to approach the parliament to raise the debt ceiling would have placed some political pressure on the government. But politicians don’t like accountability for themselves, and the debt ceiling was abolished well before the carbon tax or mining tax. </p>
<p>Joe Hockey’s first budget was incoherent. Spending was forecast to increase from $410.7 billion in 2013-14 to $412.52 billion in 2014-15. The budget deficit was initially forecast to be $29.8 billion. <a href="http://www.budget.gov.au/2016-17/content/myefo/download/15-Appendix-D.pdf">We now know the deficit</a> was $37.9 billion that year – the MYEFO forecasts <a href="http://www.budget.gov.au/2016-17/content/myefo/html/">a $36.5 billion deficit for 2016</a>.</p>
<p>Liberal propaganda blamed the parliament’s refusal to pass “budget savings” – a hodgepodge of incoherent and/or poorly explained tax increases. Hockey’s second budget was a cash splash for small business – but again lacked any serious purpose or intent to rein in excessive expenditure. Luckily a new prime minister and treasurer saved us from a third Hockey budget.</p>
<p>Despite promising early signs, the Turnbull-Morrison combination has been disappointing. The government is easily distracted and appears timid on the economic front. </p>
<p>There is also a complete lack of goodwill on the electorate’s part. Mind you, after several years of lacklustre economic performance and second-rate political leadership it is not surprising that the electorate is grumpy.</p>
<p>So the poor budget figures should be no surprise. While the AAA rating remains intact for now, we should not be surprised that a downgrade remains a real possibility. </p>
<p>Our friends in Canberra have no idea how to return the budget to surplus. This lack of imagination and initiative is bipartisan. Losing the AAA rating would be a lagging indicator of a continued, sustained and persistent failure to rein in spending and restore the budget to surplus.</p><img src="https://counter.theconversation.com/content/70585/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates and individuals to support its general activities as disclosed on its website.</span></em></p><p class="fine-print"><em><span>Sinclair Davidson is a Professor in the School of Economics, Finance and Marketing at RMIT University. He is a Senior Research Fellow at the Institute of Public Affairs, and an Academic Fellow at the Australian Taxpayers Alliance. His research has been previously funded by the Australian Research Council.</span></em></p><p class="fine-print"><em><span>Ben Phillips, Brendan Coates, and Janine Dixon do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>While MYEFO discussion focuses on the budget deficit, experts say it also serves as a stark reminder of the need for bigger policy ideas in Canberra.Ben Phillips, Principal Research Fellow, Australian National UniversityBrendan Coates, Fellow, Grattan InstituteJanine Dixon, Economist at Centre of Policy Studies, Victoria UniversityJohn Daley, Chief Executive Officer, Grattan InstituteSinclair Davidson, Professor of Institutional Economics, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/364922015-01-20T04:11:04Z2015-01-20T04:11:04ZThe truth about bracket creep and Hockey’s tax tales<p>Australian Treasurer Joe Hockey claims taxpayers are already paying 50 cents in the dollar of their income to the government and that bracket creep will push the average income earner into the second top marginal tax rate in a few years.</p>
<p>This week in an <a href="http://www.joehockey.com/media/transcripts/details.aspx?s=679">interview</a> with 3AW’s Neil Mitchell, Hockey said:</p>
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<p>“When Australians spend the first six months of the year working for the government with tax rates nearly 50 cents in the dollar it is a disincentive. You’re working July, August, September, October, November, December just for the Government and then you start working for yourself and your own household income after that for another six months, it is a disincentive. We’ve got to bear that in mind. We’ve got to bear in mind that bracket creep is going to put middle income Australians into the second highest tax bracket over the next few years which is a disincentive for people to work…”</p>
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<p>There are a number of problems with this statement. The most obvious is the confusion of marginal and average tax rates. Nobody in Australia pays 50% of their income as <a href="https://www.ato.gov.au/Individuals/Income-and-deductions/How-much-income-tax-you-pay/Individual-income-tax-rates/">personal income taxation</a>. According to NATSEM modelling, around 3.5% of those who have a tax liability actually face a top marginal tax rate of 49 cents in the dollar. Around 25% of taxpayers are paying a top marginal tax rate of at least 39 cents in the dollar. By 2020 this would be expected to increase to between 30 and 35% depending on how strongly wages grow.</p>
<p>The top marginal tax rate says little about the average rate of tax a person pays. The taxpayer is of course only paying that highest marginal tax rate on the dollars over and above the dollars earned beyond A$180,000 per annum.</p>
<p>Using NATSEM’s <a href="http://www.natsem.canberra.edu.au/models/stinmod/">STINMOD model</a> of the Australian tax and transfer system which is also used by Treasury the median taxable income for Australians (who actually have a tax liability) is currently around A$55,000. This taxpayer would have a personal income tax liability of around A$10,347 per annum, or 18.8%. Their top marginal tax rate will be 34.5 cents in the dollar including Medicare.</p>
<p>By 2020, assuming 3% wages growth, their taxable income will grow to A$63,760 and their average tax liability will increase to 21.2%. Their top marginal tax rate will be unchanged. Bracket creep is not just about moving into higher tax brackets.</p>
<h2>The real bracket creep</h2>
<p>Only around 3% of taxpayers earn more than A$200,000 each year. Their average tax rate from personal income tax would be 34% for this financial year. Even though their top marginal tax rate is unchanged bracket creep will be an issue for this individual as their expected income by 2020 (A$231,855 assuming 3% annual growth) attracts an average tax rate of 36 per cent. They pay a higher share of their income in the higher tax brackets.</p>
<p>The greatest disincentives for work are felt by women returning to the workforce after having children. They face the prospect of losing government benefits, paying income tax and child care fees. It is this group where some of the greatest challenges are for the Treasurer. A recent <a href="http://www.natsem.canberra.edu.au/storage/AMP_NATSEM_35.pdf">AMP.NATSEM report</a> shows that for a middle income family as the mother returns to work (in Australia it is still mostly the mother) she loses 45 cents in the dollar of earned income over her first 20 hours and 75 cents in the dollar between 20 and 40 hours work in lost government benefits, higher personal income tax and net child care costs. </p>
<p>Tightening welfare payments through tighter means testing may save money for the government but this can lead to higher “effective” tax rates as mothers will lose benefits more quickly for every dollar they receive from private sources – predominantly work. </p>
<p>The Australian federal government over the previous financial year collected around A$360 billion in tax revenue which is 22.8% of total income in the economy (according to the <a href="http://www.budget.gov.au/2014-15/content/myefo/html/16_appendix_d.htm">Mid Year Economic and Fiscal Outlook</a>). Since the GFC this share declined from around 25% (2007-08). In 2011-12 the government’s revenue dipped as low as 21.5% of national income.</p>
<p>Very large personal income tax reductions through the last decade (around A$20 billion per year), and changed economic circumstances, such as lower terms of trade and capital gains substantially reduced government revenue. In lieu of genuine tax reform any time soon, for right or for wrong, bracket creep will be an important tool for returning tax revenues to levels that sustainably pay for the services the community expect from the government.</p><img src="https://counter.theconversation.com/content/36492/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ben Phillips does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australian Treasurer Joe Hockey claims taxpayers are already paying 50 cents in the dollar of their income to the government and that bracket creep will push the average income earner into the second top…Ben Phillips, Principal Research Fellow, National Centre for Social and Economic Modelling (NATSEM), University of CanberraLicensed as Creative Commons – attribution, no derivatives.