A poisoned tax chalice

Wayne Swan’s initial response to Ken Henry’s comprehensive review of Australia’s tax system told us plenty about the Rudd/Gillard Government’s appetite for tax reform. As Alan Kohler memorably said at the time, only 1.75 of the 138 recommendations ended up being put in place by the Treasurer at the time.

Actually, that might be a bit unfair. Since then, the Government has made a few big moves on tax, framing the mining tax, the carbon tax and company tax cuts in two tranches. And under pressure from the independents – who forced the Government to hold a Tax Forum last year – Swan is now on the hunt for reform in the area of business tax.

Well, sort of. Swan has actually outsourced the job to his Business Tax Working Group, a team of business people, union representatives and tax experts (you can see the full list here) who have been holding a series of meetings to try and determine what big-picture tax reform should be undertaken next.

By all reports (and there have been plenty of leaks) the working group has hit on a good idea – allowing small businesses to “carry back” tax losses, such that tax paid on profits in previous years could be claimed back when the business posts a loss.

Everyone – from business groups to tax experts and politicians – thinks it’s a great idea and a worthwhile bit of reform.

But the Working Group’s work isn’t done. Swan hasn’t just asked them to come up with great ideas – he’s also asked them to figure out ways to pay for them.

And so we have a report today that the Working Group might recommend tightening the eligibility rules around the new R&D tax incentive, such that big businesses will find it much tougher to claim.

I’ve got two problems with this.

Firstly, R&D should be the last place we are looking to make savings. In an environment where we are becoming overly reliant on mining, developing new industries, new products and new ideas is essential.

This new tax incentive, which has been three years in the making, already contains rules to ensure small business gets the lion share of funding. Surely there are other areas of government spending or subsidies less worthy than R&D.

My second problem is that I don’t think it’s fair that the Working Group should have to come up with savings. It’s reasonable (indeed, it’s smart) to get business people involved in the production and investigation of ideas for tax reform, but surely Treasury is best placed to figure out where cuts need to be made.

Perhaps there are savings to be made in an entirely different area of government spending. We shouldn’t and can’t expect the Working Group’s members to be across every single part of the bureaucracy. 

The personal pressure on the members isn’t insignificant. For example, I’d imagine that Rob McLeod, the chief executive of Ernst & Young, might have got a few phone calls and emails from partners who have big business clients with large R&D budgets.

Would you want to be known as one of the people who recommended R&D spending be cut for big business? Me neither.

Wayne Swan should let the Working Group focus on coming up with great ideas for tax reform, and leave the job of finding the means to pay for it to Treasury.

And stay away from R&D!