Up there with the Michael Palin scenes from the Life of Brian is Zero Mostel in a Funny Thing Happened on the Way to the Forum. Both share a quality – making you laugh in the face of tremendous embarrassment.
There was a new form of embarrassment for Australia when the International Monetary Fund found a funny thing happening on its way to the forum. The IMF was carrying out a study of reforming tax expenditures (otherwise known as tax breaks) in Italy. Without saying so they chose Italy because it is in a spot of bother and were looking for reforms which might help. The IMF says in a working paper prepared by Justin Tyson: “Tax expenditures are government revenues foregone as a result of differential, or preferential, treatment of specific sectors, activities, regions, or agents. They can take many forms, including allowances (deductions from the base), exemptions (exclusions from the base), rate relief (lower rates), credits (reductions in liability) and tax deferrals (postponing payments). International comparisons are complicated by different methodologies and assessments as to what constitute a tax expenditure, but the practice is pervasive…”
The paper points out that tax expenditures (let’s just call them what they are – breaks) “can have major consequences for fairness, complexity, efficiency and effectiveness.” Among the problems:
“Tax expenditures can compromise fairness. Tax expenditures can be a poor way of pursuing equity objectives: in a progressive tax system, for instance, any policy that reduces taxable income will benefit most those in the highest marginal tax bracket and convey no benefit to those out of the tax system, a potential reason for using tax credits (or spending measures) instead. Tax expenditures can be inefficient and poorly targeted. Tax expenditures can create unintended or unwelcome distortions: the current deduction of mortgage interest, for instance, may have been appropriate when imputed income from owner-occupation was effectively taxable, but now may encourage leveraged housing finance. Tax expenditures are vulnerable to lobbying. Special interest groups may find it easier to argue for tax breaks than for explicit spending support. Tax expenditures often bypass the scrutiny accorded to spending in the regular budget and may not require annual renewal in the budgetary process—this lack of transparency may explain some of the appeal they hold for policy makers.”
To provide some sort of perspective for this the IMF then compared the situation in Italy with a selected number of advanced economies. The comparison of tax breaks was pretty bad for Italy because it was the second worst in the world with tax breaks amounting to about 8% of GDP. From the bottom up (ie the best and least unfair and inefficient) were Portugal, Korea, Germany and Switzerland. The USA, UK and Spain lagged a bit behind Italy.
But who was the absolute worst – the world leader in offering tax breaks? Our very own Australia of course, with tax breaks totalling more than 8% of GDP. The Abbott Government is talking about forthcoming pain in the May Budget but it’s fairly certain that few, if any, of the tax breaks get axed. Indeed, the Prime Minister has already said he doesn’t like the phrase “middle class welfare” and prefers to think the subsidies given to the well-off, companies and groups favoured by the government are really tax cuts.
In this alternative world how one describes generous treatment of rich people’s superannuation, has to be equally embarrassing. As these will be preserved at the same time as the Government plans to change financial planning legislation in ways that will cost ordinary people billions of dollars in total, and ensure the banks continue to rip off more in fees from super than they do from all other forms of fees, it is all perhaps a bit more than embarrassing.
Conservative ideological governments get themselves into trouble because they do embarrassing things which they are convinced are right irrespective of reality and then get themselves in knots explaining it – like the SPC, Cadbury, fishing etc etc examples in Australia. The Abbott kindred souls in Stephen Harper’s Canadian Government, for instance, had a similar problem when they managed to sell off a lot of bric a brac hanging around official buildings and happened to include an item which was on loan from Buckingham Palace. They got a measly price and then had to pay a fortune to get it back. As the Harper Government has the same faith in science as that of Abbott adviser Maurice Newman they also closed some scientific libraries and didn’t even bother to sell the books in them, merely dumping precious books and data in garbage trucks. Both Canadian efforts got embarrassingly wide coverage on social media around the world.
Sometimes conservative governments do embarrassing things because the Ministers are just plain dumb. In Australia’s case our new Foreign Minister, Julie Bishop, fits the category. Her effort was to argue that the international community should avoid labeling Israeli settlements in the West Bank, East Jerusalem and the Golan Heights illegal under international law. Ms Bishop was quoted as saying ‘I would like to see which international law has declared them illegal.’ As that notorious left-wing leaning radical publication, The Financial Times(1/2 February 2014), pointed out in an editorial on the Scarlett Johansson Sodastream issue: “Sodastream makes some dispensers in Maale Adumin, the biggest of Israel’s West Bank settlements, illegal under international law.” It then goes on to point out that the EU rule prohibiting grants to entities in illegal settlements “…is not a boycott. It is the application of the law.”
Like the Harper government actions Bishop’s comments were noted around the world even though the usual suspects argued that Bishop was right despite the International Court of Justice finding the settlements were illegal. Of course, the Australians might be getting ready for an adverse finding in the ICJ case between Australia and East Timor over oil and spying. If it doesn’t go the way they want, presumably like the Israelis, the decision could be just ignored.
Even Tony Abbott’s cringe making speech at Davos looks good in the light of the Bishop intervention. Treasurer Joe Hockey said that speech was not embarrassing and was very well-received – presumably by the few who didn’t walk out – although no doubt the ones that stayed fitted into that category of business leaders who regularly attend Davos. According to analysis in The Economist (25 January 2014) the 104 “companies that sent delegates (to Davos) at least three times in the past five years …underperformed both the S&P 500 and the MSCI Wold Index.”