PC report spanks online retail

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In its monster retail report, the Productivity Commission has recommended (among a great many things) that the government lower the tax free threshold on online purchases of foreign goods.

Thankfully, however, it has also amply demonstrated the practical foolishness of the idea with an assessment of the costs involved in monitoring the parcels at the border. Here’s the money quote:

Taking the current collection charges as a crude proxy for all costs (and ignoring the possible need to engage a customs broker) what would happen if Australia simply lowered its threshold to a level like that of Canada — a LVT of $20? Many submissions have advocated such an approach. This would satisfy the requirements of tax neutrality by subjecting the vast majority of incoming parcels to GST and duty collection. Data on the breakdown of the number of parcels between $0 and $100 are not available. However, the Commission estimates that over 30 million mail parcels would then need to be processed — as compared to the level of 20 000 in 2009-10. Lowering the threshold to $20 would raise in excess of $500 million in tax revenues but the cost of the processing using the current system would escalate to almost $1.6 billion — three times the additional revenue collected.

Reducing the threshold to $100 would raise an additional $470 million from about 15 million parcels, but would cost consumers and businesses approximately $715 million, still far exceeding the revenue raised.

An alternative approach would be to make only a small movement towards a lower threshold — to $900 for example. At this threshold level, about $15 million in additional tax revenues would be collected at a cost of around $8.6 million. On a simple arithmetic analysis, such a threshold appears feasible. But this would leave 99 per cent of parcels with no tax and duty collected, making little difference to tax neutrality and failing to address concerns about ‘level playing field’ competition.

At this threshold level, the number of mail parcels required to be processed would be over three times the current level, and with the current processing system, even this small increase is likely to cause significant delivery delays. The costs of suchconsequential delivery delays, possible custom broker charges, and additional infrastructure costs required to store parcels while awaiting the payment of taxes and duties, is likely to see total costs exceed revenue gains even for a modest reduction of the LVT to $900. The current Australian processing system (particularly for mail) was never designed to cope with processing volumes of this magnitude and it is clear that it simply could not cope with a dramatic and sudden lowering of the threshold to a level that would be required to achieve tax neutrality.

The Commission has not been given any reason to believe that the border protection functions carried out by Customs would necessarily suffer under such a scenario.

However, it is clear that current infrastructure and systems would neither be adequate nor efficient in meeting a dramatic increase in volumes. Substantial delays in incoming parcel processing would be inevitable, affecting not only consumers shopping online, but the vast range of businesses involved in importation of goods for retail or other purposes.

On balance, the Commission is of the view that precipitate action to lower the threshold would bring with it net costs to the community. Further, a small movement in lowering the threshold would not satisfy, in any reasonable measure, the goal of tax neutrality. In the Commission’s judgement, an interim and partial reduction would be mainly symbolic and likely to consume resources that would better be devoted to exploring the best and most expeditious manner to reduce collection costs that enable a cost-effective approach to greater tax neutrality.

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Unfortunately, as sensible as this objection sounds, I can’t see a measly billion dollars of tax payers money getting in the road of the retail campaign for protection tax neutrality. And now armed with the PCs endorsement of “tax neutrality” it’s a fair bet we’re about see the campaign go into overdrive.

To me, it’s kind of absurd for the PC to be taking a narrow perspective on this question at all. Boosting local retail sales on a point economic purity seems a little narrow when we know that that is precisely the opposite of what the RBA is trying to achieve doesn’t make a whole lot of sense.

Moreover, if the retail campaign were to succeed in lowering the threshold and retaining more local sales then the burden of adjustment that comes with the commodities boom will fall more heavily on other sectors, namely manufacturing, through higher interest rates and a higher dollar.

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And frankly, is that what retail wants? A higher dollar? Isn’t that their problem?

Here are the key findings of the report:

There are almost 140 000 retail businesses in Australia, accounting for 4.2 per cent of GDP and 10.7 per cent of employment — the industry is one of Australia’s largest employers.

• The retail industry exhibits great diversity by: size of companies, region, format, competition within sectors and in the range of goods sold — from food to furniture to footwear. While current trading conditions are challenging, longer term trends tell a larger story. Over the last three decades, retail sales growth has trended down; consumers are spending more of their rising incomes on a range of non-retail services including financial, property, travel and entertainment.

• This diverse industry has met many competitive challenges in the past and online retailing and the further entry of new innovative global retailers are just the latest. This intensified competition is good for consumers, but is challenging for the industry which, as a whole, does not compare favourably in terms of productivity with many overseas countries. And the productivity gap appears to be widening.

• Australia also appears to lag a number of comparable countries in its development of online retailing. The Commission’s best estimate is that online retailing represents 6 per cent of total Australian retail sales — made up of 4 per cent domestic online ($8.4 billion) and 2 per cent from overseas ($4.2 billion). In some other countries, online sales figures are higher and seem set to grow further, as will also happen here.

• Retailers operate under several regulatory regimes that reduce their competitiveness. Major restrictions which require improvements are:

– planning and zoning regulations which are complex, excessively prescriptive and often exclusionary

– trading hours regulations which interfere with the industry’s ability to adapt and compete in a more globalised market

– constraints on workplace flexibility such as obstacles to the greater use of enterprise bargaining and the adoption of best practice productivity measures.

• The current level of the low value threshold (LVT) for exemption from GST and duty on imports is $1000. The exemption is judged to be a minor part of the competition story, but GST is a broad-based consumption tax, and the LVT in principle should be reduced to a low level to ensure tax neutrality.

• The current processes for collecting taxes and duties at the border are not efficient. As the threshold is lowered, costs of collection increase significantly — at very low thresholds (for example $20), the costs of collection would exceed tax revenue by over three to one. Such a cost impost on both importing businesses and consumers is unacceptable even without considering additional costs such as delays.

• The processing systems for incoming parcels to Australia need to improve, as has occurred in other countries. The Government should investigate this with a view to then reducing the LVT in a cost effective way.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.