From Dick Holden professor of economics at UNSW Sydney Business School via AFR:
We are now through the looking glass on company taxation. We have industry-specific taxes based simply on which companies are profitable and what focus groups think about those companies. This is terrible tax policy.
Though all taxes are distortionary, the primary goal of sound taxation system is to raise a given amount of revenue in the least distorting way. What that definitely does not involve is singling out an industry for being profitable and slapping an additional tax on it.
Just as old-style industry policy of “picking winners” is thankfully a thing of the past, so should this new habit of “picking losers”.
From the Murray Inquiry:
Actions taken by governments both in Australia and overseas to support their financial sectors during the GFC have reinforced perceptions of an implicit guarantee. Implicit guarantees arise when creditors believe that, if a bank were to fail, the government would step in to rescue the institution.
Implicit guarantees reduce banks’ funding costs by moving risk from private investors onto the Government balance sheet — a contingent liability for Government. As a result, the creditor takes no (or a reduced) loss, making it less risky to invest in the institution. Creditors will therefore accept a lower interest rate, which lowers funding costs for the bank and provides a competitive advantage to those institutions most affected.
Empirical studies have found that Australian ADIs, especially the largest ADIs, benefit from an implicit guarantee. This is also evident in the credit ratings of the major Australian banks, which all receive a two-notch credit rating uplift from credit rating agencies Standard & Poor’s and Moody’s due to expectations of Government support. Implicit guarantees create inefficiencies by:
• Providing a funding cost advantage for banks over other corporations.
• Giving large banks an advantage over smaller banks.
• Weakening the market discipline provided by creditors.
• Potentially creating moral hazard that encourages inefficiently high risk taking…Perceptions of an implicit guarantee introduce a range of damaging distortions into the financial sector that reduce efficiency. They also transfer risk from the banking sector to taxpayers. In the Inquiry’s view, such factors make it appropriate to take steps to minimise implicit guarantees…
The big five have their liabilities guaranteed. That the distortion. The RBA puts the bill at $5bn per annum:
According to RBA research in 2015, the “major banks have received an unexplained funding advantage over smaller Australian banks of around 20 to 40 basis points on average since 2000″…
The RBA’s 20 to 40 basis point estimate of the too-big-to-fail funding advantage implies that the majors capture an annual taxpayer subsidy worth more than $5 billion from their implicit government guarantee (using the wholesale liabilities identified in the budget).
This makes the majors by far the most publicly subsidised companies in the country…
We’re nowhere near that yet but the more we price the externality the more efficient is becomes.
Arguably SA isn’t the right public entity to do it, but given the schmozzle of Australian public policy these days let’s not split hairs over who is taking the money. SA is doing it and has been kind enough to take only its fair share.
Put ’em in change of the Commonwealth, I say.
