The budget black hole means multinationals aren’t going to win this tax battle

Shift a rock in the garden and the insects underneath will scurry away to cover. Only the foolish or desperate stand their ground, ready to take you on. So when a Senate committee decided to probe the tax arrangements of some multinationals last week, and they fought back, it was difficult not to conclude that there was more than a touch of stupidity involved – even if the companies are desperate.

That’s because this time it’s more vital for the politicians to raise money than to keep on the good side of business. Finance has a way of concentrating attention. The investigation is, at heart, simple. The committee wants to know why, although the multinationals conduct activities in Australia, profits only seemingly accrue offshore. This means it’s exempt from tax. This accusation elicited such hissing, anger and outrage as to suggest the companies do, quite genuinely believe they are operating not merely in another country, but also in a parallel universe.

No longer.

Once there were enough dollars to go around. There was no political will to probe particularly hard. There was an assumption that what was lost on the swings to tax was gained on the roundabout of jobs. It was better to have companies operating here and, if they shifted some profit, that was an acceptable part of the cost of participating in a global economy. That “gentleman’s agreement” has now broken down.

Paul Keating still holds the award for the most spectacular political backflip in recent history for his twirling manoeuvring over the consumption tax. He transformed himself from a proponent of such a broad-based tax in the 1980s to vitriolic and scathing opposition of the impost less than a decade later. In 1993 the country rejected the GST; but five years and two elections later there was a political mandate to introduce the tax. There’s entrenched opposition to any increase from the current rate of 10 per cent, yet nobody is suggesting its abolition. And that’s because of the perception it’s “fair”. You spend money; you pay tax.

Even though this means disadvantaged people hand over a greater proportion of their income to the taxman, wealthy people are unable to utilise structures to avoid the tax. Instinctively, this feels “right”.

The only thing people dislike more then handing money to the taxman is discovering that somebody else has managed to avoid doing so. This is why the politicians are going to win this particular fight. It doesn’t matter what excuses or justifications the multinationals provide as they attempt to rationalise away their arrangements, they’re not going to get away with profit shifting.

That’s because two global trends have become apparent. First (and primarily), nation states everywhere are finding it increasingly difficult to make ends meet. Wealth is flowing to a small number of individuals and companies at the top of the income scale – yet these are the very entities that are best placed to avoid tax. At the same time, governments are expected to increase expenditure on social security while maintaining expenditure elsewhere. The pressure is on to find ways of increasing revenue. The keyword here is “fairness”.

I’m currently in Britain, where last week the Conservatives’ campaign for re-election suddenly went off the rails when Labour targeted a hitherto unknown group. It kicked the rock off “non-doms”, exposing them to the light. Although “non-doms” do actually live in Britain, where they enjoy all the benefits provided by the taxpayers of Britain, they’re not officially domiciled in the country for tax purposes.

It’s a bizarre tax lurk, which began as little more than a bribe to encourage super-rich foreigners to move to London. Now it’s become an inherited (although only if you’re male) tax lurk that allows some lucky individuals to contribute merely nominal amounts to the British Treasury.

Some of these chinless wonders rushed to argue that unless they can retain this special tax status they’ll leave. Others insisted they pay more than their fair share of tax anyway, which begs the question of how intelligent such people actually are. Nevertheless, neither argument has washed. The consistent demand is for fairness – something self-evidently absent from the current scheme.

That’s why our multinationals are on a hiding to nothing. At one time they might have got away with it. We recognised that operating overseas justified convoluted company structures. But there was also an instinctive assumption such businesses would cough up a “fair” rate of tax. Last week’s hearing suggested this isn’t occurring.

It seems unlikely the blustering and fulminations of the companies will achieve anything much – the politicians are too determined. Indeed if business persists in refusing to provide information for the committee, it seems highly likely they’ll bring down greater wrath than if they worked cooperatively to achieve a constructive outcome. But even these savings are unlikely to go far towards fixing the budget’s basic problem: not enough income. That’s why, at some point over the next decade, whichever party is in office, fundamental reform will be needed to tackle the biggest problem; the black hole. This needn’t involve convoluted arguments nor esoteric taxes nor even raising the GST. Two simple changes are all that’s required, They have the advantage of being both fair and easy.

It is an outrage that capital gains are taxed at half the amount of real work. This needlessly benefits wealthy people and effectively devalues labour. This is a moral issue as much as a fiscal one. The second reform target must be superannuation, which has become little more than a tax-advantaged method of investing. The time has come to rebuild the tax system using a basic principle: fairness.