|Submission No. 41||Back to full list of submissions|
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SUBMISSION TO THE REVIEW OF BUSINESS TAXATION (RBT) BY M.ROSS VENNER F.C.A.
DATED 11 April 1999
INTRODUCTION - TAXATION AS AGENT FOR UNEMPLOYMENT
Taxation has the primary purpose of raising revenue. Without revenue governments can not provide services and their activities are reduced to irrelevance, if not tyranny. It is sometimes overlooked that all taxation has secondary effects. It is the contention of this submission that the largest secondary effect of the current business taxation regime is to discourage employment.
Employment is discouraged because of the intersection between taxation and corporate reporting which focus on year by year results and management remuneration which is largely focused on the same short term outcomes.
Business managers know that a defensive decision, "Cut ten jobs and save $500,000" will have the same or better effect on their remuneration and tenure as the risk decision "Invest $1M create ten jobs and earn $500,000 extra". Managers goals are sometimes brutally expressed as "make 20% compound on capital employed and dont get sued". Unfortunately, managers know that one bad year can permanently blight their careers but also that they will be moving-on before the overall effect of their defensive, job destroying, decision making is identifiable.
Thus, defensive strategies reducing employment become the "good business" decisions applauded by the community and rewarded in the boardrooms. From this perspective, the scarcity/high price of venture capital and the rapid decline of employment in the manufacturing sector are logical outcomes.
This submission proposes the incorporation of a mechanism in the business tax system to compensate for these intrinsic disincentives to employment.
DECISION MAKER FOCUSED INCENTIVES FOR EMPLOYMENT CREATION
This submission sets out an incentive structure to promote the growth of employment, particularly permanent full-time employment, in Australia. These incentives are based on the application of non-monetary "Points" awarded to employers, on the basis of numbers employed.
The budget would define "Exorbitant remuneration" and the discount on transferred points for each fiscal year.
The proposal would have the following effects: -
The table of Points awarded would be structured to favour recruitment of members of the community over-represented among the unemployed. Specifically, the beneficiaries will be; the young, elderly, aborigines, migrants and particularly the long-term unemployed. Two benefits flow from this policy: -
HOW POINTS WORKS
Points are awarded on the basis of numbers employed; incentives are structured by weighting the points in favour of outcomes deemed desirable. A possible basic Points structure is summarised in the accompanying table.
An essential feature of the Points system is inherent in the weighting of the full year employment value.
Weighting of incentive points allowed for the recruitment of disadvantaged individuals is the second element of the Point process. On recruitment of an individual receiving benefit, the employer would receive a notification of the Points score of the individual. Points for different disadvantages may be added together to a maximum of say, 10 points.
Disadvantage points for a new recruit decrease by one for each week of employment.
THE PHILOSOPHICAL PERSPECTIVE
It is proper for a government to influence the market of its community. Its activity will, in practice, influence the market whether it wishes or not.
It is implicit to the operation of capitalism that the owners of businesses will and should seek to maximise their profits.
The Points system is based is the belief that the community is a stakeholder in the activity of the its economy and has an obligation to provide price signals which reward the decision makers who assist the community in achieving its highest priorities. The creation of jobs, which provide the most effective mechanism of reducing poverty and hardship should be rewarded and the wilful destruction of jobs discouraged.
IMPACT ON BUSINESS DECISION MAKERS
Jobs are not created as a direct result of economic settings in the economy. They increase or decrease as a result of the decisions of individual business managers. Those business managers must achieve compound growth on the capital they deploy. Their bonuses, even their positions depend on growth.
The opportunities to achieve profit growth come from the following areas: -
1 to 3 (above) can only be achieved by incurring risks which typically combining all three elements (and take years to provide positive results), but managers themselves can control the reduction of cost. Faced by market demands for profit growth at rates far exceeding growth in GDP, can it be any surprise that managers frequently focus on reducing jobs.
The Points system will redress the balance in favour of investment and against retrenchment. It would also actively reward companies.
(This analysis was developed from Gareth Powells analysis of the impact of profit expectations in the Sydney Morning Herald)
The Points System will also reward companies which adopt non-discriminator policies
As individual managers make recruitment choices, the Points system gives a powerful justification for decisions, which favour those who are disadvantaged, by the present employment market. Many managers will recognise occasions when they must chose between individual candidates and instinctively chose the non-controversial, low risk individual. Under the Points System a decision to give a disadvantaged candidate "a fair go" will become laudable for the manager who made it, not stupid.
OTHER USES FOR "POINTS"
Once the points mechanism was established other opportunities would exist to utilise the paradigm. Two examples are offered.
Employment agencies are used by some recruiters to achieve discriminatory outcomes.
Employment creation targets incorporated in government contracts are widely regarded with derision. With the Points system in place such outcomes become highly measurable and thus enforceable.
ANTICIPATING THE IMMEDIATE CRITISMS
Ease of administration.
Privacy No candidate would be compelled to apply for disadvantage points.
International competitiveness of the tax system Australia already offers incentives to overseas companies to set up operations in Australia. If such companies intend to generate employment in Australia, they will be net beneficiaries of the system.
Avoidance and manipulation An anti avoidance mechanism would be required to ensure that disadvantaged workers were not employed for brief periods so that unscrupulous employers could "cream off" their disadvantage points. All tax systems require anti avoidance mechanisms, the points system is no different.
The effect of the Points system would be:-
The Points System would be revenue positive itself and provide other revenue positive benefits.
The Points System would be easy to administer and require no additional bureaucracy.