First of all, I am not an accountant or an economist.
Having made that disclaimer, I still feel compelled to understand how the review, released today, could have affected food supply chain players and the environment in which they do business. And I say “could have” because the great majority of the potential impacts have been averted in the Government’s response to the Henry Tax Review report today. For good or for bad.
I have selected some paragraphs of the review, released today, so the reader can refer to the source and make their own minds:
LAND AND RESOURCE TAXES
In this first installment of the new proposed tax measures, the Government did not address the recommendations of the Henry review, in establishing a national land tax of 1 per cent to all land regardless of use. The review established that “When broadly applied across all uses of land, the introduction of a land value tax should not affect whether land is used for agriculture, housing or manufacturing. Even if a business (such as a farm) uses a disproportionate amount of land to produce goods and services, it will not be affected since the price of land is commensurately lower.” (Page 248).
The Henry review states that a narrower GST does not always lead to a fairer income redistribution. The report mentions the following example: “while the proportion of income spent on GST-free food does fall with income, absolute actual expenditure on GST-free food is almost six times greater for the highest than the lowest income groups. Among food categories, expenditure only on powdered milk, canned meat and offal actually falls with income (ABS 2005). As a result, more than one-third of the $5 billion exemption for GST-free food (Australian Government 2009, p. 205) benefits households in the highest 20 per cent of the income distribution. These sorts of exemptions add significantly to the complexity of the GST” (Page 286).
While the review in theory excluded GST as a potential tax change, there is indeed an entire section of the report that outlines why the costs to make greater use of GST-free or reverse charging treatment for some business transactions outweigh the benefits.
ENHANCING SOCIAL AND MARKET OUTCOMES
The Henry review addressed the issue raised by the National Preventative Health Taskforce (2009), on tax incentives to promote the production, access to and consumption of healthier foods.
The report concluded that, while obesity does involve significant health and productivity costs, the relationship between these costs and consumption of certain products is far too complex to be addressed through a tax mechanism. The review also stated that “any quantifiable health benefits of imposing the tax would need to be weighed against the loss to those people who are at low risk” (Page 320).
The Henry review discloses that in 2007-08, agricultural levies (administered by DAFF) were $594 million.
Nearly half of the agricultural levies was extracted from the so-called “dairy adjustment levy”, which ceased in Feb 2009. The second highest was the cattle transactions, but it represents only 30% of the disappeared dairy adjustment levy. The horticultural levies, which are split into about 25 different levies (apples, potato, vegetables, turf , table grapes and so on) represent a cumulative $43 million per year. This is about the same levies collected from wool alone.
The levies go to fund industry-specific R&D. While the levies charged are very small, the administrative costs of collecting several small levies can be very high. The example given by the Henry report is the Queen Bee levy, where the collection costs amounted to 38% of the collected revenue (that is, $10,000). Surely, there are better ways to handle R&D levies and I could not agree more with the review on this aspect.
Alas, this issue has not been addressed in the Government’s response to the review.
MARKET FAILURE AND TAXATION
Another interesting take on taxation as an instrument to address market failure was given in the example of regulations in food preparation in restaurants.
The Henry report states: “Where there is a market failure, due, for example, to information asymmetry about the
standard of food preparation, regulation can play an important role in enhancing the wellbeing of society. Without such intervention a number of transactions which would improve each party’s wellbeing would not occur as, due to the information asymmetry, one party would not be sure of the quality of the product they were purchasing (even though it actually meets their requirements)…However, regulations are not costless â€” resources to design, implement and enforce them need funding. Using general taxation to fund this cost is both inequitable and inefficient. It is inequitable, as it imposes a cost on people for regulating this market even though they do not benefit from the transactions occurring in it. It is inefficient, as those operating in the market would not face the true cost of their activities, and hence more than the socially optimal amount would be produced and consumed”.
As an alternative to using taxes to fund food regulations in this example, the report suggests: “A better alternative is for the beneficiaries of the regulation (that is, the producers and consumers of the product) to bear the cost associated with it. It is generally most cost effective if the producer faces such charges, with the true economic cost of the regulation likely shared between the producers and consumers, depending on the elasticities of the product demand and supply (which determines the extent to which producers can pass on the cost of the regulation)”.
The report goes on, explaining that, when regulatory services are funded from taxes, regulated industries do not face the full social costs of their actions. Businesses that spend money on effective risk management are worse off than those not investing on ensuring safe handling and manufacturing practices.
The report finalises the section stating that “those who pay regulatory charges have an incentive to monitor the quality of the regulatory services and lobby government for better services or lower costs. This reduces the likelihood that regulatory services will be provided inefficiently”.
This telling section was not addressed by the Government..or not yet. But I do wonder if this is the future of food regulations in Australia: the user pays to be regulated. At the moment, we all pay for it: consumers, manufacturers and primary producers. We all share alike the cost of food regulations at all levels. Isn’t that what the Henry review suggests? or do they suggest that the food manufacturers/ producers pay for FSANZ to regulate and pass the cost on to consumers?
TAXES TO IMPROVE THE ENVIRONMENT
Clive Spash will be happy to know that the option of using an environmental tax was considered in the Henry review with some depth.
However, the report concludes that environmental taxes can be difficult to design and implement and seems to support the CPRS as the main instrument to transition to a low carbon economy. The report concludes on this point: “Once introduced, the Carbon Pollution Reduction Scheme (CPRS) will be the largest environmental policy intervention in Australia. Market-based mechanisms such as the CPRS are the most cost-effective way to reduce Australia’s carbon emissions. The efficiency of the CPRS should be monitored, and opportunities taken to improve it, such as by recycling the permit revenue to reduce other taxes (where appropriate), removing supplementary measures, phasing out concessions such as free permits and broadening the scheme’s application (as this becomes possible).”
Needless to say, the discussion on CPRS has now been parked until late 2012. Naturally, no comments from the government on this regard. Ouch.
So, this is my take on the subject of how changes proposed in the Henry review could have affected the food industry at various levels. Bye for now.
But not before adding a last disclaimer: in line with current politics, if my blog popularity decreases more than 5% in the next few days due to my opinions, I will retract from my current view, I will come up with a good reason as to why I have retracted and I will blame everyone else for my decision to retract…