Tuesday, June 21, 2005

Selective tax cut NO, Flat Tax YES

Graeme Philipson, in the AGE (Melbourne - one of Australia's prestigious newspapers) gives a classic example of how to slide into a protectionist measure while praising Adam Smith, free trade and globalisation.

He writes:

“I am a believer in free trade and globalisation. Adam Smith's law of the comparative economic advantage of nations is a self-evident truth. Anybody should be able to import anything they want, free from tariffs and other trade restrictions, because certain countries have advantages which they are right to exploit, which makes for cheaper goods and a higher standard of living for all.”

No quarrel with that clear and unambiguous exposition of free trade.

Then Graeme Philipson brings into play his classic “but” part:

“our ICT [Information, Computing Technology] trade deficit is higher than our total exports of iron ore, beef and wheat combined. Australia's overall trade deficit is at record levels, exceeding $25 billion last year. ICT makes up just about all of that and the proportion is increasing.”

He thinks this is shocking; it should be “front page news”. Since he admits that there is no point Australia competing with China, Malaysia, Japan, South Korea, Singapore and Taiwan (America is not a problem and neither is Europe) in cheaper IT hardware, it must export something it is better at than them. Sure enough there is something that Australia could be competitive in exporting:

“As Adam Smith would tell us, we should be exporting that which we can do better or cheaper than other countries. Our export of ICT services is the one bright spot in the picture.”

However, despite the endorsement of the use of Adam Smith’s name, there is a major problem.

“Local ICT companies, pay higher rates of tax than their multinational competitors. The total tax rate in Australia has steadily increased. Taxes get higher, our companies become more uncompetitive, our deficit increases, we have to borrow more to pay our way.”

Now Graeme does not spell it out – the solution that we dare not name – but it is clearly a cut in company taxation of the ICT software companies that could raise exports by using Australia’s great reputation for “innovative software engineers and good project managers”.

He might even be suggesting a tax rebate for those that export their ICT services, perhaps the kind of “Bounties” that Adam Smith justly criticised in “Wealth of Nations”. But consider the implications of a slective tax cut for ICT service companies in Australia. Under WTO rules other countries would consider that a subsidy. And why not?

Graeme’s ritual genuflection for free trade, globalisation and Adam Smith’s comparative advantage becomes a purely protectionist measure, and a Mercantile one at that with roots going right back to the 17th and 18th centuries and beyond. It’s what Australians call a “bum steer”.

If he was to advocate a tax cut for all Australian companies - even better, a Flat Tax - he could continue to link Adam Smith's name to his proposals. This would be the appropriate solution. And given the general problem of high company taxation he mentions, it seems to be justifiable on its own grounds and not just for exporting ICT services.

[Graeme Philipson is on: graeme@philipson.info]

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