Taxpayers ambushed by government's stand-and-deliver tactics

SO these are the "substantial cuts" Wayne Swan promised: at $6.8 billion across four years, the claimed savings in last week's mid-year economic and financial outlook weigh in at a mighty 4c in each $10 of commonwealth government outlays.

In fact, even those 4c are mere spin. For MYEFO itself shows that policy decisions taken since the budget actually increase cash outlays by $9bn across four years. And in fiscal (rather than cash) terms, things are even worse: the policy decisions taken since the budget increase spending by $18.7bn across four years.

Little wonder that despite economic growth at or above trend, spotting the much vaunted surplus requires an electron microscope. Little wonder too that as far as mini-budgets go this package is all slug, no slash. And if the spending is poor quality, the tax slugs are even worse.

The mining tax is an obvious example. But that tax is by no means the most objectionable of the revenue measures. For what is truly shocking is the government's growing recourse to retrospective tax changes; that is, to tax changes that alter taxpayers' liability after the fact.

The most extreme case is legislation rushed through parliament to amend the petroleum resource rent tax. Those amendments, which alter the tax back to July 1, 1990, were plainly aimed at preventing a possible adverse decision against the commissioner of taxation by the Federal Court in a long-running dispute with Esso and now BHP Billiton. Indeed, they came into effect just days before the decision was to be handed down.

As it turns out, the Federal Court actually found in the commissioner's favour, so the commonwealth would have gotten its revenue in any event. But the government wouldn't let that process run its course. And as well as those amendments, two other major retrospective tax changes, both announced last month, are on the cards.

The first reverses provisions the government itself rolled out only last year specifying the tax treatment of consolidations; that is, corporate acquisitions. Although the legislation being amended was introduced in May last year, the proposed amendments' effect is to increase some taxpayers' liabilities stretching back to 2002.

The second set of changes amends the rules by which multinational firms record transactions, and hence allocate profits, between their operations in Australia and overseas. These changes to the so-called transfer pricing rules will apply back to 2004.

It may be that both sets of laws merit being changed.

But imposing liabilities on taxpayers they could not reasonably foresee when the transactions occurred, and that differ radically and unfavourably from the obligations at the time, is profoundly objectionable.

To begin with, it is constitutionally abhorrent. It is absurd for the government to say, as it did only last week, that the changes to the PRRT merely clarify what parliament actually intended in 1990.

What parliament intended in 1990 is a matter for that parliament, not today's; and whatever it may have been, that intention is now a historical fact, which this parliament can no more alter than it can turn back time.

Moreover, in our system of government, determining that intention is the task of the courts, for tax laws as for other legal obligations. Stripping some taxpayers of the right to have courts interpret and apply the law, merely because the present government fears the outcome, is every bit as objectionable as allowing parliament to determine the guilt or innocence of individuals the government dislikes.

Additionally, as the Tax Institute has emphasised, these retrospective changes result in manifest unfairness. For example, the changes to the consolidation regime penalise companies that, acting on the basis of the laws at the time, structured mergers as a purchase of shares rather than of assets. As a result, otherwise identical transactions will incur different tax obligations.

And last but not least, retrospective tax changes are inefficient, shrinking the pie even more than taxes necessarily do. They undermine the role of taxes as a signal to private decision-makers. They chill investment, as investors cannot be confident the rules on which they rely will in fact be the rules that ultimately apply.

And they force taxpayers to bear risks they are poorly placed to manage: for it is one thing to assume the risk that the future will differ from the past, and quite another that the government will decree that the past is not what it was.

This is not to say retrospective changes are never justified. They can be when they close off conduct that amounts to tax evasion. Allowing that conduct to continue unchecked inevitably invites additional abuses, encouraging unproductive expenditure on tax dodges, reducing revenues and inequitably and inefficiently increasing the tax burden on those who comply.

Moreover, it is desirable for taxpayers to anticipate that if they engage in abusive conduct they can be hit retrospectively, as that anticipation will reduce the level of abuse.

But none of the government's changes conceivably fall in that category. Rather, they are precisely the types of changes that Senate Standing Order 24 on legislation that trespasses on personal rights was intended to preclude. As the Scrutiny of Bills Committee has noted, that standing order requires it to "comment adversely" on retrospective tax changes other than those that are merely technical in character or are to the benefit of taxpayers.

Those protections support confidence in our tax rules. Yet they cut no ice with this government, desperate as it is to raise cash. And the victims fit Labor and the Greens' increasingly strident anti-big business agenda to a tee, particularly as many are foreign-owned.

Not that any of this stops Labor and the Greens excoriating Tony Abbott for wanting to repeal the carbon tax without compensation. Nor does it stop them from trying to make that repeal as costly as possible. But, then again, Abbott has had the decency to say well in advance what he intends to do. The government's retrospective tax changes, in contrast, are little better than ambushes.

This, therefore, is what Swan has really delivered: more poor quality spending funded by an even poorer quality tax grab. But tarnishing our tax system's reputation will hardly be costless. Presumably, the government reckons someone else will pay that price. And there, at least, they're right: it will be all of us.