CFMEU is picking political fights with a weird tax dressed up as a housing policy

Why a tax policy, not a housing policy? Why tax super-profits? And why $20 billion per year?

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Last week, the Construction, Forestry, Maritime, Mining And Energy Union (CFMEU) released a new campaign to enact a broad super-profits tax to fund their housing ambitions, which they argue will require about $20 billion of funding per year.

In their words, it is a

[…] permanent, 40 per cent tax on excess profits.

It would only apply to mining projects and non-mining companies with turnover over $100 million, which is only 0.3 per cent of companies in Australia.

Companies would be able to carry losses forward like any current corporate income tax.

They’ve put a lot of work into this campaign, with a fancy website and a report from Oxford Economics that contains more detail and analysis.

This proposal confuses me. It is weird. There are three reasons why.

1. It is a tax policy, not a housing policy.

2. Super-profits taxes are good in theory but bad in practice, while also being politically contentious.

3. We need much less than $20 billion per year for a major housing program.

1. Why a tax policy, not a housing policy?

Like the Housing Australia Future Fund (HAFF), the “super-profits tax for housing” idea is not really a housing policy. It’s a tax and revenue policy.

The federal government raises about $500 billion in taxes per year. The expected $20 billion from the “super-profits” tax is a 4% increase in federal revenue. Not huge. But not nothing.

Last year the Goods and Services Tax (GST) raised $75 billion. So the proposed super-profits tax is equivalent in revenue terms to increasing the GST rate from 10% to 13%.

In fact, there are numerous changes to tax policy at the federal and state levels that could raise $20 billion per year. If we want to raise more public revenue, let’s choose the best way to do it.

But I don’t think there is any funding problem when it comes to housing.

We just saw the Labor government splash another $2.5 billion of “unfunded” cash to win a political argument over a $10 billion swap of treasury bonds for a portfolio of other listed financial assets in the form of the HAFF.

You don’t need to link revenue to spending. I always tell people that if you are focused on the funding and not the program you want to be funded, you are merely providing an excuse not to enact your preferred policy.

You need buy-in on the program. The CFMEU proposal appears to have not thought this through.

Is this proposal about giving $20 billion per year to state public housing agencies, like the $6 billion Rudd stimulus in 2009? Or is it something different? Is it co-funding new projects with Community Housing Providers (CHPs)? Is it subsidising private rentals like the National Rental Affordability Scheme (NRAS)?

I don’t think they really know.

If I wanted political action on housing I would be pitching a housing policy, not a tax policy. I would pitch a universal program, to get broad political buy-in, and focus on a public homeownership option more than public or discounted rentals. This type of program ticks the box of increasing homeownership and getting cheaper housing, and I’ve proposed in detail a version of this idea called HouseMate.

2. Why a bad super profits tax?

In addition to being unclear about how these funds are to be spent, the source of these funds from a super-profits tax on all companies with a turnover above $100 million per year is a weird choice.

Standard economic theory says that taxing super-profits, which are unexpectedly high profits, is efficient. Standard practice, however, is the opposite.

The reason for the difference between theory and practice is that in theory, a firm is a clean unit of account. It is obvious where one firm begins and ends. But in practice, the boundaries of firms are far from obvious and constantly changing.

Complex ownership structures hide subsidiaries and allow for profit-shifting amongst related entities. We already have a tough time cracking down on profit-shifting to other jurisdictions by multi-national companies who currently vastly minimise their corporate taxes.

It is a constant battle to apply transfer pricing rules to overcome the evolving accounting tricks. For example, one trick is for a local company may pay a related company abroad huge licence fees to minimise its local profit. Or, it may sell its products to a related foreign company at a cheap price to reduce profits generated locally.

So sure, crack down on enforcing the existing tax rules we have. But introducing another tax on this same base, with an arbitrary turnover cut-off is adding extra margins for accounting manipulation.

For example, every company that looks like it might hit the $100 million turnover trigger start looking to split into different entities and change their corporate structure to avoid crossing that margin and paying more tax.

This practical problem of such taxes is why we held a 2017 review into Australia’s existing super-profits tax, the Petroleum Resources Rent Tax (PRRT) (my submission to that review is here). This tax applies to companies that extract offshore petroleum and has been in operation for three decades, yet it has failed to raise the revenues expected. Too many accounting tricks evolved and revenue from that tax fell from nearly 50% of profits in the 1990s to about 10% in the 2000s.

There is also a political problem of trying to extend this type of tax. Kevin Rudd’s Minerals Resource Rent Tax (MRRT), for example, was a political failure.

But I get the feeling that this doesn’t matter. The choice of tax proposed by the CFMEU seems more like a political signalling game than a genuine attempt to generate revenue.

Clues come from the fact they cite a Parliamentary Budget Office (PBO) cost estimate of this exact tax when it was proposed as a “Tycoon” Super Profits Tax by the Greens at the last federal election, and the extreme uncertainties about tax, which “could raise as much as $350 billion over the next 10 years or as little as $72 billion”.

Compare the likely political drama and accounting complexity of this type of tax to something as simple as updating royalty rates on minerals.

In its 2022 budget, Queensland added three extra tiers to its coal royalty program that apply when the price exceeds $175/tonne. It raised $8 billion of extra revenue in 2021-22 from this alone. A royalty is simpler and harder to avoid than a profits tax. Similar resource royalty updates could happen more broadly to capture a larger public share and also recoup some super-profits from this sector.

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Superannuation taboo

Weirdly, CFMEU Secretary Zach Smith doesn’t seem to grasp that super funds own large shareholdings of the companies that would be subject to a super-profits tax.

Here’s how things went down on a Sky News interview.

Peter Stefanovic: “Why not go after the super funds?”

Zach Smith: “Well, you know, super funds hold in trust, umm, retirement savings for all Australians.”

Peter Stefanovic: “And also contributions to the unions”

Laughs all round.

Zach Smith: “I think that’s greatly overinflated”

Just to be clear, an effective super-profits tax on all major companies that raised $20 billion million per year would wipe tens of billions of dollars from the value of super funds, which own about half a trillion dollars worth of listed Australian shares.

The CMFEU wants to tax the big end of town but has not realised that the superannuation system is also the big end of town.

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3. Why $20 billion? It’s too much

The final weird part of the CFMEU campaign is that they think they need over $20 billion per year in extra revenue for a major housing policy.

But they don’t.

Housing is an asset. So good are the returns from owning housing assets, investors are willing to lose money each year to earn the capital gains. This was my argument against the Housing Australia Future Fund (HAFF). Why buy non-housing assets to raise money for housing when homes themselves are assets?

As I noted in my submission to the HAFF Senate inquiry, the typical Australian home earned a higher rate of return than the Future Fund since its inception. Yet apparently, buying low-return financial assets helps fund high-return housing assets.

After homes are built they start earning rental incomes for their owner, even when the rent is discounted. These incomes can then fund more home construction.

The CFMEU seem to be mixing up the construction cost of homes with the economic cost of the gap between market rents or prices and the discounted rents or prices paid by tenants in the new homes this money will fund.

To give an indication of how over-sized the $20 billion-plus revenue is, consider that the total rent paid by Australia’s three million renter households is only about $60 billion per year ($20,000 per home per year on average). With $20 billion it is possible to subsidise a third of every single household’s rent!

Paying $500 a week? Now it’s $335.

The $20 billion price tag the CFEMU came up with is the cost of constructing 50,000 new homes and giving them away for free.

The budgetary cost of my HouseMate policy, which would build 30,000 new homes per year and sell them to buyers at heavily discounted prices (up to 50% below market), is less than $3 billion per year.

In sum

The weird CFMEU proposal is a revenue policy, not a housing policy. It picks unnecessary political fights with a heavily impractical and politically controversial tax, while massively overestimating funding needed for a major public housing push.

This suggests to me that there is a strategic political element to this CFMEU housing campaign that I am unaware of. Which is fine. Do your political thing.

But it doesn’t seem to be a genuine attempt to provide non-market housing options to Australia. It seems more like a difficult-to-implement tax proposal.