COMM1100 Business Decision Making

Government intervention:
Government as a stakeholder

Ms Aleksandra Balyanova
Associate Professor Rob Nicholls

To create a positive online class experience

• Please switch your microphone off so we can ensure a quality class experience.
• Please ask questions! We will use Slido to answer your questions.
• The lecture will be recorded, and the recording will be available in Moodle for you to review.
 Update on assessments
• Results and feedback on your case study analysis (assessment 3) will be
available in Week 10
• Assessment 2B (the second quiz) must be completed on Monday 17 April ,
6:00 - 7:00 pm (Week 10) (AEST)
Assessment 2B
Assessment 2B – Problem Set B (10%) Due Week 10: 6-7: 00pm (AEST) Monday 17 April

The second quiz will assess all concepts covered (CR, econ and law) in Weeks 4-8, including
individual core learning, synchronous (live) lectures, associated readings, and tutorials.

There is a practice quiz 2b to help you prepare

There are 3 consultation sessions in week 9

COMM1100 Business Decision Making
Foundations of Business Decisions Decision Making Processes
Decisions Related to Stakeholders

1 2 3 4 5 6 7 8 9 10 11

10 11
Intro to Decision Surplus
making,
Stakeholders Employee Stakeholder
Business Decision measure & Legal rights of Competitor
Supply & welfare, and & Supplier Decisions
Making stakeholders Relations The role of Regarding Manages
Stakeholders Demand market power Customer Flexibility Relations
in decision Decisions government in
and & imperfect Relations Week Decisions Complexity in
making business
CR competition Decisions Business Decision
Making
ASSESSMENTS

Quiz 1: Case study Quiz 2: Final

10% analysis: 20% 10% exam
50%

Participation: Participation: Participation: Participation: Participation: Participation: Participation: Participation:

10% (in total) 10% (in total) 10% (in total) 10% (in total) 10% (in total) 10% (in total) 10% (in total) 10% (in total)
Questions?
Direct Slido link: https://app.sli.do/event/2w8os0qm

Or you use use

the QR code:

Or go to https://www.sli.do and enter the code #2249226

This week we consider the following:
• Stakeholder [mainly] in focus: Government
• In the independent study materials, you have material
on:
• Taxes and transfers
• Price control laws
• In this lecture, we will mainly focus on:
• Why and where the government intervenes in markets
and society
• Economic effects of government intervention in
markets, with main focus on taxation
Tax law considerations
 The Tax and Transfer system
• Overall tax system refers to all of the Composition of Australian Taxes 2020/21
taxes in place at the national, state
and local levels. In 2020/21, this was
$594 billion or $23,096 per capita. State and local taxes
About 28.6% of GDP.
20% 19% Personal income tax
• Henry Review: estimated Australians Company tax
paid at least 125 different taxes 8%
Other Federal tax
annually, of which the government
attains 90% of its tax revenues 17% 36% GST

• Tax mix: The combination used to

generate tax revenues

• Transfer payments: Cash payments

to individuals and families (for Source: ABS, Taxation Revenue, 2020 -2021.

example, pension, youth allowance

and childcare payment).
 Corporate Tax Avoidance
• A form of corporate responsibility is whether an organisation pays tax that is expected of
them in countries where they are located and earning revenue.
• Business taxation behaviours can be grouped into three categories:

• In the case of multinationals “Base erosion and profit shifting”(BEPS): exploits

mismatches in interaction of different tax systems to artificially reduce taxable income and
shift profits to low-tax jurisdictions in which little/no economic activity is performed.
 A torrent of data
leaks…

Source:
https://www.statista.com/chart/11698/the-
scale-of-the-paradise-papers-leak/
Mind the (tax) gap!
The tax gap is an estimate of the difference between the amount of tax the ATO collects and what
it would have collected if every taxpayer was fully compliant with tax law. Tax gaps are, in effect,
about measuring what is not visible – what people have not told the ATO.

Taxpayers may not have reported their true tax position:

• due to a misunderstanding;
• by choice;
• by taking a tax position that differs from the ATO’s
view of the law.

The tax gap can be viewed from two perspectives:

• the gross gap – this is the gap before the impact of the ATO’s engagement
• the net gap – shows the final uncollected amount after the impact of the ATO’s action.
 Framework of
principles in tax
gap program

Source: ATO (2022) 'Why we measure

the tax gap' | Australian Taxation Office
(ato.gov.au)
 Mind the (tax) gap!
Net gap Net gap
Tax gap estimate Reliability assessment Financial year Gross gap ($m) Gross gap (%)
($m) (%)

Large corporate groups income tax High 2019-20 4,561 2,580 7.4 4.2

Petroleum resource rent tax Reliable 2019-20 n/a 13 n/a 1.3

High wealth income tax High 2019-20 812 737 7.4 6.7

Medium business income tax Medium 2019-20 1,198 994 8.4 7.0

Small business income tax Medium 2019-20 12,872 11,886 12.6 11.6

Fringe benefits tax Medium 2019-20 1,016 991 20.8 20.3

Individuals not in business income tax High 2019-20 9,673 9,030 6.0 5.6

Large super funds income tax High 2019-20 378 230 3.2 1.9

Small super funds income tax Low 2019-20 56 37 3.2 2.1

Table 2: Income-based taxes, latest available data

https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Tax-gap/Australian-tax-gaps-overview/?anchor=Whywemeasurethetaxgap#Whywemeasurethetaxgap
Consider this scenario…
• A well-known landscape company specialises in landscape
design and construction, for both large and smaller projects for
private land-owners. The company’s average annual net
income is $10 million. With 100 tradesman working in groups
of five across NSW, each group has one skilled landscaper
and four casual labourers working 9 hours a day, including
Saturday. The company always outperforms its competitors on
both price and clientele. Landscape contracts range between
$20,000 to $500,000, depending on the size and scope of the
work required. The company motto is “We design beautiful
gardens, always on time and always meeting your budget.”
Consider this scenario…
The company has another motto that is hidden from the public:
“Always undercut competition, pay the minimum and make a deal the
customer can never reject.”
What is the secret for the company’s apparent success?
• The company offers clients the opportunity to pay regular cash
payments as each job proceeds, therefore saving the customer
10% GST.
• The company pays its casual labour force minimum wages, cash in
hand. Most labourers are doing it as a second job or unemployed
workers who are glad to get the cash, not pay tax and still get
unemployment benefits.
What is the impact of the company’s
practices?
The company practices illustrate tax evasion but also show it is
operating in a shadow economy. A shadow economy is
described as:
• Monetary transactions made to avoid burden of taxes or circumvent
regulations
• Unreported income from the production of legal goods and services
• Cash is used to make transactions that agents want to keep hidden
from official records
Shadow economy - continued
The company practices illustrate tax evasion but also show it is
operating in a shadow economy. A shadow economy is
described as:
• Such transactions are difficult to trace because they leave no tracks
• Significant contributor to the erosion of tax and social security bases
• May cause significantly large budget deficits that render government
policies ineffective
• Transactions may be undeclared; under-declared; non-measured
and under-registered.
Shadow economy activities: Illegal activities
Impact on Consumers
• No protection for rights and obligations relating to insurance,
warranties, consumer rights and government regulations
• Risk having no evidence to claim a refund if goods or services
purchased are faulty
• Unable to prove who was responsible in case of poor work
quality.
Impact on Employees
• Workers missing out on entitlements (for example, proper
wages, leave or employee protection, super).
Shadow economy activities: Illegal activities
Impact on Government
• Transactions escape taxation, thus keeping tax revenues lower
than they otherwise would be
• Unreliable ABS data: (unemployment, labour force, income etc.)
• Government policies/programs framed on basis unreliable
statistics may be inappropriate.
Impact on Society
• Exacerbates social and financial disadvantage and inequalities
(less money to support universal health care, education, disaster
responses, public transport and infrastructure).
CR considerations
Taxes and Regulations: Some CR
considerations
Taxes
• A major role of government is to provide services and support to
members of society. This is money that relies on taxes.
• As a tax-paying member of society, it is the responsibility of
businesses and/or their owners to help fund the government to
indirectly provide services and support.
Regulations
• Regulations protect stakeholders from harm in a way that ensures
all those who may cause harm comply.
• Normative decision-making: If taxes and regulations apply to all
competitors, they put less pressure on businesses to have to do
more to address other stakeholders.
References

Australian Taxation Office (2022) 'Why we measure the tax gap.' Australian Government. 31
March, 2022. https://www.ato.gov.au/About-ATO/Research-and-statistics/in-detail/Tax-
gap/Australian-tax-gaps-Overview/?page=4
Australian Taxation Office (2021) ‘Shadow Economy Explained.’ Australian Government. 20
August. 2021. https://www.ato.gov.au/General/Shadow-economy/The-shadow-economy-
explained/
Baxt, R (2012) Securities and financial services law, LexisNexis Butterworths, Chatswood, NSW
Dreher, A. and Schneider, F (2010) ‘Corruption and the shadow economy: an empirical analysis’,
Public Choice, 144: 215-238.
Frey, B.S and Weck, H. (1983) ‘Estimating the Shadow Economy: A Naïve Approach’, Oxford
Economic Papers, New Series, 35, 1:23-44.
Schneider, F. (2012) ‘Size and Development of the Shadow Economy of 31 European and 5
Other OECD Countries from 2003 to 2012: Some New Facts’, ShadEc Europe, 1-7.
Economic considerations
Taxes: The big (economic) trade-off
Taxation is necessary as tax revenue goes to fund:

• Public goods like law enforcement, national defense, the functioning of

the government itself

• Subsidising or providing goods that may be underproduced by a

market, like education or healthcare (more on this later!)

• Transfers, redistributions, and the social safety net

Taxes: The big (economic) trade-off
But taxes are, for the most part, distortionary in the markets they are
levied.
Taxes: The big (economic) trade-off
But taxes are, for the most part, distortionary in the markets they are
levied.
Taxes: The big (economic) trade-off
But taxes are, for the most part, distortionary in the markets they are
levied.
• Deadweight loss measures
foregone economic surplus from
mutually beneficial trades not
realized!

• Taxes don’t just redistribute the

pie: they make some of it
disappear altogether, to be
enjoyed by no one.
Taxes: The big (economic) trade-off

• In 1696, England imposed a

property tax based in part on
the number of windows a house
had.

• Pros: easy to measure without

entering the house (unlike
square metres)

• Cons…?
Taxes: The big (economic) trade-off

• In 1696, England imposed a

property tax based in part on
the number of windows a house
had.

• Pros: easy to measure without

entering the house (unlike
square metres)

• Cons…?
Taxes: The big (economic) trade-off
But taxes are, for the most part, distortionary in the markets they are
levied.

• Question: So what is a
government to do?
Taxes: The big (economic) trade-off
But taxes are, for the most part, distortionary in the markets they are
levied.

• Question: So what is a
government to do?
Taxes: The big (economic) trade-off

In which market will the government raise more revenue?

Taxes: The big (economic) trade-off

Demand and supply are highly

elastic.

Quantity decreases significantly due

to the tax.

As a result, the government does

not raise much tax revenue.

DWL is substantial!
Taxes: The big (economic) trade-off

Demand and supply are highly

inelastic.

Quantity does not decrease much

due to the tax.

As a result, the government raises

substantial tax revenue.

DWL is minimal.
Taxes: The big (economic) trade-off
• Lesson: taxes are less distortionary in inelastic markets (and raise
more revenue).

• Stamp duty vs. land tax debate

• Stamp duty is a transaction tax and discourages trade in real estate
• Consequences of distortion: people stay in houses no longer suited to their needs,
people are less willing to move for a great career opportunity, etc.
• But land taxes are typically very politically unpopular
Taxes: The big (economic) trade-off
• Lesson: taxes are less distortionary in inelastic markets (and raise
more revenue).

• Stamp duty vs. land tax debate

• Stamp duty is a transaction tax and discourages trade in real estate
• Consequences of distortion: people stay in houses no longer suited to their needs,
people are less willing to move for a great career opportunity, etc.
• But land taxes are typically very politically unpopular

• What if the government wants to reduce the economic activity in a

market?
Taxes and externalities

• In the presence of a
negative externality, the
market equilibrium quantity
is TOO HIGH to be
economic surplus
maximizing.
Taxes and externalities
• A tax forces market
participants to internalise
the externality, and brings
the market outcome (with
tax) in line with the surplus
maximizing outcome

• A tax that corrects an

externality is called a
Pigouvian tax
Taxes and externalities
• Similarly, subsidies can be
used to increase
production/consumption of
a good with a positive
externality.

• Public policy about

externalities is why
cigarettes cost ~$2 each
and the COVID vaccine is
free.
Next week
• Stakeholder decisions regarding managers
Thank you!

If you have any questions about

this lecture, please post it on
Moodle.

The lecture recording will be made

available in Moodle.

Moodle course site:

https://moodle.telt.unsw.edu.au/course/view.php?id=60102

Course email:
[email protected]