A tax by any other name

Like any other type of tax, levies are rarely ever abolished or reduced

IN MANY rural sectors, producers pay levies which are collected by the government and transferred to an industry organisation which is responsible for spending the money for the benefit of the industry.

Levies are used to support research and development, promotion and marketing, residue testing, and plant and animal health programs. In some cases the government contributes additional funds, a form of corporate welfare.

Quite sizeable organisations are funded by levies, including Meat and Livestock Australia, Australian Wool Innovation, the Grains Research and Development Corporation and Horticulture Australia. Many careers are dependent on their continuation, which means a significant amount of scepticism is required whenever they are discussed.

Levies are in reality a special purpose tax. And like any other type of tax, they are rarely ever abolished or reduced.

The arguments in favour of levies rely on the proposition that by pooling producer funds, activities can be undertaken that would not otherwise occur. Some people refer to this as market failure, which may be technically correct although those who like the market failure term tend not to have much faith in markets to start with.

In the case of research, some activities are certainly too expensive or too long lasting to be undertaken by individual producers. In other cases, individuals who fund the research would not be able to gain the benefit without sharing them with those who have not paid.

This especially applies to fundamental research that explores the building blocks upon which applied research is based. Someone needs to discover the genes, molecules and biological pathways that drive organisms before products can be developed to block, enhance or modify them.

However, it is also true that levies pay for a lot of research and development that would be funded by individual producers if they were not available. There are few things faster than the withdrawal of a proposal to undertake R&D upon discovering that it might be funded via levies.

In an ideal world, R&D would all be funded by individuals on a voluntary basis. The benefits would flow to those who provided the funding, leading to economic rewards that provided an incentive to others to either buy into the results or undertake their own. In fact, this is the model used in most industries. Levies are not found in mining, manufacturing, transport or tourism, for example.

The availability of funding for R&D which would otherwise have been undertaken privately is a major disincentive and almost certainly leads to a lower overall level of R&D expenditure. The R&D organisations all know that, and yet there is an enormous amount of work undertaken that falls into this category.

This problem is even more significant when it comes to marketing. These levies are similarly based on the argument that marketing by individual producers can only take market share from competitors and not expand the overall size of the market. Only by pooling resources, it is claimed, can this ‘market failure’ problem be rectified.

Like many traditions common in the rural sector, this has an element of truth. When there are large numbers of producers of roughly similar size, it is not feasible for any individual producer to take on the role of market development. It is too expensive and in any case the benefits are inevitably shared with those who have not paid for them.

Things change when one or more producers have a substantial market share, however. If they invest in market development, as a minimum they will pick up any growth in proportion to their market share. If they manage to brand their product and create customer loyalty, they should do better than that.

The same applies to export markets. These are more expensive and require more resources to develop, so only very big producers have the resources to chase customers and increase demand. Development of the Aussie beef market in Japan, for example, may not have occurred if it had been left to individual meat producers or processors.

The point is, there may be occasions when pooling funds is warranted, but there are many more times when the use of pooled funds cannot be justified and may even have a negative effect on private investment. Each use of pooled funds should be carefully considered.

But convincing anyone of that is probably not very likely given the range of vested interests. It is a forlorn hope to think that rural R&D and marketing organisations might apply a more critical eye to their activities. A more attractive option would be to ensure that those who pay the levies, the producers, have a regular opportunity to decide whether to pay levies in the first place and, if they agree, how much they ought to be.

The wool industry does exactly that. Every three years a poll is conducted in which wool growers vote on a range of levy options, including a rate of zero. Although there are plenty of growers who believe zero is the right amount, a majority has so far consistently supported a higher amount.

While some levies are only used for R&D (eg the cotton industry), they are all compulsory. Moreover, while the introduction of levies is normally subject to some kind of plebiscite, unless there is a proposal to increase them only wool producers ever get an opportunity to decide whether to retain them.

In my view the whole system of levies, from deciding whether to introduce them, whether to retain them, how high they ought to be and how to spend the funds, is overdue for review.

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FarmOnline
David Leyonhjelm

David Leyonhjelm

has worked in agribusiness for 30 years and is a Senator for NSW representing the Liberal Democrats.
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READER COMMENTS

Mabel Peyton-Smyth
16/07/2014 8:47:21 AM

Proud to say that a very close friend of mine was at the forefront of deregulating the dairy industry . Also all sides of politics were on board.The fact was that NSW and QLD dairy farmers were subsidizing the manufacturing sector mainly in Victoria from a highly profitable fresh milk market bought about the demise of a Pandora's box of regulation and subsidy. Now we see the QLD sugar industry afraid to face the reality that it needs weaning from the breast of regulation. At times painfull but in the end adults walk into the room
dogsbody
16/07/2014 4:45:05 PM

A few years back at a local unity meeting I asked my friends and neighbours what made them vote for an MLA levy. All responded in the negative! As we collectively send several thousand head to market every year and most of us find our own markets as we are sick of saleyards price manipulations why can't we have the right to opt out? The biggest joke was the statements made originally that electronic tagging would not add to costs. The MLA adds no value to the industry but lots to its executive.
John from Tamworth
16/07/2014 6:02:59 PM

Spoken like a true lemming Mark2.That's right follow the rest of the agrarian socialists of the cliff.Dont forget that cattle producers have never been allowed to vote on the levy which has been imposed on them by the plutocrats in the National Party and the SFO who for some odd reason think they are smarter than everyone else.
John from Tamworth
16/07/2014 6:11:42 PM

WTF,I know this is getting a little repetitive but if you really hate central banks then you should argue for either the return of the gold standard or the establishment of a currency board.Under either arrangement the central bank becomes redundant.Hong Kong has had a currency board since 1983 and the note issuing banks can only issue currency against their holdings of US Dollars.
wtf
17/07/2014 7:02:06 AM

thankyou for the suggestion JFT, still don't like the link to the US dollar, any other options? If we opt out of a link to the worlds reserve currency where do we end up? I'm guessing civil war like those who don't have a central bank now?
mark2
18/07/2014 9:39:57 AM

well Archibald, my comments regarding market regulation were made in response to comments by another "poster" and those comments referred to the behaviour of the "global henchmen " running the international financial system, read the posts. Yes I'm aware that the topic is levies, what I'm saying is producers have input at some stage, you have to participate in the process. I'm not saying any of it is working very well but in my opinion that is because most of the SFOs have either been captured by vested interests or divided by lack of participation by producers.
Peter Williams
20/07/2014 8:01:21 PM

Yay I say and good by to MLA. These people have achieved nothing in the past 20 years. Go hard at this windmill Don Quixote and good luck.
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Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at reclaimfreedom@gmail.com

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