Perhaps the most maddening thing about Treasurer Wayne Swan’s backdown on a budget surplus for 2012-13 is it forces us to ask whether some of the damage that’s been inflicted on Australia’s reputation among international investors in pursuit of that goal was ever necessary.

Much has been made about how little the minerals resource rent tax will raise for government coffers and thus help deliver a surplus that's no longer coming. Indeed many column inches have been devoted to how commodity price fluctuations ensured that a reliance on this tax device to deliver in this financial year, or any year, in any meaningful sense was clearly idiotic the day it was suggested.

It was this tax device that, when announced in its original form as the resource super profits tax, raised serious questions about Australia’s sovereign risk, particularly in the world’s financial capital, New York. These questions can best be addressed with a change of government, even if it’s a government that will be led by one of the most unlikeable and uninspiring leaders in Australian political history.

But in a strange way, the MRRT of 2010 is less of a problem for Australia’s international reputation as an investment destination than the lesser known changes to the withholding tax made as part of the May budget.

The government announced its intention to raise the withholding tax on foreign investors in managed funds to 15 per cent from 7.5 per cent.

The argument is that these rates tend to apply to wealthy investors who can afford it, plus it would bring Australia’s rates into line with international competitors. Both these points are correct and it should be noted that this rate used to sit at a much higher 30 per cent.

So sure, the tax would be doubled, but it’s still half what it used to be. What’s the problem?

There are actually two problems here and neither can be easily addressed, no matter what Swan has conceded about the budget’s bottom line.

Firstly, it was terribly communicated to international financials – just like the RSPT, or was that the MRRT? Sources in New York’s banking industry indicate that big institutions are still somewhere between puzzled and infuriated with this meddling without consultation.

Secondly, it’s a complete about-face on what Labor was telling us in 2008. It was the then Rudd government that cut the withholding tax from 30 per cent, to 15 per cent and then 7.5 per cent, all the while making a big deal about how it was sending a message to the world that Australia is a place for investment – a terrific message, particularly when the investment world is in such a mess.

The MRRT was a bigger tax policy blunder for the country, no question. But global financials were concerned about it on behalf of their mining clients, almost all of which were always going to be able to meet their obligations, mining tax or not. Besides, the swift amendments made by the freshly installed Prime Minister Julia Gillard via closed talks with BHP Billiton, Rio Tinto and Xstrata ensured that the thing wouldn't raise much more than dime.

By contrast, the withholding tax changes mean that these financial firms have to go to clients across their organisation and tell them, "Hey, remember when we said you should invest your cash in Australian infrastructure and construction because they’ve got their head screwed on straight? We were wrong and your return is seriously compromised. Oh, and if you're still keen at 15 per cent, the Australian dollar is in a terrible mess."

It’s embarrassing for them. The spectre of the RSPT just reinforces the questions in their minds about Australia’s reliability.

Granted, international financials have rightly been brought down a few rungs after the global financial crisis. They can no longer expect to get everything they want from governments around the world or demand to have a direct line to relevant ministers on minute policy details before they’re made public.

But the unconvincing performance of Australia’s economy, the primary reason for our budget deficit, illustrates how desperately we need international investment.

For that we need the confidence of major multinational financial institutions and a proper discussion about how to fix the budget’s structural problems, rather than random tinkering with tax rates and a shuffling of spending forwards and backwards.

Between the MRRT and withholding tax changes, the first has been significantly weakened. Between the ALP and the Coalition, the judgement is yet to come – but the withholding tax decision is unlikely to do Labor any favours.

Alexander Liddington-Cox is Business Spectator's North America Correspondent.

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Anonymous,

This issue attracted a lot of attention in my world, the institutional investment community. It was a complete reversal of a recent policy change, and quite at odds with what has been happening overseas (Labor's menacing tax memo to the world, January 7).
I must say it left many overseas investors totally baffled at how we like to call ourselves the "clever country".

Anonymous,

So why provide a tax break to foreigners? (Labor's menacing tax memo to the world, January 7.)
I've got some US investment and unless I provided them with information I was to be taxed at 30%, but by filling out the appropriate forms will be taxed at 15%.
So why should foreigners be taxed less on the income than what my SMSF will pay?

Anonymous,

Yes agree. Also a withholding tax of 10% would have been smarter meeting other foreign withholding rates e.g interest earned by foreigners in Australia (Labor's menacing tax memo to the world, January 7).

Anonymous,

Alexander, thank you for saying things that are required to be said (Labor's menacing tax memo to the world, January 7).
Australia must get it's investment houses in order. What I am saying is that Australias superannuation holdings are more than we require to fund All Australian investment. So, it is clearly time to manage this portfolio, with Australian investments as the core value.
Australia, needs to learn from the US entreprenuer. Not borrow from him.
We need university lecturers from the USA.

Anonymous,

"We desperately need international investment." Really? Superannuation funds now total $1.3 trillion, yet "foreign investment … is vitally important" (Labor's menacing tax memo to the world, January 7). Granted, super funds are notable for their preference for financial speculation with their vast amounts of members' money rather than investing in socially or industrially useful enterprises.
Back in 2000, 80% of foreign investment was to buy existing Australian owned business. . . The level of foreign ownership doubled in the [1990s] decade to 21% of gross domestic product, and the money leaving Australia for foreign owners also doubled, reaching $12 billion.
An effective and interventionist socio-economic strategy matters more than ownership. Colonial and Commonwealth economic history conclusively demonstrates that active and specific government intervention is not only highly effective but also is necessary if the public interest (that of the millions and not the millionaires) is to be served.
Not having an effective and interventionist socio-economic strategy is very costly for any small, open economy, be it Greece or Australia. Greece, much discussed, is simply facing the future most countries will face as resources become more expensive and the bill arrives for decades of debt-driven "growth". It needs socialism, not criticism.

Anonymous,

Thank you Alexander (Labor's menacing tax memo to the world, January 7).
The situation is actually worse because at the same time the tax withholding has doubled, the 50% CGT
discount has been scrapped for overseas investors even for existing investments.
This will put more downward pressure on commercial real estate.
We are a property syndication business, and we must now have all our properties valued as per June 2012, as our investors only benefit CGT reduction up to that date.
Not a good story indeed to our overseas investors!

Anonymous,

Does anyone know whether the ALP and it's budget officers ever seek advice from the RBA before they embark on these international taxing schemes? (Labor's menacing tax memo to the world, January 7.)
IMO all governments should look at the trading model used by Coles and Woolworths Supermarkets when they started off in the food businesses low margins delivered high turnovers delivered higher surpluses but I bet if these two major Supermarkets used the ALP model of making more per sale their turnovers would drop and I bet so would their surpluses.

Anonymous,

There is already too much foreign investment and takeovers of what still exists of our few remaining companies (Labor's menacing tax memo to the world, January 8).
We need the foreign interests to actually pay like local citizens do. In part it is the distortions in the tax system that is providing an added incentive for foreign ownership of our businesses, I want to see them pay the same sort of taxes as we do. Make them pay tax at the highest marginal rate of tax, and not at just 15%.
We really need a public audit of what each foreign company pays in tax. I suspect they pay next to nothing using all sorts of tax minimisation measures. In addition they refuse to train locals and demand the right to bring in cheaper labour as if we were some sort of colony.
One thing that should not be allowed is the use of interest payments as a tax deduction by foreign firms as they are simply buying up our companies with borrowed funds and having the interest payments on those borrowings as a tax deduction. In addition Xstrata was reported as having made a tax loss of some $600m by buying a non-performing asset from Glencore (a related company) - I wonder how many multinationals are doing this?
The upshot is that there is now talk of raising the goods and service tax from 10% to 15% to cover the loss of government revenue.
Yet our journalists are silent about the real negative issues that foreign investment are causing and just seem talk about all the supposed good things that generally never seem to eventuate to our benefit. I guess our journalists are just not competent to do serious economic analysis.

Anonymous,

Did the government upset some financiers, by raising the with- holding tax to international parity, without consulting them first? (Labor's menacing tax memo to the world, January 7.)
Even sovereign risk was mentioned.
When Indonesia, Mongolia et al insist on getting back the "farm"
on their terms, that is sovereign risk. Doesn't stop investment but
We are only a risk to ourselves and our children. Stop selling and start clawing back.
Start pricing gas at US prices.
Upset a few more people.

Anonymous,

This hike only affects foreign investors who can't offset the withholding tax against their domestic tax liability, under double taxation agreements. (Labor's menacing tax memo to the world, January 7)
May even deter some of the hot funds which are pumping up the AUD, so the change is not necessarily ill conceived.