Profitable Businesses Don’t Need Tax Credits

The global film industry is an interesting insight into how different types of companies approach their tax affairs.

Money making companies like tech giants, energy producers and financial institutions approach their tax affairs with the goal of reducing their global tax bill.

This means they are looking to book revenue in low-tax jurisdictions, make use of transfer-pricing arrangements to the maximum extent they’re allowed and leave accumulated cash reserves offshore instead of repatriating it and paying additional “home country” taxes.

Money losing companies like Hollywood studios and industrial giants who have failed to innovate approach their tax affairs with the goal of increasing the level of de facto support they get from the public sector.

Profitable businesses don’t need tax credits. Giving movie studios tax credits is an implicit recognition that the failed Hollywood business model needs handouts to survive.

Most movies lose money hand over fist. The handful of blockbusters (LOTR, The Hobbit, Harry Potter, Terminator) provide the justification for the industry to keep on trucking when it’s clear that it’s a net capital drain on the economy taking advantage of naive politicians and investors alike.

Many commentators have gotten it completely wrong about giving handouts to profitable movie studios. We’re actually increasing their revenue and therefore subsidising the flops Warner Brothers have made.

It’s no wonder John Key is very friendly with Hollywood executives – he’s been brainwashed into putting money into studio executives pockets in exchange for temporary albeit well paid contracting jobs and an NY Times profile.

I hope that the Warner Brothers executives got multi-million dollar bonuses for their lobbying coup in New Zealand. They brilliantly realised they were dealing with a photo shoot hungry Prime Minister and played his government hook, line and sinker.

We have to ask ourselves, what is the difference between giving a failing manufacturer tax credits and giving the film industry the generous treatment it currently receives in New Zealand?

There is none. They are one and the same. But for political reasons, a film industry handout that leads to 3,000 creative and technical contracting jobs for a couple of years is preferable to taking aggressive tax credit steps to spur an economic recovery from the global financial crisis.

All of the arguments that the National government have used to justify The Hobbit’s special treatment can be applied to any industry.

If the National government thinks that special tax treatment in the film industry creates jobs and economic activity, why doesn’t it extend that thinking elsewhere?

It’s scary how some industries are more equal than others. Particularly when the recent RBNZ manufacturing report shows clearly how a major rebound in construction¬†above and beyond the Christchurch rebuild would quickly recover the losses from the past few years.

But cutting the ribbon on construction projects is not as glamorous as attending red carpet events on Hollywood Boulevard Courtenay Place.