KISS - the taxation system

For as long as we persist in the concept of "plucking the goose", we will deny any decent relationship between those who govern and those who are governed. The entire equation has to be rewritten.

Are we living in a “free” country or are we still living in feudal times where the ruling classes can tax willy-nilly to fund their circuses and even their peccadilloes? Surely citizens of a free country should be employing their government to defend their life, liberty and property. Surely public servants should be there to serve the public, not pluck us to the limits of electoral endurance. But a funny thing happened on the way to the forum as they say. We live in a time where, “No man's life, liberty or property are safe while the Legislature is in session” (attributed to various sources).

For anyone remotely interested in the subject, the book For good and evil - the impact of taxation on the course of civilisation by Charles Adams is well worth reading. When taxes become too onerous, citizens either vote with their feet, or they revolt and overthrow the oppressive government, often with much bloodshed, and too often with an even more oppressive government in control.

The Roman historian, Tacitus, circa 80AD, had the opportunity to study the styles of numerous Roman emperors, and made an interesting observation. The most successful Emperors were those who had simple and just rules, even if they indulged in a few peccadilloes which at least distracted them from the temptation of making more rules. The least successful were the bureaucrats, who tried the “nanny state” approach, and who concocted rules for every occasion, with increasing police-state enforcement of those rules. Tacitus wrote in his Annals and Histories of Rome, words loosely translated from the Latin as “When the rules were most numerous, the Commonwealth was most corrupt”.

That quote should be carved in stone over the entrance of every Parliament in Australia. It can be best comprehended in the context of living in the outer suburbs when outdoor dunnies were still de rigueur. If the rules required costly “perfection” as specified by some bureaucrat (e.g. ceiling insulation, solar panels and a limit meter on the daily flushes), the householder had four choices: 1) do nothing if the extra costs made it unaffordable; 2) if it could still be afforded, pay through the nose for unnecessary requirements; 3) break the law and build it, at risk of being fined or jailed in the event of being found out; 4) slip a metaphorical case of scotch to a buddy in the Planning Department to obtain official sanction through the back door.

Reading between the headlines of the daily news, the 4th alternative is a not uncommon occurrence.

Our taxation rules became too complex and to bypass the complexity a system of “rulings” was introduced whereby official sanction was given to various business activities. Inconsistencies and opportunities were apparent to those “in the know” and the Nick Petroulias affair was the tip of the iceberg in the rulings fiasco. He was locked up and his undoubted abilities have been sterilised by a corrupt system.

Many others have fled the country to low-tax opportunities offshore, and there are now about 100 Australians working in a thriving banking industry on a low-lying coral atoll in the Caribbean, The Caymans tax haven has even attracted accounts from five subsidiaries of the Australian Government's Future Fund “to minimise its taxes” (Jacob Saulwick, Sydney Morning Herald, October 2009).

As Shakespeare presciently wrote in Hamlet, “Something is rotten in the State of Denmark”.

(And Copenhagen curiously was the scene of the latest government assault on our freedom and our senses with new and amazing plans to tax and control “emissions”. If an ETS is introduced, that would require a new army of lawyers, accountants, auditors, administrators, police and other bureaucratic paraphernalia to control and enforce the slippery concept of “emissions”. The control and taxation of “emissions” would provide governments with ultimate power over the populace, and our hard-fought-for freedom would be destroyed with the stroke of a legislator's pen.)

Here in Australia we have rapidly descended into a nanny state situation, and in addition to a flood of new cradle-to-grave rules and regulations, entire government departments are now devoted to the mystic art of changing the climate and in pretending to do so, employ an army of spin doctors to justify their existence. No matter how many forms they devise, or how many carbon certificates they issue, this is fraud on a monumental scale.

But the underlying Tax Acts must also be cleaned out. They are the lead in the saddlebags of production - tens of thousands of pages of rules and regulations demanding compliance are an abomination, and only fundamental reform can tackle this problem which is suffocating production and exchange.

The so-called “progressive” Income Tax system is anything but progressive. Annualised profit can be measured in as many ways as there are creative accountants, yet this slippery concept is the basis for one of the main sources of funding our government. The only time anything has a precise monetary value is at the moment of sale. A house may be purchased for $1 million but the next day a buyer may offer $2 million, or it may be in the path of a flood or bushfire and be worth only an insurance valuation.

Our government is charged with the responsibility of printing money, the lubricant of commerce. Yet the volume of money printed is in the hands of the soothsayers (economists) who depend on ABS statistics (months or years out of date, and with garbage-in-garbage-out data and data analysis - the complex ABS forms result in cursory answers just to be seen to comply) and probably as reliable as the Romans contemplating the entrails of chickens for strategic advice.

If nine major taxes, Personal and Company Income Tax, GST, Payroll Tax, Capital Gains Tax, Fringe Benefits Tax, Provisional Tax, Withholding Tax and Superannuation Tax were replaced with a simple Spending Tax, the government would have close to real-time information on the valuation of all goods and services being traded in the country as determined by every buyer and seller in the country, and could adjust the money supply to suit. Too much money sloshing around in relation to the goods and services being traded is inflationary. Too little is an impediment to trade. Capital Gains Tax is a joke as the value of money constantly changes with inflation, and with respect to other currencies.

A comprehensive computer model analysing six years of the Australian economy, breaking it out tax by tax, state by state, and industry sector by industry sector, demonstrated that by substituting a 2 per cent Spending tax for the abovementioned nine major taxes, every sector would benefit (the finance sector showed up as line-ball but would benefit with increased real economic activity). The manufacturing and primary production sectors would benefit enormously and the cost of all three tiers of government would be slashed by the minimisation of churning taxes e.g. Group tax collected from public servants and paid to the Federal government for redistribution. (See Your Future in Your Hands.)

The new take-home pay would be the same before and after the change-over, but the cost to employ would go down to take-home pay plus 2 per cent. Demand for employment would rise, paperwork demands on employers would fall, and a huge underbelly of unemployed and under-employed would emerge from the shadows of politically manipulated employment statistics.

The figures are stunning. The conversion process has been simplified since the introduction of the GST which the 2 per cent Spending tax would replace. BAS returns would be three-line statements: How much did you receive for the period? How much did you pay your employees? What is the 2 per cent component of these? There is also a simple accounting for tax on imports while tax on exports is accounted for in the normal process (the overseas buyer pays the tax to the local seller, and the seller remits this to the government).

The tax paper trail would be invoice and receipt - no exemptions, no deductions, no tax year. There could be a stock exchange beside every TAB in the country, where people could back companies with the same zeal as they back horses, and with the same predictability of the tax payable if they win. The horse race is over when the horses pass the finish line, the company bet is over when you choose to sell the shares (and that would be to suit the market, with the decision not distorted by which financial year is involved).

Every tax review, including the current Henry Review, is hamstrung by an obsession with a revenue neutral approach. This locks in the enormous waste of churning taxes, and opportunity cost of tax avoidance and evasion (going on the dole is a double-dip into tax avoidance/evasion as not only is nothing contributed to the tax pool, but something is taken out).

Motivation is the key to productivity, and punitive taxation is inimical to motivation. The best stimulus package is not a handout of money taken from some to give to others, but major tax system reform which would make this country an economic powerhouse. Australia would also become a continent sized tax haven, and our contingent of young bankers could return from exile on a barren coral atoll in the Bahamas and enjoy a full and productive life in their homeland. There are something like two million of our best and brightest working offshore in many diverse industries.

We need them here, and a tax revolution would be the stimulus for their return. Those people are surely our first choice for skilled immigration and some return on money invested here in their education would be realised.

Unless the Henry Review addresses the waste resulting from an archaic accumulation of political garbage, we will only add more layers through which to wade. It is not a Herculean task to clear the Augean Stables of our corrupt Tax Acts, but it does require courage and vision to tackle the job. Surely it is best not to pluck the goose at all, but to encourage it to lay more golden eggs.