RAJ REPORT

TWO PER CENT EXPENDITURE TAX vs GST

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The Tax Morass

A PATHWAY THROUGH THE SWAMP

by John McRobert ( Civil Engineer and Inventor of 2%Easytax )
(written back in the late 90′s)

THE PROBLEM AND A SOLUTION
The Australian tax system is in chaos, and the bureaucratic answer is greater bureaucracy. A New Tax System (ANTS) is a farce which ignores the fundamental problem. The proposed GST is a complex Expenditure tax which overlays a complex Income tax. However now that Australians are seeing the build-up of compliance corps and price police, they are beginning to understand what their future will be like under these draconian tax laws. A political opportunity now exists to properly reform the system.

Progressive Income Tax is a fraud based on a fallacy. It is a relic of the discredited Marxist economic theory, and Australia’s Income Tax Acts and their derivatives should be replaced at the earliest opportunity with a rational and fair system for funding government.

The fraud is the notion that profit can be precisely measured in order to tax it. The pursuit of this impossible dream has resulted in over ten thousand pages of incomprehensible legislation, untold pages of rulings and judgements, and the grotesque substitution of ‘if it can’t be measured, then deem an arbitrary measurement’. Ask any two accountants to independently analyse the books of a company or an individual, and the odds are two different taxable incomes will be produced. The only thing which can be accurately, consistently and visibly measured in an exchange of goods and services, is the monetary value of the trade itself.
The fallacy is that by taxing the rich at progressively increasing rates, governments can help the poor. A simple what-if analysis of a comprehensive computer model of the economy shows that the existing system has taxed out of existence close to two million jobs. The current tax shambles has created more poor people than it could compensate. It has massively surcharged the price of bread and other basic necessities, it has locked hard-working people into poverty traps, it has deprived them of the opportunity of finding meaningful work, and it has robbed them of their dignity.

If expenditure alone was taxed, with no exemptions, thresholds, rebates or demarcations, and if all the expenditure was taxed at the same low, fair and visible rate, we would for the first time in history know, and hopefully respect, the rules and get on with the job of producing and exchanging goods and services. The Buyer pays the tax and the Seller remits it in a simple operation.

Increases in real productivity, increases in real employment (not make-work taxpayer funded so-called training schemes), and savings in the cost of government through the elimination of the churning taxes upon taxes (every ton of steel and cement needed to build hospitals and schools is surcharged with huge taxes on labour), would require that a tax on each sale be no more than 2% after eliminating all current Income and Sales (Expenditure) taxes and their derivatives.

The figures have been substantiated by a major a computer model of the Australian economy detailed in the book ‘Your Future in Your Hands’. (Banking or withdrawal of money is not a sale and is not taxable under this proposal. It is neither a Debits tax nor a Financial Institutions Duty.)

THE GREAT TAX DEVIDE
The Business Review Weekly (Feb 2000) posed the question: ‘Why is the great tax divide growing wider?’

Number one suspect is the Income tax system itself. Fiddling with this economic baggage to skew development from Sydney to the bush or to take from savings saints to give to squandering sinners only swells the tide of resulting rules and regulations which drowns the poor and helpless first.

A fraction of the wealth generated within our shores and syphoned to overseas tax havens would be enough to fund sorely needed infrastructure which could bridge the gap between rich and poor, and between city and country.

When profit cannot be accurately measured, how can it be fairly taxed? When the tax on labour is complex and burdensome, how can we create jobs?
When the motivation to produce and exchange is replaced by the motivation of envy, how can prosperity for all become a reality? When it is more remunerative to be a wealth redistributor than a wealth creator, how long will it be before we are reduced to consuming our seed corn when the larder is empty ?

Taxes based on shifting sands of deemed profit allow overseas based companies to have unfair economic advantage over local companies which cannot shift this onerous burden offshore. Complex labour based taxes are also borne more inequitably by local
companies, as they can be avoided by overseas companies who shift jobs and capital to where the tax burden is least.

After an immense amount of accounting and legal work, the total revenue of the ‘BRW1000 companies 1999’ of $903 billion, resulted in company tax paid of $18 billion – near enough to 2 %, a figure of more than passing interest. But of even more interest would be an analysis of the total revenue and taxes paid by all local and overseas companies and economic entities in Australia, including Group tax, to demonstrate howtransfer pricing allows overseas corporations a tax advantage over local organisations on those taxes based on profit.

If the extent of the problem is dragged out into the daylight for all to see, real tax reform, in which all citizens are treated fairly, will soon be placed on the political agenda.

UNEMPLOYMENT AND TAXATION
If you want less of anything, you tax it more. There is a direct relationship between unemployment and the high and complex taxes on the cost of employment.

A brief analysis of the real wage, the take-home dollar and what it can purchase, is illuminating.

Employee A on a gross $25,000 pa, may take home $20,053, but the cost of employment can be upwards of $39,000.
Employee B on gross $75,000 may take home $47,873, but the cost to the employer of providing this job is upwards of $120,000. The on-costs are mainly tax and tax inspired (accounting complexity etc – the costs of providing work space and tools of production are not included in these figures). The job-killer on-costs are a product of the antiquated, complex and punitive taxes on labour which surcharge the take-home pay to a level beyond which the market for labour can bear.

On the other side of the coin, the take-home dollar has to pay for goods and services produced by the tax inflated labour costs. It is a ‘courageous’ government which plans to double dip and re-tax (with a VAT/GST) the taxes already built into goods and services produced using Australian labour.

This would indicate their advisors had spent too much time with text books and are divorced from the real world. They would certainly have great difficulty running a corner store where the rent would increase by up to 10 per cent, while demand for product drops as purchasing power of the take-home dollar is driven down by higher prices.

This may be good for economists, they could ponder this strange phenomenon for years, but would be bad for the real wealth creators, the farmers, the miners, the manufacturers, the distributors right through to the corner store owners, as their lights go out across the country.

Total tax reform is long overdue, but it must be based on eliminating the complex taxes surcharging the cost of labour and consigning to the dustbins of history the concept of taxing the indefinable profit. The method of funding government must be visible, simple, understood and respected by all, and it must not stifle the motivation to produce and exchange.

A paradigm shift in thinking is long overdue. The taxman exists to serve us – we do not exist to serve the taxman.

WHERE DO WE GO FROM HERE?
Even when a catastrophe is totally visible, a common human response is denial.For example, eyewitness accounts of the great San Francisco earthquake described people wandering around preoccupying themselves with trivia, attempting to preserve trappings of normality, pretending it wasn’t really happening.

The GST is a calamity not immediately visible, but one which will cause greater economic havoc than any earthquake. We must snap out of it and fit this now or later generations will have good cause to condemn those who let it happen. People who pretend things are all right in the face of evidence to the contrary are dissociating themselves from the real world, and record bankruptcies, retrenchments,
unemployment and suicide rates belie the Prim Minister’s message to the nation that ‘we now enjoy the strongest economic fundamentals in a generation’.

In this resource rich country, it is a scandal that any of our people should live in poverty, it is a disgrace that any should fear the tax collector because neither party understands the rules, it is a tragedy that those who make so many rules are insulated from the cost of those rules on the lives of ordinary citizens who just want to get on with the job of providing for their families and have little left over for their old age.

The GST was best described as ‘a 1950’s tax from socialist Europe’ (Terry McCrann). It is a complex expenditure tax which taxes the income taxes buried in the cost of each product or service.

No wonder ‘generous’ income tax cuts can be promised. If you glance down, you will notice the taxman’s hand is deeper into your other pocket. Our leaders say this is ‘Not a new tax, but A New Tax System’. But the goods-and-services providers of the nation are realising that they are being called on to work harder to comply with a brand new government imposition – the brainchild of bureaucrats, made by bureaucrats, and for bureaucrats.

Luckily it is not game, set and match. Other factors can still prevent another generation of taxation drudgery.

It requires a leader of vision and integrity to state the obvious and announce that the Income Tax Act use-by date has long since expired.

The only fair method of funding government into the next millennium, one which treats global trading over the Internet on the same basis as local trading over-the-counter, is a low consistent and visible expenditure tax to replace the complicated income tax based mess which is increasingly suffocates creativity and potential in a country which could be great.

TWO PER CENT EXPENDITURE TAX
A simple 2 % Expenditure tax on the exchange of goods, services, property and labour can initially replace nine major taxes on production, exchange, employment and motivation.

It also has the advantage that the political stage has now been set for a simple transition to this fair methos of taxation by changing the 10 % GST with rebates to a 2 % Expenditure tax with no rebates and abolishing Income associated taxes.

The only time anything has a monetary value is at the moment of sale, the moment of exchange of ownership when both the buyer and the seller agree that is the dollar value at which both believe they have profited. That is the only thing that can be taxed in monetary terms without having a book of rules pretending to measure that profit and an army of people paid a fortune to interpret those rules.

The 2 % Expenditure tax is designed to raise much less tax than is extracted now. Less is needed if the tax burden is lifted from the job creation and people are allowed to stand on their own two feet rather than being forced into dependence on government handouts.
Any proposed system which aims only to replace the method of taxation but not reduce the total burden is on a road to nowhere.

A fair tax system must tax the cash economy on the same basis as those who use a bank account. A 2 % Expenditure tax requires the Buyer to pay the Seller a tax of 2 % of the purchase price. It is then the Seller’s responsibility to remit this tax to the government using a simple, consolidated one page tax return.

This is an accountable fee for the government service of providing a fair field with no favours, a fertile field in which the production and exchange of goods and services would thrive. The lines of responsibility are clear. Both Buyer and Seller rely on honest money which is not subject to inflation.

Money only has human value when it can be exchanged for food, shelter and the essentials of living (you can starve to death locked in a vault filled only with gold). A 2 % Expenditure tax would provide the key to maintaining the money supply in tune with the goods and services being exchanged.

Instead of the wealth redistribution tail wagging the wealth creating dog, the natural balance would be restored, and we would be proud to hand over a healthy, and happy pet to our children instead of having them inherit a monster that will eat them out of house and home.

THE CRITICS
The main criticism of the 2 % Expenditure tax came from those who claimed it would cascade through the production chain and overtax the economy. All taxes cascade, but none so much as the hidden income taxes on labour. At 2 % on expenditure, the cascade factor is visible and low.

Consider $10 of grain growing $20 of wheat making $30 of flour baking $40 of bread selling for $50 in the shops.
2 % at each stage accumulates to only $3 tax or 6% of the final sale return of $50 (not the facile 2% x 5 steps = 10% as claimed by the critics).
Consider also a product with more stages. Most products incur the greatest cost increases in the final few stages (assembly, marketing and distribution). A $100 book is purchased by a bookstore for $55, by a distributer for $35 – shared by the author, publisher and printer. The film, paper and ink suppliers might get $10, and those who supply them $5. In this production chain $5 begets $10 begets $35 begets $55 begets $100. Only 5 stages appear at the big end of the chain. The 2 % Expenditure tax sum comes to $4.10 representing only just over four per cent of the retail price as total tax revenue from all stages. 2 % on any earlier stage involves tiny amounts.
Would a bookshop make a take-over bid for a paper manufacturer, or a paper manufacturer covet a bookshop to gain a few percent tax, but loose much more in lost touch with the marketplace?

The clothing trade would cascade less again. A few dollars of material can make a very expensive dress with large mark-ups in the marketing stage. Check your own industry. Those who claim 2 % cascades to raise too much are as wrong as those who ridicule 2 % as too little.

Both sets of critics have much to learn about a tax which can allow Australia to lead the world in wealth creation and elimination of poverty traps. It is easier to share a larger cake than to waste resources fighting for a larger slice of a shrinking one.

Analysis presented to, and ignored by, the Senate Select Committee shows the 2 % Expenditure tax cascades st a much lower rate that the existing array in the most complex of manufacturing processes – ref price comparison tabulations attached showing for this example that two percent expenditure tax cascades at 13% as against the wholesale system cascading at 31% and the GST at 28%. The Senate Committee purported to carry out an objective inquiry into ANTS but political pressures dictated their adoption of the roles of the three wise monkeys. The government did not want to HEAR of any criticism of their GST, the opposition did not want to SAY anything because they knew if they said nothing the next election will be theirs and the others could not SEE the wood for the trees.

IN CONCLUSION
Leaving a complex and punitive tax system in place and fiddling only with interest rates is turning a blind eye to the problem. The ‘new economy’ differs from the ‘old economy’ only in that it happens faster today. ‘You shall not steal’ is still a fundamental social law, and ownership is still a great motivating force.

Introduction of a 2 % Expenditure tax would result an increase of spending power of the dollar of 20% to 30% for both the public and private sectors with obvious benefits in improved services all round.

The fundamentals of economics do not change. Complex and punitive taxation thieves time and property and steals motivation – no amount of fiddling with interest rates can restore the wealth of the nation. Only motivated people can do that.

When the citizens of this country realise that there is a better way, the political path will open up to establish a decent economy. In a world of natural abundance, we cannot continue to wallow in the man-made swamps of bureaucracy.

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