A West Australian accountants Queries and Comments on Debit Tax.

The following comments and responses originate from a letter to the ATRG. As an accountant he is clearly fully aware of the arguments used by the masters of the current system and the limitations imposed by the fixed political ideas of most commentators who mostly trot out reasons for NOT changing the existing mess. The comments and responses below are made in that context.

Comment 1. (by WA accountant)

Money does not flow miraculously out of nowhere. It also flows through to the cost of goods and services.

Response (by ATRG)

One of the great illusions of the current tax system is that all sections of the population and business world are being taxed at saturation levels therefore the additional money raised must come from effectively raising tax levels.

There are two issues. The first is that companies and individuals spend large amounts of money reducing or dodging tax and that the amount spent on dodging is often about 3% i.e. 2% greater than the full tax which would be paid under a debit tax system – that doesn’t count the tax left after the manipulation.

Second is the question of whether taxes which should be paid in Australia are in fact being paid in other overseas jurisdictions because it cheaper.

The facts are easily established by anyone capable of research. The bulk of Australian taxation is borne by individual PAYG taxpayers and small to medium businesses who between them are only responsible for a small proportion of economic activity. When we first commenced research this ratio was about 70/30 (70% of taxation/ 30% of economic activity) but the continued sell-off of major Australian businesses to multinational conglomerates has now produced a ratio closer to 85/15. In other words the people who are responsible for 15 % of economic activity are now responsible for approximately 85% of taxation. The ratio might be as high as 90/10 if the true ownership of all businesses was publicly listed.

Are the multinationals untaxed? No, they aren’t, but they only pay a small proportion in Australia and the bulk of their taxation is paid in countries where there are much lower rates. For instance the company which owns Heinz and a major country newspaper chain is based in Ireland. The company tax rate in Ireland is 12%. Why would any sane businessman with the available option generate his profit in Australia at tax rates at least three times those of Ireland and Ireland is not a particularly low tax regime. Special areas such as Labuan in Malaysia offer company tax rates of 3%.

The simple answer to the critical comment is that it is correct – the money will not come from nowhere – but it will come from the taxation on profit that is actually earned in Australia but is taxed elsewhere in the world under current arrangements and has been removed from Australia where it was really earned.

The problem arises because the tax system was designed at a time (1942 introduction of uniform income taxation) when Australian tax rates were far lower that the UK’s maximum rates (at the time up to 99%) and when only a few very large businesses were in overseas hands. This meant that a balance was achieved between the contributions of business/industry and the individual taxpayers. The ownership shift which has occurred since 1942 is dramatic and means that the fundamental design of the current taxation system no longer works.

Comment 2. (by WA accountant)

Debit tax obviously eliminates a mountain of costly and useless paperwork but unfortunately it ignore the fundamental principle of a fair system – ability to pay.

Response (by ATRG)

Insofar as the elimination of paperwork is concerned again the commentator is correct, but it is clear that the political idea of so-called "progressive taxation" (i.e. the higher the income the higher the nominal tax rate) is uppermost in the commentator’s mind.

Progressive tax is an illusion beloved by most left wing theorists. It basically translates as "tax the rich - they can afford it."

In the real world the smart rich pay a smaller percentage of their income in tax than the poor. Progressive tax systems make their proponents feel good about perceived equity but don’t work because the rich have the time, knowledge and professional assistance to minimise their taxes in a way ordinary people can’t.

The numbers tell the tale: someone earning $20,000 p.a, i.e. among the lowest paid in the country currently has about $4000 tax deducted, plus the GST rip-offs. Hopefully they can recover a part of this deduction once a year at tax return time but are still likely to pay $2000 tax plus the GST. Under the Debit tax the same person would have $200 deducted and there wouldn’t be any GST.

At the other end of the scale there is the famous case of the country’s richest man, Kerry Packer, paying $29 in tax instead of the hundreds of thousands he would pay under the Debit tax.

We are talking about throwing out a system which says that it extracts tax on the basis of ability to pay but in fact does no such thing.

One last contrast: The United States now has a tax system where a family on $42,000 p.a pays $45 tax. Yes - that’s not a misprint $45. The top tax rate ( 28% of earnings) kicks in at $532,000 or approximately 17 times average earnings. (Source; KPMG survey and report).

In Australia (from 1st July 2006 announced in the May 2006 budget) the top tax rate (45%) kicks in at $150,001.

The question proponents of the current system have to ask is: Why can the United States, a country with a similar capitalist system to Australia, have a so much fairer tax regime than ourselves which doesn’t penalise the lowest paid workers as badly as our does? The basic answer is that US companies pay their taxes in the U.S.

(This is not a defence of the obvious faults in the way US society operates and the lack of care they exhibit for the unfortunate in their own midst)

Comment 3. (by WA accountant)

It would be a big mistake to try to embody a taxation system within a new constitution – there are enough things to argue about –separation of powers, voting, one house or two, political parties etc.

Response (by ATRG)

Observers of the international scene can provide a basic division between the methods governments use to control their populations.

There are two basic methods which are used – the totalitarian police/secret police state method using actual physical control of the population and the fundamental western method of control by finance - or a mixture of both.

In all the western countries governments have used their taxation powers and the riches that flow from that plus financial regulatory powers to crush their enemies and to reward their political friends. You don’t need gaols if people are struggling constantly to feed and house themselves and their families – poor suburbs serve as gaols just as effectively. Occasionally armed physical control is necessary when people eventually rebel.

Taking those powers over basic finance away from politicians by embedding them in the Constitution is the most important single fundamental step to providing freedom for the populace.

As a reform it’s not enough on its own, but far from being a minor distraction it is a vital first step. It removes one of the prime reasons politicians seek power over their fellow citizens. It also removes the ability of pressure/lobby groups to carry out social engineering by using economic pressure – e.g. the high taxes on smoking/alcohol etc. True freedom includes the ability to do things that may harm yourself as long as you don’t harm others.

The basic thrust of any new constitution is that it must regard all people who seek power as being suspicious and impose strict controls on them – not on the population as a whole.

The one indisputable lesson of the 20^th century is that political leaders (and especially unelected bureaucrats and judges) can’t be trusted and even the rare exceptions are still fallible humans who make large mistakes sometimes.

Never again must any government be given unlimited power. Only the people must have unlimited rights and let any government which needs more authority justify that to the people. Achieve that and the questions of separation of powers, political parties, etc. fall into place relatively easily.

But until the day we no longer use money and no longer need taxes to supply public needs we must keep the power over these out of politicians’ hands in the most fundamental way. Remember, we can always choose to give governments more power if they really need it – but politicians never voluntarily surrender any power they’ve gained.