Taxation reform has become the main catchcry of Australian politics.  Unfortunately the real issues of taxation are carefully shrouded in mystery so the public won't  reject the latest smoke and mirrors "reforms".

 

For instance the main reason advanced for introduction of the Goods and Services Tax in Australia was the alleged need to "widen the tax base" because the "wholesale sales tax base" was shrinking. The facts are interesting.

 

1. The wholesale sales tax base was indeed shrinking - because of other government policies which inevitably caused it to shrink.  Most notable among these was the deliberate policy of  "exporting" our low tech manufacturing industries.

 

The figures show that in the early years after World War 2 when full civilian production returned that Australian manufacturing accounted for approximately 72% of all manufactured goods sold in Australia.

 

While this was to some degree an artificially high figure because of the destruction of European manufacturing capacity, significant damage to British manufacturing capacity and the need in most countries to provide some goods for domestic populations deprived by man years of war it nonetheless demonstrated an inherent capacity in the Australian economy to meet our needs.

 

For instance introduction of the first Holden car in 1949 provided an alternative to small imported Ford and Morris cars from England, the first Renault 750s from France and the occasional large car from the United States.  Since American cars were never manufactured in right hand drive there was no major market for them here.

 

At that time there was no Japanese production capacity and in any case postwar public sentiment made Japanese goods unacceptable, whatever the quality.

 

In short there was little competition and an extreme thirst for consumer goods after the shortages of the war years.  At the same time payment for goods was usually in cash with hire purchase etc not yet available.

 

2. Contrast Australia in 2005.  Today Australian manufacturers constitute just 6%  of the economy and in fact only produce  14% of the manufactured goods other than foodstuffs.  Even former Australian manufacturers have moved their machinery and factories offshore to tax havens provided by the developing Asian economies.  For instance companies based in the Malaysian special economic zone of Labuan pay just 3%  for both company and personal tax rates.

 

3. To this must be added the progressive sale of other major Australian companies to overseas purchasers.  The result is that 90% by value of Australian  economic activity is conducted by companies controlled by foreign interests. Only 4 years ago the figure was 70%.   This must not be confused with the number of companies remaining in local ownership.  Numerically these are by far the largest number but the cumulative value of their activity is minor.

 

4. Because of the mechanisms which are available to foreign purchasers under the provisions of the International Taxation Agreements Act 1953  (the so-called Double Taxation Act) these major companies consistently record losses or small profits and pay little company tax.  They proudly point to the amount of group tax they pay but fail to mention that it is actually their employees who are paying the group tax in the form of deductions from their wages.

 

5. Did the GST broaden the tax base?  In fact it didn't. 

 

Examine the mechanism.  The major companies, which used to pay the wholesale sales tax at the last stage before the goods were sold to a retailer, now receive a 100% rebate of all GST they pay out during the business cycle.  The GST imposes no taxes at all on the major manufacturers.  Even the materials they consume in-house such as stationery or fuel for the company cars which used to be paid by the companies are now rebated in full. 

 

The major manufacturers are significantly better off under the GST, which is why they support it.

 

6. The taxes are now transmitted downstream and paid by the ultimate purchasers, the ordinary consumers.  These are the same people who used to ultimately pay the wholesale sales tax.

 

7. At the same time we have reduced significantly the number of  local manufacturers who potentially could pay tax.

 

8. The end result is a much higher total tax burden on consumers and on businesses which are price takers, that is, those who have to take whatever the market offers them rather than only sell at profitable prices.  This includes most of the rural sector.  Recent changes to the dairy markets have placed even more rural producers in this category because of  the abolition of guaranteed prices for market milk and the resultant fall in the price supermarkets are forced to pay.

 

9. Genuine tax reform firstly requires a genuine expansion in the tax base.

 

10. The only way to achieve this is to tax every person and every company on the same basis with absolutely no exceptions.  The result is a truly national tax base which includes the foreign companies as well as local consumers.

 

11. Where a social obligation exists to support particular projects or even industries let it be totally transparent.  Do not provide tax deductions in any form.  Make payments openly and with full public accountability.

 

12. The only form of taxation which meets these criteria is the Debit Tax..

 

13. It has the lowest collection cost of any type of taxation.

 

14. It is the most difficult tax to avoid of any type of taxation.

 

15. It generates less paperwork than any other form of taxation.

 

16. It has no compliance costs for businesses or individuals.

 

17. It does not require a bloated bureaucracy nor encourage corruption of the bureaucrats..

 

18. It does not require horrendous police powers to be placed in the hands of tax gatherers such as currently in effect.

 

19. It prevents any business being destroyed by taxation.  The ATO today liquidates over 2000 companies every year throwing tens of thousands of people out of work and economically destroying many families.   This is not a valid function of government.

 

20. It encourages saving and capital accumulation because no taxes are levied on deposits or interest earning. (Tax is paid by those paying interest but this is 1% of the interest paid, which in the case of 7% pa interest would amount to .07% tax.)

 

21. At the same time the amount of disposable income in the hands of individuals and companies increases dramatically.

 

22. The cost of all goods will fall allowing significantly increased unit sales.

 

23. In 2004-05 the projected GST take is $34 billion.  As shown above this is ultimately paid by consumers so the removal of GST alone returns $34 billion to those who have earned the money  by their labour or business activity.

 

24. If the Debit Tax rate is set at 1% the revenue amount for the year 2004-05 would be $470 billion based on the current levels of economic activity.  Commonwealth budgeted tax revenue for the same year is approx $220 billion plus the GST.

 

25. Reduction in personal tax burdens can be accompanied by major increases in public services such as provision of schools, roads, hospitals, increased pensions etc.

 

 

 

26. Superannuation contributions would only attract the initial 1% (paid by the contributor) instead of the current 15% tax and the accumulated fund and its earnings would be free of tax until payout time. No complex rules would be required and government involvement could be diverted to ensuring the probity and soundness of companies like HIH handling large amounts of superannuation.

 

27. Based upon the current circulation figures there would be some reduction in monetary transfers because of the simplification of group structures currently used to reduce taxation.  (Strings of companies transferring their profits from one to the next annually to escape taxation would be a thing of the past) but the key issue is that this would not actually reduce real economic activity earning the profits which are being concealed.

 

28. The Debit Tax is the only tax which can always tax e-commerce activities no matter which country of origin of the service being charged for.  In fact it would make Australia the preferred country of residence for all e-commerce businesses. E-commerce methods can currently be used to avoid the GST.