A DIET OF 2%: JUST ANOTHER TURNOVER TAX!
A COMMENT (written late 1997 or early 1998)
Professor of Economics (Name withheld)
Much has been said about the virtues of moving away from the current system of taxation to a simple flat tax on turnover of say 2% which would replace a range of taxes such as those on income and various types of expenditure.
Leaving aside the transition to such a tax – as detailed in J.D.McRobert’s “A Diet of 2% can Prevent Harder Tax” – lets move to the key question which is whether this tax will really achieve all the expected benefits.
There is no questions that such a tax could be imposed on a relatively low rate – simply because the tax has such a broad base-and no doubt the attractiveness of 2% proposal by people such as McRobert is that everyone would like to pay a 2% rate of tax. But if such a tax is to raise the revenue expected, how can it be that 2% an adequate rate of tax.
The answer is that the tax is a turnover tax – a tax on each and every sale of a good or service or factor input. Such a tax is not new. The current FID in many senses has a similar underlying concept. It is a tax on all deposits into financial accounts and is generally levied at a rate of 0.06% (although it is 0.1% in ACT and 0% in Queensland)
In 1997-98, FID is expected to raise the state some $2.062billion. If we assume Queensland’s exclusion from the base has reduced FID revenue by say 10% (an under-estimation) and that a flat rate of 0.06% is an approximate average for all states, then the base of FID in 1997-98 will be around (2.0612/(0.9×0.06%) 3,733 billion. On this basis a FID of 2% would raise $74.7 billion. What would be the communities response to a FID of 2% and how much revenue would it raise?
In 1997-98, the States are expected to raise $31.8 billion in tax revenue and the Federal Government some 127.2 billion. A diet of 2% FID would therefore raise only 47% of Federal and State taxes. A diet of 4% would be necessary if all the taxes were to be raised from FID based turnover tax.
Is a 4% FID a good idea? The answer is an emphatic no. State governments are currently very eager to abolish their FID’s. The problem is that FID is:
- Indiscriminate in its impact on households and businesses:
- Vulnerable to new technologies:
- An input taxes which adversely affect international competitiveness:
- Is easily avoided by business vertically integrating their business structure (owning the farm, the manufacturer, the wholesaler and the retailer); and
- Anti-small business in that small business cannot vertically integrate to avoid the tax.
These are just some of many criticisms of a FID like turnover tax. Quite simply, turnover taxes are distortionary and therefore economically inefficient taxes. Moreover, the ease with which the tax can be avoided through vertical integration means that the 4% (or 2%) would soon need to increase and possibly quite dramatically. The consequent distortion to the economy as people try to organise their activities in order to minimise their turnover tax liability will be significant.
It should also be remembered that the VAT (or GST) is a turnover tax with a credit for the tax paid on the previous stages in the production and distribution process. Why should Australia move to introduce a tax from which the worlds economies have universally moved away from over the past forty years.
Quite simply, a turnover tax has many fundamental problems which must mean in the end, that it is not a serious option for tax reform in Australia.
Letter sent to the Professor from John McRobert 1st May 1998
I was recently sent a copy of your comment on the 2%Easytax. Could you please reconsider your criticism in the light of my attached response.
Taxation is in dire need of major reform and a new tax paradigm is sorely needed. PAYE tax is just a complex and discriminatory turnover tax on labour. VAT/GST is just a complicated turnover tax where the practical costs outweigh the theoretical benefits. Unemployment is a major problem in every country where these two taxes operate in tandem.
Why not one visible, low predicable, equitable charge for the use of money in the exchange of ownership of property, goods, services and labour ? Movement of money in and out of financial institutes is not taxable under this proposal. It is not a financial institutions duty, neither is it a debit tax.
( NO RESPONSE OR ACTION FROM THE PROFESSOR )
Response to Comment on A Diet of 2% by Professor (Name withheld)
John McRobert 1st May 1998
2% Easytax is not a Financial Institutions Duty, nor does it bear any resemblance to one in its application or operation.
The 2%Easytax proposal is to tax the exchange of ownership of property, goods and services (including labour), after the consideration is received, and regardless of whether it is banked into a financial institution or not. In fact, under the 2%Easytax proposal, depositing or withdrawing money is not taxable per se. It taxes Imports at 2% because the seller, who is normally required to pay the tax, is overseas. It taxes cash transactions, inheritances, gambling winnings, and even the cash valuation of both sides of a barter as equivalent sales to each party. A recently retired Chief Compliance Officer of the ATO could not fault the proposal, but said it ‘suffered only from equity’ which he suggested would therefore be not favoured by political strategists who like playing off one sector of the community against another. Because the rate is so low, and the penalty for non-compliance can be comparatively high, the cost / benefits ratio of compliance would heavily favour voluntary compliance. Also peer pressure to comply with a fair system should not be underestimated.
Regarding the adequacy of the rate, in the first stage of what would be the prelude to further reform it is proposed that only 8 major taxes be replaced, these being Personal and Company Income tax, Sales Tax, (State) Payroll Tax and Fringe Benefits, Capital Gains, Withholding and Provisional taxes. In a three year transition to complete this phase, through a tax refund process to the employers, the effective new gross wage will become equivalent to current take-home pay plus 2%Easytax. This is to undo years of tax damage to the cost of employment caused by the so-called Progressive Income Tax system and other taxes on labour which, exacerbated by bracket creep, have rendered the cost of employment beyond that which too many potential employers are prepared to pay. Why tax labour on a different basis from goods and services ? What is the difference between labour and services ? Many goods (computers etc) may replace labour – the boundaries are blurred. Tax must not penalise one against the other. This is not ‘just another turnover tax’ To respond in detail:
Para 3-4: How can it be that 2% is an adequate rate of tax?
Refer above. Also a comprehensive model developed in conjunction with Unisearch shows the potential revenue tax by tax, State by State and industry sector by industry sector. It also shows how the cost structure of the government sector may be reduced by largely eliminating the churning taxes within the 3 tiers of government. PAYE tax costs within the public service sector may be reduced by approximately $15 billion when the wage structure is adjusted as described above. The Federal government employs approximately one quarter of the 2 million public servants, the remainder being employed by State and Local governments. This wage tax surcharge is a major source of the Vertical Fiscal Imbalance.
Para 5: What would be the community’s response to a FID of 2% and how much …would it raise?
It is NOT a Financial Institutes Tax. This can not be repeated often enough. 2%Easytax would raise less gross revenue, but more net revenue for better government in the fields of defence, justice, infrastructure and society in general, than is possible under the present system.
Para 6: A diet of 4% would be necessary if all taxes were to be raised from a FID based turnover tax.
It is NOT a Financial Institutes Duty. And all taxes are NOT proposed to be replaced (more will be removed when better information is available about the motivation factor and renewed confidence in the economy ). Modelling indicates 2% is conservative for the program offered.
Para 7: Is a 4% FID a good idea? The answer is an emphatic no.
Correct. A 4% FID would be a disaster. But we do NOT propose a Financial Institutions Duty, especially at 4%
However some of these points should be addressed from the 2%Easytax point of view.
1. The 2%Easytax lies lightly and fairly across all sectors of the community, therefore it is indiscriminate. It does not discriminate against any sector. It offers a fair field with no favors. It is perfectly equitable. It does not attempt to build social engineering into the equation. Where is the problem?
2. Unlike the FID, 2%Easytax is invulnerable to new technologies, and is the only tax which treats trading over the Internet on an equal basis with sales over the counter – it does not discriminate between electronic or cash transactions. It is the only tax which can embrace new technology and provide confidence and resources to develop new technology.
3. The highest input taxes which adversely affect international competitiveness are the cascading taxes on labour (not addressed in any VAT / GST option). If each manufacturing stage has a labour content of 10%, and the direct and indirect taxes on that labour are 40%, we have a 4% cascading flat tax (on top of the profit based taxes) in the system already. 2% beats 4% by a handsome margin, and there would be no profit based taxes to double dip into the harvest.
4. The old economist’s furphy of vertical integration comes up every time. How many economic units will choose vertical integration to avoid 2% tax ? We have 12 million employable people in this country who are voting taxpayers, plus 2 million retired people who still vote. Couples may horizontally integrate to form families, and say there are 4 million families and 4 million single units plus 1 million single retirees, and half a million retiree couples (let’s keep the figures simple), and 1 million small businesses, and maybe 100,000 medium to large companies and a million or so trusts, partnerships, unions, associations, charities, churches, clubs etc. Clearly trusts which have been formed to minimise tax will not vertically integrate, they will dis-integrate. But of all of the other economic entities capable of ownership, few could or would choose this course of action because of the nature of their association. If the tax is low enough, the incentive to vertically integrate will more than often than not be decided by more powerful economic considerations. I witnessed at close hand the operation of one of the worlds largest vertical integrations in corporate history, when General Electric swallowed up Utah Development in a $2 billion takeover. (Curiously this was done because the existing Australian tax system threatened Utah’s long term profitability.) GE in turn wanted to have control over the mines, right through to the consumer product sales. However, again the existing Australian tax system stymied the immediate profit growth, and GE abandoned the Utah acquisition by selling out to Australia’s BHP who brought in to get their investment dollars offshore. That’s a long story in itself, but working with Utah Development also gave first hand experience about the swarm of small companies, suppliers, contractors and consultants needed by even the greatest of companies. Lesson: no company (or country) is large enough to exist in isolation. If vertical integration offers sufficient market advantage for whatever reason, that is up to each company, and if it results in a more competitive economy with greater export potential, what’s wrong with that ? Coles buy direct from the factories and avoid paying high WST to distributors. The existing system encourages vertical integration.
5. With taxation administrative overheads slashed, small businesses would thrive. Moreover the greatest barrier to starting a small business, the first provisional tax which hits when it does the most damage to a fledgling enterprise, would be relegated to the chamber of horrors in the museum of bad dreams dedicated to failed tax systems. The 2%Easytax is not anti, its pro small business. As a small businessman who works 7 days a week, the undersigned can vouch from bitter experience that 2%Easytax is better by far than anything else on offer, especially VAT / GST.
Para 8:Quite simply,turnover taxes are highly distortionary & therefore economically inefficient taxes
The proposal for a highly visible 2% tax on each receipt would make 14 million taxpayer / voters highly conscious that government has a cost, and that everyone is paying their share. Any attempt to change this rate would mean instant resistance. It is critical that the tax has inbuilt resistance to change, and that everybody knows that the rules today will be the rules tomorrow, that they may start to plan with some confidence in the system. The model of the loaf of bread lays clearly how the current system distorts the economics of producing and exchanging the humble loaf, and the Unisearch model of the Australian economy shows how inequitably the current system falls on each industry sector. The complex turnover tax on labour, PAYE, is certainly highly distortionary.
Para 9: …VAT is a turnover tax with a credit for the tax paid on the previous stages in the production and distribution process. Why should Australia move to introduce a tax from which the worlds economies have universally moved away from over the past forty years?
Now that is the $64 trillion question. Why are the worlds economies in such disarray ? Why in France, the home of this ‘perfect’ VAT system, has the rate crept to over 20% and is unemployment over 12%? World economies are also universally burdened by the insidious Progressive Income Tax which is attempting to strengthen the poor by weakening the strong, has created more poor than it can ever support. The solution is not more of the same.
Para 10: ….in the end it is not a serious option for tax reform in Australia.
The textbook also says in the end we are all dead. But while we are alive, do taxes have to be so complicated and demanding that our lifestyle and motivation to produce and exchange is destroyed ? Seriously, it is not only a better option, it is the only option.