Parliament of Australia
Select Committee on a New Tax System -28/01/99 – A new tax system Hansard
CHAIR —I welcome to the witness table Dr Sheil, Mr McRobert and Mr Smith. Our normal process is to invite you to deliver an opening statement and then ask you to answer questions that the committee may wish to pose to you. It is my understanding that you wish to be sworn in as witnesses. The normal proceeding is to not do that, but I have no difficulty in acceding to your request if that is your desire. The usual understanding is that evidence given here is essentially on oath and treated as privileged in any case. There being no objection from the committee, oaths were taken by Dr Glen Sheil, Mr John McRobert and Mr Derek Smith.
Dr Sheil —Thank you very much for the opportunity to appear here and give evidence to the committee. Do you wonder about me wanting to have us sworn in? They often say the good that men do is often interred with them. I was in the Senate with Lionel Murphy, and one of the really good things he did was to strengthen and develop the Senate committee system until we got the fine machines that you people are running today. They became a powerful weapon both for governments and for oppositions. It was a very brave government that would legislate in the face of Senate recommendations.
But, sad to say, I think Senate recommendations have lost a lot of their force and, as an example, I could quote to you the evidence given by the Tax and Treasury officials when they questioned the integrity of the committee earlier on in your hearings. They questioned whether the senators on this committee could overcome the established positions of the political parties on the GST in coming to conclusions. And you, Mr Chairman—and I commend you for it—said that the Senate did have a higher responsibility when it was in committee like this and that it could rise above party positions because of its higher responsibility to the Senate, the parliament and the people of Australia. I think that is important because we want to appeal to that heightened sense of responsibility because we have a new scheme to put before you.
There is a little bit of history you might want to know about. About 15 or more years ago, I was in the National Party and keen to study flat rate tax. We had seen what happened in Hong Kong, which had a flat rate tax for companies and businesses, and we came back here and hired the top man in Treasury to make a submission on implementing a flat rate of tax. We were going to introduce about a 15 per cent flat rate tax. That is when Mr McRobert and Mr Smith heard about it, and they examined it further. It is from that that we came to the scheme that you have got today. It has had a 14-year gestation, and it has been modelled lots of ways. So it is not just something new, something that has not been tried or something that has not been modelled—which is more than you can say for a lot of schemes that have been put before you and a lot more than you can say for the Tax and Treasury officials that appeared before you previously.
We hope to be able to show that it will be straight out self-evident that the 10 per cent GST will not be able to fulfil what the government requires of it. We think it will be self-evident that what we propose will be able to fulfil the government’s objectives.
Firstly, we can demonstrate how our proposal will virtually abolish unemployment and, therefore, the crime associated with unemployment which, of course, will reduce government expenditure on welfare, police and justice. It also will enhance government’s revenue, have more people working and have less people dodging tax. We maintain that it is the high tax component of wages and salaries that creates unemployment. For example, the last rise in public service top level salaries, of 40 per cent, was a public relations disaster. But it is illusory because they do not get the money; they only get half of it, and half of it is clawed straight back in tax for the government. But, for the outside world, it creates unemployment. The cost of employing people is just too much.
To allay any fears, the low broad based expenditure tax will create plenty of revenue and protect the government’s revenue and, importantly, over four or five years, our public debt will be paid off with the expenditure tax. It will cover all the current environmental programs and, importantly again, it will provide a sustainable superannuation program, which you have not got at the moment. We have put that in the submission. It can be brought in immediately, by 1 July or something like that, with virtually no economic disruption to the country at all. Because we feel so confident about it, Mr Chairman, I ask the indulgence of the committee that, if anybody does make a claim against it, they should be made to substantiate that claim. If they can in anyway substantiate a claim about it, then we would like an opportunity to come back and answer it.
One final point is that the expenditure tax allows for taxation of Internet trading such as no other taxation scheme does. It taxes it on an over-the-counter basis at source. This will be very important in future trading because Internet trading is going up and up. That concludes our opening statement, Mr Chairman.
CHAIR —Thank you. Dr Sheil, do any of your colleagues wish to add to your statement?
Mr McRobert —I would simply like to say that the tax system we have is ramshackle. The GST is simply to overlay an existing mess. I would have brought in my briefcase, if it was big enough, the entire tax acts that we have to comply with, but I think there is something like 10,000 pages. That is a lot of reams of paper. It is ridiculous that we continue to persevere with something that has proven to be unworkable and unsustainable. We are proposing that this is a wonderful doorway of opportunity to look at the whole mess and clean it up once and for all.
CHAIR —Thank you, Mr McRobert.
Mr D. Smith —I would like to make a comment that the focus of tax reform in Australia seems to be more tax and fails to recognise the reality that Australia finds itself in; that is, we have to reduce our costs and we have to reduce our prices. We as a nation of people are blessed with the richest country on earth. Per capita we have the greatest wealth of any people on this earth, yet our performance is poor. You only have to look at the value of the Australian dollar as witness of that. The reason for it is that our costs and our prices are too high. They are too high because of tax. We have got to get the tax out of our prices and, having done that, then look at a new tax system, an expenditure tax on much lower prices, to give government the revenue it needs at a much lower cost. That is what the proposals are focused on.
CHAIR —Thank you, Mr Smith.
Senator GIBSON—Dr Sheil, isn’t it true that a turnover tax basically encourages vertical integration? In other words, it would favour Coles-Myer buying farms and then handing the produce from the farms right through to the supermarket, with no turnover within the company. Isn’t that a disadvantage to all the small operators, the farmers, the distributors, the truckies, the retail outlets and the corner stores?
Dr Sheil —You are quite right. That is a disadvantage of a turnover tax. This expenditure tax is not a turnover tax. That is the big difference. John McRobert knows a lot about that.
Mr McRobert —Can I explain perhaps a little further? You are familiar with the book selling process? Take a book that is worth $100. The bookstore buys it at $55; the distributor buys it from the publisher at $35. That is shared between the printer, the publisher and the author. Then the paper and print makers might get $5. If you go through the chain, you are getting two per cent of five, plus two per cent of 10, plus two per cent of 35, plus two per cent of 55, plus two per cent of 100. It totes up to 4.1 per cent. Is a paper mill going to take over a bookstore to get vertically integrated? I think not. We are talking about minimal cascading effects. I think if there is a tendency for vertical integration, we have got it now. Look at what Coles-Myer are doing right now.
Senator GIBSON—But isn’t it the point that it will encourage further vertical integration of the major retailers as opposed to the small shops?
Mr McRobert —Let us look at the bright side of life. It imposes no bar to small shops starting and using their little niche markets to develop. If some companies can develop to become monoliths to compete with the Mitsubishis and the big multinationals, what a good idea.
Senator GIBSON—The other problem with it is that it is easily evaded by resorting to use of cash, is it not?
Mr McRobert —It is not as easily evaded because the tax department will not have as many things to monitor—they will simply have to monitor income. Lifestyle can be checked very simply. They do not have to do all the nonsense things they have to do now. With the cash economy, if the cost benefits of evading are in favour of evading then people will evade. If the cost benefits are in favour of compliance then they will comply. We are saying that this is a very light load and the cost benefits are in favour of compliance. Have you had the chance to read one of my books or any of the books?
Senator GIBSON—I have a copy of your book, I have seen your submissions and I have heard you speaking several times, as you know. It is also a fact that earlier this century most European countries ran turnover taxes. In fact, as I understand it, the reason why they were dropped in Europe and moved to a VAT was because of the unfairness of turnover taxes.
Mr McRobert —They ran them selectively and at very high levels. If you have a turnover tax at seven per cent, you have a disaster on your hands. They ran them on top of income taxes. We are talking about taxing the dollar traded, not who traded the dollar, why it is traded, where it is traded, how it is traded or when it is traded. We tax the trade, not whether it is traded for labour or goods and services made of that labour. What is the difference?
Mr D. Smith —Our modelling has shown that a turnover tax or expenditure tax—and this is where the Europeans got out of kilter—works on a factor of seven. Three times seven is 21, it will work; four times seven is 28, it does not work; and five times seven, it does not work. The Europeans got into rates above four per cent and that is why it did not work. When you are down to two per cent and three per cent it does work. That is why this proposal will work.
Senator GIBSON—All I can say is that it is not used anywhere else in the world. Turnover taxes were used previously and most European countries retreated from them because of the unfairness. I have just distributed a paper from Neil Warren of last year’s date. It was published about nine months ago. Neil Warren is Associate Professor of Economics in ATAX at the University of New South Wales.
Mr McRobert —Could I mention that I responded to that paper by Professor Warren. He has not had the courtesy to come back to me. I refuted every item he made. It is nothing like an FID and I have had no response from Professor Warren yet. I am prepared to send you my response and have that tabled as a refutation of this—it is not an FID tax. It has nothing to do with it.
Senator GIBSON—Thank you.
Senator O’CHEE—Under what you are proposing, what happens is that every stage along the process you are adding a tax which is not rebated. Is that correct?
Mr McRobert —Yes.
Senator O’CHEE—Your colleague, Mr Smith, acknowledges that there is a compounding effect which means that the final incidence of the tax is roughly seven times the tax itself.
Mr McRobert —No, that is a rule of thumb.
Senator O’CHEE—Rule of thumb or across-the-board average is the same thing.
Mr D. Smith —No. The average works at 13. A complex manufacturing stage product with two per cent tax will compound to 12.7 per cent.
Senator O’CHEE—If it is 12.7 per cent, 13 per cent or 14 per cent—that is close. We are talking about—
Mr D. Smith —I was talking about 21.
Senator O’CHEE—Yes, but we are talking about a degree of magnitude, aren’t we?
Mr D. Smith —Yes, that is right.
Senator O’CHEE—So it follows from that that goods which are elaborately transformed or complex manufacturing processes end up having a higher incidence of tax than goods which are not transformed or are not processed several times.
Mr McRobert —The worst cascading taxes are the taxes on labour. If you have got a 10 per cent labour component at every stage and a 20 to 30 per cent tax on that labour, you have a two to three per cent tax cascading through before the profit taxes start cascading through. We are talking about replacing taxes on labour and profit. We have modelled the cascade effect—it is in the submissions you have got—for the existing system and all taxes cascade. Ours cascades less than the existing mess, with less complexity.
Senator O’CHEE —Do you not accept the fact that if you have three steps in the process, then the tax burden will be at least 50 per cent higher than if you have only two steps in the process? If you have four steps in the process—
Mr McRobert —Can we go back to the bookselling trade? The taxes cascading through the five steps I outlined cascade through at 4.1 per cent, because there is a lot of value added in the last stages. Do the maths; they are quite astounding.
Senator O’CHEE—I am just asking you for comparisons. Do you not accept that the more you transform the original item—in other words, the more you process it, the more you manufacture it —the more the tax falls on the final good?
Mr McRobert —Yes, but when you get past about five stages back, you are talking about two per cent of minuscule amounts. Most value adding comes in the last few stages of manufacture and distribution. You find that in the rag trade; you find that in any trade.
Senator O’CHEE—We will get on to the minuscule amounts in a minute. It follows from that, because nobody is going to take a pay cut, that this in fact discriminates against manufacturing; it discriminates against elaborately transformed goods.
Mr D. Smith —No, it does not.
Dr Sheil —Nobody takes a pay cut.
Senator O’CHEE—Exactly, Dr Sheil. Nobody takes a pay cut, so we are not talking about reducing the labour cost of manufacture.
Dr Sheil —Yes, we are. We are reducing the tax.
Senator O’CHEE—But nobody is taking a wages cut. You have accepted that.
Mr McRobert —The take-home pay stays the same.
Senator O’CHEE —Take-home pay stays the same.
Mr McRobert —The tax comes off it, the cost of employment goes down.
Senator O’CHEE—Yes, but we are not talking about people taking a pay cut.
Dr Sheil —No.
Senator O’CHEE—Thank you.
Mr D. Smith —The gross pay reduces to become the net pay, so the cost of the business reduces substantially. We are talking about a 28 per cent to 30 per cent reduction in cost to employ in a factory environment. Under the current taxation system, in the same production scenario, the current taxation system of income tax on wages, PAYE tax, payroll tax, superannuation tax and profits tax compounds to 28 per cent. Our two per cent, without all of those taxes because they get abolished, we compound to 12.7 per cent. So we compound at half the rate.
Senator O’CHEE—That assumes that you can actually meet the revenue requirements of the state and federal governments.
Mr D. Smith —That is right—and we can do that.
Dr Sheil —We can do that.
Senator O’CHEE—What is the size of the economy?
Mr D. Smith —The size of the economy is now discounted because the cost of government is lower. Local government is full of tax because it is labour intensive. State government is full of tax —it is labour intensive. Federal government is full of tax—it is labour intensive. The cost of all government goes down. The cost of all business goes down in the rural sector, the mining sector and the manufacturing sector. Their prices and costs go down; their ability to compete internationally goes up; tourism can compete with other low dollar value countries; and prices domestically would be a lot lower. By keeping take-home pays at their current levels, we now put into the hands of every Australian a buying power he does not have today.
Senator O’CHEE—Sorry, Mr Smith, that was not the question I was asking. I was asking you what is the size of the economy?
Mr D. Smith —The size of the economy, as I say, is then a lot lower—
Senator O’CHEE —No, what is it currently? If it is going to shrink, that is going to actually impact adversely on your calculations.
Dr Sheil —Do you mean the total government income?
Senator O’CHEE—I am asking what the size of the economy is that you are going to tax, Dr Sheil.
Mr D. Smith —In terms of turnover, it is $3 trillion.
Senator O’CHEE—$3 trillion. How do you reconcile that with a GDP of $500 billion?
Mr McRobert —We have added it up. The GDP has no relevance to what we have been doing. We are talking about an actual value of all the goods and services traded in this country. GDP is just another academic tool that has no relevance to the turnover in this country.
Senator O’CHEE —Everybody accepts $500 billion, and there is a supply side and a demand side to GDP, but can you justify how you get to $3 trillion when everybody accepts the GDP is $500 billion?
Mr McRobert —It is in the book.
Senator O’CHEE —I am giving you the opportunity now while the nation’s eyes and ears are upon you, Mr McRobert.
Mr D. Smith —The GDP is a net figure. It is not a gross figure of the transactions that are undertaken in the country.
Senator O’CHEE —Isn’t it also the case that some of your fellow travellers, for example, are debits tax friends?
Mr McRobert —No. They are not fellow travellers. We have nothing to do with debits tax and it is nothing like a debits tax or an FID tax. Please read the submission. It is all there.
Senator O’CHEE —If you tax the expenditure—and they just say that debits tax is a way of taxing expenditure—
Mr McRobert —It is a faulty way of taxing expenditure.
Senator O’CHEE —They say it is a way of taxing expenditure. In fact, if anything, it is a more efficient tax collector because it catches a wider range of transactions.
Mr McRobert —That is the one that does not catch the cash economy and it does not catch transactions offshore.
Senator O’CHEE—But we are not going to catch the cash economy at two per cent anyway.
Mr D. Smith —Yes. We are.
Senator O’CHEE —If somebody’s income is $50,000 a year, their total expenditure tax is going to be $1,000.
Mr McRobert —Yes. That is if they spend it all.
Senator O’CHEE —And it is very marginally inefficient for the tax office to go chasing somebody for $1,000.
Dr Sheil —They would not have to chase them.
Mr D. Smith —Means testing has moved away from income based testing to expenditure based testing, and that is because you can enforce compliance and you can detect the cash economy before paying out social security. You have got to remember that in every transaction there is a seller and a buyer. Under our proposals both parties are equally liable for the two per cent easy tax to see that it is paid. It is not in your interest to have a transaction with me and not to see that that two per cent is paid. The other thing is that, if you think about most transactions, they pass through centralised type operations at the checkout at Myers, at Coles and so on, so you have got very rigid mechanisms of compliance.
Senator O’CHEE—But that is not the cash economy. The cash economy does not use cash registers, Mr Smith.
Mr D. Smith —The cash has got to be laundered. Cash has no value until you can exchange it for something.
Senator O’CHEE —That is the whole thrust of the cash economy.
Mr D. Smith —That is right.
Senator O’CHEE —That it never goes through a cash register. That is why it is a cash economy.
Mr D. Smith —Of course it does. Every transaction leaves a trail. If we focus on the transactions we will focus on the trails and we will find the cash economy.
Senator O’CHEE —But if we are going to go through and chase two per cent of every dubious builder’s under-the-table payment it is going to be grossly inefficient.
Mr D. Smith —You are making the point about why should somebody not pay the two per cent.
Senator O’CHEE—No. We are talking about the efficiency of the transaction. If somebody comes and says, `I’m going to repair your washing machine and it’s going to cost you $50′, you expect the tax office to go chasing that transaction when they are going to collect $1. I would suggest to you that is a highly inefficient process.
Mr McRobert —Senator, that is a nonsense statement because at the end of the month they tote up their gross income and pay the tax—or at the end of the year if it is an individual. We are talking about in the sum total it will be worth chasing the individual defaulters, but where the taxes are too high people will evade taxes very vigorously. Most people are honest and decent people who will pay their taxes if they feel that it is fair. But, right now, when Kerry Packer does not pay much tax in Australia, most people are saying, `This tax system is rotten’.
Senator O’CHEE —Okay. But let us suppose we are not talking about one $50 transaction; we are talking about a repair man who turns over $50,000.
Mr McRobert —If the tax man misses him, too bad, it is not big. But, if he catches him, the penalty for avoidance can be relatively high compared to the benefit of trying to avoid it. There is no problem.
Senator O’CHEE—You concede the cost of chasing the transaction. If this man has a turnover of $50,000, he pays $1,000 in expenditure tax, divide it by 12 and we are talking about $80 a month that the tax office is going to chase after. I do not really believe that anybody in the tax office wants to chase a business for $80 a month. If he does not pay it, we forget him. If Senator Gibson does not pay his, we forget him because it is not worth chasing $80.
Dr Sheil —That is a pretty sterile approach. I do not think it is even right. You have more tax evasion and avoidance now than you are ever going to have if you implement this.
Senator O’CHEE —I am just taking what Mr McRobert said, that if the tax office misses this man, it does not matter. Everybody is going to take the view that the tax office is not going to chase them.
Mr McRobert —No. I am saying that economically it does not matter, but they will get him in the end. There are a lot of other things going on now which are far worse than a couple of people avoiding a small, fair tax. We have not got a fair tax right now; it is not fair and not seen to be fair. What have you got philosophically against a low and fair broad based tax?
Senator O’CHEE—I do not have anything against it, but I want a tax system that is going to work. What I am pressing you for are reasons why this scheme will work. We already have a big hole, because everybody knows the amount of tax they have to remit is too small for the tax office to go chasing after it.
Dr Sheil —They do that now. What we have now does not work and the tax office does not bother chasing little amounts now.
Senator O’CHEE—But at least we know how much tax we collect. Dr Sheil —Yes. It is minuscule.
Senator O’CHEE—All we have from you is a promise as to what we are going to collect. There is nothing certain about it.
Mr McRobert —You have read the front page of the Australian yesterday where the Australian Taxation Office is throwing in the towel about taxing many big companies. We have massive transfer of profits that cannot be effectively taxed right now. We have major problems in this country. We are putting up a very serious solution as to how to run the country. We cannot get hung up on chasing small individuals, because you will always find a few criminals around the place, you will find a few non-citizens. But I am talking about cost benefits in favour of compliance, as opposed to cost benefits in favour of avoidance. Please understand that.
Senator O’CHEE—I put it to you that, in fact, the cost of compliance from the government point of view is substantially more than they are going to get. I would have much more intellectual respect for your proposition if you said that the government will not bother chasing people for the money and will put them all on an honour system for 1 per cent. I would find that intellectually more honest.
Dr Sheil —We think the whole climate will change. People will not want to avoid the tax, because it falls so lightly and so evenly on everybody that there will be an ethos in the community that says, `Pay your tax.’ If you don’t pay your tax, you will be looked down upon by other people for not serving the country properly.
Mr McRobert —Peer pressure is a powerful thing.
Senator O’CHEE—We hope.
Mr D. Smith —If you think about the transactions, they involve an individual and an organisation, for example, yourself and Myers. The question of compliance by Myers is a very simple one because it is 2 per cent on their total turnover. The confirmation that that has been paid is a very simple compliance. It is very low cost compliance for the government. If you think about farming, most farming is done through marketing organisations and cooperatives. Again, you have a very simple compliance. In other transactions you have organisations and entities where you have a very simple low cost, secure basis of compliance. The more you tie down anything and limit the opportunities for your cash economy and non-compliance, the more evident these things become.
The other thing is that the penalties for non-compliance in the case of the 2 per cent easytax become very real. The penalties for non-compliance today are a commercial risk and they are commercially affordable. I have just come out of an industry where decisions are made about non- compliance as a commercial economic decision. I am talking about big money. None of that applies to easytax.
CHAIR —I would like to move the call around, but I want to give senators a reasonable chance. Senator O’Chee, are you happy to come to a conclusion soon?
Senator O’CHEE—I am happy to leave it there. CHAIR —Thank you.
Senator MURRAY —Mr Smith, what modelling has your company done to ascertain the validity of your conclusions?
Mr D. Smith —We have had Unisearch produce a model of the Australian economy by industry. About 10 years ago we went to Access Economics and other organisations to ask them to model our proposals, but we were not successful in gaining the cooperation of that organisation, or other organisations, to model the proposals. We therefore went to Unisearch in Queensland and Unisearch did the modelling. That modelling has now been done twice. Outside of that modelling we have done other modelling. We used principally government budget papers—federal, state and local government—and ABS statistics.
Senator MURRAY—I am not familiar with Unisearch. This committee has been hearing from a range of modellers concerning this inquiry. Could you tell us a bit about Unisearch, what kind of model it uses and who buys it?
Dr Sheil —It is in the back of the book.
Mr McRobert —Could we pass some of these brochures?
Senator MURRAY—For the purposes of the record, could you give us a brief summary of the figures.
Mr D. Smith —Unisearch is headed by a group of economists. We went to them with a brief as to the model we wanted them to produce. They spent some considerable time looking at the challenges of the database, because there is no other model like it. Part of our requirement of them was that every data set had to have a reference, so it had to refer to the ABS statistics, or a budget paper or some other authoritative work. They took a considerable time to be able to trace all of the turnover and sales transactions of all of the industry groups in this country. Finally, they came back to us and produced the modelling.
Senator MURRAY—Are they Queensland academics?
Mr D. Smith —Yes, they are Queensland academics.
Senator MURRAY—From the University of Queensland?
Mr D. Smith —No, not from the University of Queensland. They operate under the name of Unisearch.
Senator MURRAY—The proposition of all of the modellers we have spoken to is, of course, that their assumptions and their approach should be open for public evaluation. Is the model and the assumptions and data used to arrive at the conclusions you have drawn up publicly available?
Mr D. Smith —It is published in the book.
Dr Sheil —It is in the book.
Senator MURRAY—Could you tell us the reasons that Access Economics, and anyone else you approached, would not do the job for you? Was it financial or were there other reasons?
Mr D. Smith —No, we went with the money.
Senator MURRAY—What was their reason for rejecting you?
Mr D. Smith —I think it was intellectual. We challenged their mind-set of the economy and they had an intellectual problem in dealing with it. That is my personal view.
Senator MURRAY—With the economy model you have used, and the conclusions you have reached, how much will you be able to raise through this method?
Mr D. Smith —The two per cent tax will raise $57 billion. With the other taxes that are not abolished, the government revenue then sits in excess of $100 billion. By the time you take the taxes that are abolished out of the cost of government and all of its distributions and disbursements plus certain savings that are taken from Budget Paper No. 1 of this budget year, we then have a balanced budget for the first year.
Senator MURRAY—If I may stop you there, I think the combined state and federal taxes are of the order of $170 billion. Your recommended expenditure tax would deliver $57 billion, which is roughly a third. Is that right?
Mr D. Smith —We are relating to the federal budget of $153 billion and it will raise $57 billion of the $153 billion. The taxes that we do not abolish raise another $47 billion, from memory.
Senator MURRAY—So just to get a feel for it, roughly speaking, you believe your system would raise a third of budgetary needs?
Mr D. Smith —It is in excess of a third
CHAIR —Reading pages 66 and 67 of your book, and I have drawn it to the Secretary’s attention, if he could do as you have done—get his report in rhyming couplets—it would be quite an achievement.
Dr Sheil —Thank you.
CHAIR —Senator Conroy I know does not have any questions. Senator Sherry is not here. Are there any further questions from the committee?
Senator MARGETTS —Yes. Can I clarify something? Senator O’Chee said that the tax on a $50,000 income was $1,000. That does not seem to sit right with, I guess, the
compounding of a transactions tax. Can any of those giving evidence comment on whether or not that $1,000 tax from a $50,000 income accords with their understanding of what an individual might end up paying?
Mr D. Smith —I think he was talking about $50,000 of expenditure, not income, so it would depend on the nature of the expenditure.
Senator MARGETTS—Yes, but it is compounded, so surely that is not correct?
Mr McRobert —How does it compound when you spend it once?
Senator MARGETTS—If you have a tax on each stage of production then when you finally expend on a certain item, in reality the tax paid on that is quite high, I would have thought.
Mr McRobert —No, the whole concept, if you can stretch your mind around it, is that whenever you go out to buy an item you pay the tax on that item. You pay two per cent on the cost of that item. That means the buyer has paid his tax to the seller. It is the seller’s responsibility to remit that to the government. That is the paper trail. That gets rid of nine major taxes such as income tax, company tax, payroll tax, fringe benefits tax, withholding, provisional, and superannuation. The whole idea is to stop the tax tail wagging the production dog. At every stage of production you run into a taxation barrier.
Senator MARGETTS—So if someone was on an income of something like $50,000, what would you expect their contribution to be to the national coffers?
Mr McRobert —It would be $1,000.
Mr D. Smith —Are you talking about $50,000 of expenditure?
Senator MARGETTS—I changed it because you corrected me. You said we were not talking about income, we were talking about expenditure. Therefore, if someone was on an income of $50,000, what would you be expecting their contribution to the national coffers to be?
Mr McRobert —It is $1,000 when they get it because the person purchasing the labour has paid that $1,000 as the tax. If they spend it all, it is another $1,000. That is the end of the story.
Senator FERGUSON—One of the things that we are concerned about, or have been all along, is the fairness and equity of the taxation system. Are you suggesting that under your system a person that earns $100,000 a year will finish up paying something like the proportion of tax that they are paying now, compared to a low income earner?
Mr McRobert —What we are proposing will lower the cost of a loaf of bread. There will be fewer poor people. Why is there all this social engineering concerning who you are and where you are? Why is there all this discrimination? If you work a bit harder, you step over a threshold. Let us get social engineering out of taxation. Let us make taxation just a method of finding revenue for government and let production get on with the job. We are saying there could be up to another two million people in work with the existing population. We have got taxation blocking people from working.
Senator FERGUSON—With respect, that is not the question I asked.
Mr McRobert —You did not ask the right question.
Senator FERGUSON—Yes, I did. You did not give the right answer—or you did not give an answer to the question at all. You said if a person works a bit harder why shouldn’t he retain more, but I know some people who are getting $100,000 a year who are not working all that hard, particularly some who are living off investments and such.
Mr McRobert —Yes, but it is not the tax department’s job to differentiate the rate.
Senator FERGUSON—Are you saying that they will have a far greater percentage of that $100,000 left as disposable income compared to a person on a low income that exists under the current system?
Mr McRobert —They will have the same percentage as the lower income person.
Senator FERGUSON—The same percentage?
Mr McRobert —It is two per cent, whether you are low income—
Senator FERGUSON—Yes, I know. Are they going to have more disposable income under this system than they would under the current system?
Mr D. Smith —The starting point is take-home pay—to preserve your take-home pay, your income and your profits, if you are in business, at the amounts that they are currently at, net of tax. So, if you are on $100,000, your net of tax is $70,000, so you start off with $70,000. If you are on $30,000 and your net of tax is $25,000, you start off with $25,000.
Senator FERGUSON—So you are going to reduce the income from $100,000 to $70,000 to start with?
Mr D. Smith —That is right. You come to net of tax positions.
Dr Shiel —Take-home pay.
Mr D. Smith —Take-home pay.
Senator FERGUSON—What about a person who is not a wage and salary earner who earns $100,000 from previous investments or just happens to come into that sort of money? Are you going to reduce his or her income to $70,000?
Dr Shiel —We are not going to reduce his income. You just tax him on what he spends.
Senator FERGUSON—So you would have more disposable income to spend.
Mr D. Smith —They all have more disposable income.
Mr McRobert —They might make more jobs. You never know. They are not going to live with it.
Dr Shiel —Under our scheme, if it is brought in, everybody’s spending power goes up 17 per cent —from pensioners to the fellow on $100,000 a year. They all go up.
Senator MURRAY—Mr Chairman, I heard an interesting proposition from you when you used a right-wing mantra of social engineering in response to a question. But the taxation system has always been used to encourage particular policy outcomes. Are you saying to us that you do not believe that the taxation system should try, for instance, to create employment by encouraging investment through depreciation allowances or favourable capital gains regimes or through any kind of subsidy in any area? Are you saying tax should be completely neutral?
Mr McRobert —We are saying that is why there are 10,000 pages of rulings and rubbish that no- one can get over. We are stopping wealth creation. We have a tax system where, in trying to tax the rich to give to the poor, we have created another two million poor. We have created two million job losses with this hideous tax system which has tried and failed to redistribute the wealth.
Senator MURRAY —So the worldwide Western system of wealth creation, which has made people better off than they have ever been in the history of mankind, which involves countries such as the United States making sure the taxation system is adjusted to redistribute wealth or create wealth, you suggest should be done away with completely?
Mr McRobert —We are suggesting that that is why there are so many unemployed people in the world. In the Western world the wealth has been created because of the tools and the creativity, and now we have an underclass who are denied a job because you cannot get a job because it has been taxed out of existence. If you could study those graphs—I do urge you to read the books.
Senator MURRAY—So the massive unemployment in Chad, for instance, is the result of a bad tax system?
Mr McRobert —Chad has got nothing to do with Australia.
CHAIR —I think we are beginning to debate the matter.
Senator MURRAY—I am trying to flesh out the economic philosophy that lies behind it. If the philosophy is that you do not want the tax system to be used in a manner which produces certain policy outcomes, then that, I believe, is germane to our consideration of this proposal. What is before us is a tax system which does produce certain policy outcomes. The whole government intention is to do just that, and that is what I wanted to establish.
Dr Sheil —That has been proven ineffective and wrong. Tax is a very poor tool to use in social engineering, and it has been proven so all around the world. Anybody who says differently just has not looked at the world, particularly at Chad.
Mr D. Smith —Wherever you have the highest tax, you have the highest unemployment, as the graphics would show.
Mr McRobert —Have you seen `the misery index’ in Forbes Global Business and Finance magazine recently? There is a very strong correlation between the high level of tax and the high rate of unemployment. I urge you all to get that magazine, dated 28 December 1998, for the latest misery index across the western world.
CHAIR —Thank you, Mr McRobert.
Dr Sheil —We are offering to virtually abolish unemployment and to abolish the national debt and to make taxing trading on the Internet a lot easier. I hope the committee will take note of those benefits that I outlined in the opening statement, because I do not think any other system will do that for the country.
CHAIR —Thank you, Dr Sheil, and Tax Reform Ltd. [2.51 p.m.]