Taxes and their Economic, Social and Political Issues in the light of the Coronavirus Epidemic

Introduction

The Australian Government uses its own currency, issued by the Reserve Bank of Australia (RBA). China, USA, Japan, the United Kingdom, New Zealand and many others do the same. A Sovereign currency Government creates money at the computer keyboard

The State and Local Governments cannot issue currency and rely on transfer payments from the Australian Federal Government, State and local taxes, stamp duties, rates, fines and fees, poker machine taxes etc.

Money enters the system when the government spends it into existence. The Australian Government requires that it’s taxes are paid only in $ Australian, ensuring acceptance of its currency.

I’m from the Tax Department!

Despite abandoning the Gold Standard and moving towards a modern economy in the 1940’s, there is a commonly held view that taxes are needed to fund government spending – “the Taxpayers Dollar” is a term widely used today.

Away back in the middle of the twentieth century, Ruml, Lerner and others demonstrated a clear understanding of how a modern economy really works. We have failed to use these insights. For a more complete discussion see We don’t need the taxes of the rich

In 1946, Beardsley Ruml published Taxes for Revenue Are Obsolete He was then Chairman of the Federal Reserve Bank of New York.He argued that “… given (1) control of a central banking system and (2) an inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore should be regarded from the point of view of social and economic consequences.”

A taxation system that deters work effort and directs resources into {understandably) seeking ways to reduce a confiscatory tax system is ridiculous. So too is the superannuation system, bank taxes, GST, supporting (fudging?) GDP through unsustainable immigration and so much more.

Taxation supports demand for the currency.

The Australian Government requires that its taxes are paid only in $A, ensuring acceptance of the currency only it can issue. Taxation supports demand for the currency. The Australian Government’s capacity to spend is independent of taxation revenue.   It spends first and taxes afterwards. This ‘spending’ circulates until governments tax the money out of existence.

Taxes should be all about public purpose and should never be about raising revenue.

Tax is all about the social consequences – the total impact of each tax on the real economy and on people’s well-being. In a modern economy, spending and taxing are economically separate activities.

Taxes can be levied to curb inflation or to advance economic issues or address social issues, stimulate research and local manufacture and much more. All taxation should be regarded from the point of view of social and economic consequences.

A core principle of tax design is neutrality: ensuring that taxes depend on behaviour as little as possible. Keeping tax as low as is necessary mitigates tax dodging. When the cost to avoid a big tax bill involves mobs of records, tax accountants, lawyers and even off-shore havens, then it will often be a better choice is to pay it, not dodge it.

Keep it simple and as small as necessary to achieve its fundamental purposes, which have nothing to do with raising revenue to spend. All taxation should be regarded from the point of view of social and economic consequences.

Some examples of many socially destructive and ill-considered taxes

Excise on petrol is 41 cents per litre. GST adds 10%. This means we usually pay tax at around 54 cents a litre. Rationale seems to be to raise funds to support the transportation infrastructure. Excise and GST are regressive taxes affecting mostly those least able to afford a ‘hit’

State governments considering increasing excise taxes to back-fill revenue failures and pay for increased expenses due to the economic impact of the coronavirus shutdown is “bad tax policy,” according to an analysis by the Washington, D.C.-based Tax Foundation.

“The coronavirus-induced economic crisis has impacted “almost every meaningful source of state revenue,” Ulrik Boesen from the Tax Foundation says in a new report published on state deficits.”

The single most expensive ingredient in Australian beer is Australian Government tax. Tax accounts for almost half (42%) of the price of a typical carton of full-strength beer. Of the $52.00 retail price, a whopping $21.84 is tax. Beer excise Aust World’s worst

Fuel tax credits provide businesses with a credit for the fuel tax (excise or customs duty) that’s included in the price of fuel used in machinery, plant equipment,heavy vehicles and light vehicles travelling off public roads or on private roads.

Goods and Services Tax (GST) – We pay GST on power bills and phone/ NBN bills! Abolition of the GST would be sensible. The States should be funded by the Federal Government by Grants and not by using  the present  bizarre GST link.

GST and Fuel taxes see very substantial cost to businesses – Requires Business Activity Statement (BAS). Cost of record keeping for BAS estimates suggests businesses pay billions in time, tax accountants etc – MYOB has estimated that the time lost to GST compliance for the approximate two million small businesses in Australia equates to a productivity cost of $13.5 billion. (MYOB is a business software supplier and its estimate needs verification – high cost nevertheless.)

The systems can easily be fudged e.g. diesel in private cars from tractor stocks. GST is easily avoided. A anyone seeking repairs or maintenance to property or vehicles and other things is usually offered a cheaper price for cash, i.e. GST free.  GST also sees some dodgy companies collecting GST and later deliberately liquidated to avoid paying its debts, including taxes, creditors and employees. A new company is then created to continue the business of the company that has been placed in liquidation. See discussion Combating Illegal Pheonixing

Corporate Tax

Corporate tax is a particularly misunderstood and misused weapon. To again quote Beardsley Ruml:-Taxes for Revenue are Obsolete. “ Taxes on corporation profits have three principal consequences —- all of them bad. The bad effects of the corporation income tax are:-

  • “The money which is taken from the corporation in taxes must from the people, in the higher prices they pay;… from the corporation’s own employees in wages that are lower than they otherwise would be … from the corporation’s stockholders, in lower rate of return …harmful to production, purchasing power, and to investment.
  • The corporation income tax is the cause of double taxation. ….taxed once when his profit is earned by the corporation… again when he receives the profit as a dividend . …. stockholders with small incomes bear as heavy a burden under the corporation income tax as do stockholders with large incomes.”

Ruml also pointed out that:-

  • “A corporation is nothing but a method of doing business which is embodied in words inscribed on a piece of paper. The tax must be paid by one or more of the people who are parties at interest in the business…
  • …. the bad effect of tax consideration on business judgment is seen in the preferred position that debt financing has over equity financing. … interest and rents… are deductible as expense; whereas dividends paid are not . …. weighs the scales always in favor of debt financing, since no income tax is paid on the deductible costs of this form of capital. … in many cases, a high corporation income tax induces management to make expenditures which prudent judgment would avoid.
  • Corporation income tax results in either higher prices, lower wages, reduced return on investment, or all three in combination. The effects of the corporation income tax are bad effects.
  • Suppose the corporation income tax were removed, where would the money go that is now paid in taxes? … a large share would go in lower prices, and a smaller share would go in higher wages and in higher yield on savings invested in the industry.
  • A high corporation income tax induces management to make expenditures which prudent judgement would avoid. This is particularly true if a long-term benefit may result, a benefit which cannot or need not be capitalized.
  • The public purposes to be served by taxation are not thereby well served. The tax is uncertain in its effect with respect to the stabilisation of the dollar, and it is inequitable as part of a progressive levy on individual income. It tends to raise the prices of goods and services. It tends to keep wages lower than they otherwise might be. It reduces the yield on investment and obstructs the flow of savings into business enterprise.”

The foregoing supports a case for low or nil corporate tax and use instead other imposts and fees to address conduct or products that are at odds with the public good; eg fees for a licence at premises used to sell junk food or advertise gambling promoters, etc. Perhaps some fee or tax on certain advertising destined for viewing on the internet, payable by Google or Facebook of whatever.

Superannuation, Future Funds and Sovereign Funds

Superannuation, Future Funds and Sovereign Funds are effectively a tax on businesses and individuals with exorbitant management fees and offshore investment rife. Trillions in assets – billions a year in fees and wasted insurance premiums – value of the tax concessions far outweighs the reduction in Age Pension outlays. Judith Sloan  The Australian Contributing Economics Editor 18 August 2018 wrote-

… forces many people to forgo valuable current consumption — think buying a house, paying school fees and the like — in order to knock off their full entitlement to the Age Pension. In other words, it is essentially a tax — and an inefficient one at that. Second, the unmanaged basis of the super industry has created a bounty of wealth for those who run the funds and the associated entities. …..The bottom line is the industry is beset with problems that ultimately stem from the compulsory nature of contributions.’

 

The Australian Business Review 2 May 2020

“Super does not fulfil the requirement of a retirement income system; it’s better thought of as a growth-sapping, resource-wasting, tax-advantaged asset purchase scheme for high income earners, that may ultimately have little effect on reducing reliance on the age pension system.”

Aged pension more effective in retirement than ‘failed’ super

The Government should provide pensions and disability income at responsibly generous levels, with private superannuation available to those who chose it, at their own cost without tax concession, to augment their government pensions. Australia’s sovereign currency government can always repay its liabilities, which are repayable in $A,as they fall due.

The rationale for the Future Fund:-’We invest the assets of the Future Fund, the Medical Research Future Fund, the DisabilityCare Australia Fund, the Aboriginal and Torres Strait Islander Land and Sea Future Fund and two Nation-building Funds’.

Australia’s sovereign currency government can always fund medical research, care for the disabled and provide sensibly and adequately for Indigenous need. Australia’s sovereign currency government can always fund medical research, care for the disabled and provide sensibly and adequately for Indigenous needs right now and an on-going basis in $A, when and where they are needed, many urgently right now.

A future fund is costly to oversee and manage, as is any venture depending on return on investment. The fund is at the mercy of markets and trade wars e.g. USA/China tariff wars, which has seen falling stock markets, leaving returns in doubt.

The Coronavirus epidemic and Government’s responses  have  exacerbated the problems inherent in a Stock Market based, privatised program supposedly for the future ‘Public Good’.

The Australian Future Funds have substantial investment in Global Equities e.g. Future Fund as at 31 March 2019 has 17.4% in Developed markets and 9.00% in Emerging markets. This at the same time as Australia’s Public Good is grossly diminished by unemployment, underemployment, crappy Aged Care, contemptuous NewStart and disgraceful Indigenous disadvantage.

A Sovereign Currency Government – Australia’s – can always  pay for things as they fall due and to fund their superannuation liabilities when they became due, without any need to reduce any other necessary spending,

Those (few) governments with fixed exchange rate currencies have to fund future liabilities before they come due. Enough reserves must be held to make the guaranteed conversion features of the currency work. It also applies to non-government users of a currency.

A government with a Future Fund or Sovereign Fund spends an amount equal to that which drains it from the private sector with taxes to speculate in the financial and broader asset markets (domestic and abroad). It buys up assets including shares and real estate.It  competes in the private equity market to fuel speculation in financial assets and distort allocations of capital.

What the government does to generate the ‘funds” for its Future Fund adversely affects the economy and the public good. The Federal Government spends less than it taxes and this leads to ever decreasing levels of net private savings. The Private Sector has to borrow more to stay afloat. Private Sector debt is at an all-time high and worse in Australia than just about anywhere else.

The Future Fund’s investments are largely overseas with around 35% in USA, Europe 7 % Britain 3% Japan 8% Developed (other) 5% Emerging  Economies 21% – See https://www.futurefund.gov.au/about-us/annual-reports

The Future Funds Tribunals’ Determination 2017, taking effect from 1 July 2017, set the annual fee payable to the Chair at $206,330 and the fee for other members at $103,170. Some 7 Senior Managers share around $7,000.000 in salaries, entitlements and performance bonuses!

Is a Future Fund, as outlined above, a sensible use of public funds?