Webdiary - Founded and Inspired by Margo Kingston

A Take on Taxes

The government is having a tax forum, my invitation seems to have been lost in the mail. Never mind, I’ll give them the benefit of my wisdom, courtesy of Webdiary.

To set the scene, let’s remember why governments tax. There are two reasons: (i) to raise revenue; and (ii) as a policy instrument. A tax can be for one or both purposes. For example, an tobacco tax both raises taxes and encourages people to stop smoking. Taxing the middle class provides a lot of revenue, but doesn’t serve policy. Speed camera fines – yeah the government argues it is not to raise revenue, but only to deter speeding. Let’s give them the benefit of doubt on that.

We have been conditioned to think that governments that raise taxes are bad, and those that cut taxes are good. But that is not true. The real question is how wisely the government is using the money it raises, is the money used more wisely than we would or could? But that is a broader question than can be tackled here, so the suggestions that follow focus on the policy angle, what will be the effect, rather than how much money the government actually needs.

Get Rid of Payroll Tax

This is a no-brainer. Every state is taxing jobs, requiring businesses to pay a tax for each person they employ, of around 5% of their salary. There are two problems with this.

Firstly, it discriminates against people in favour of machines. Say there is a job that can be done by a person or a machine. The person costs $100, the machine costs $103. Because of Payroll tax, its better to get the machine (manufactured in China). Or if the job costs $100 here or $103 to import it from Indonesia….. We’ve stacked the cards against Aussies.

Secondly there is the paperwork. Don’t forget, the business already has to manage the paperwork of PAYE tax collected by the federal government. And if the business is operating in different states, just to make life more complicated, the rules are different for each state.

Ok, if a no brainer, why hasn’t this been fixed? It’s a state versus commonwealth issue. The payroll tax gives states a lot of money, since each has different rates (which the states do change) it gets into the too hard basket.

Get Businesses to Pay Their Fair Share

Yes, that’s right, businesses are getting a free ride. Ever wondered why businesses are calling for increases to GST( http://www.tax-news.com/news/Australian_Industry_Group_Calls_For_GST_Increase____51695.html )? It’s because they effectively don’t pay GST. Currently, businesses pay a flat 30% on profit, while people pay on income, and can go up to almost 60% by the time GST is included. And make no mistake about it, businesses get a lot of benefit from infrastructure, from healthy, educated workers.

But won’t increasing business taxes drive down investment? Australian taxpayers get an imputation credit on tax paid by companies they have invested in, company tax rates don’t matter to Australian investors. But it will matter to foreign investors, who will have to cough up. As Warren Buffet (http://www.timesonline.co.uk/tol/money/tax/article1996735.ece ) has himself complained, the rich get away with paying relatively much less tax than everybody else.

Our subsidisation of foreign investors has caused two substantial long term problems. Firstly, it is a major reason why our dollar is so high, as investors bring money in to buy our assets. And make no mistake about it, the two speed economy is bad for Australia. It’s called putting all your eggs in one basket. And two speed suggests that there is anything else other than quarrying. Even steel is moving overseas, where they use Aussie iron ore and Aussie coal.

The second major problem is that we don’t invest enough. As a wealthy nation, we are too reliant on foreign investment, our Capital Account – which is similar to our balance of trade account, except that it measures the balance between whether Australia is investing overseas or foreigners are investing in Australia, has always been in the red. And the problem did not start with China, it started with the UK.

Don’t get me wrong. I’m not advocating protectionism, I’m not saying let’s close our borders to foreign investment. What I am saying is let’s at least have a level playing field.

Legalise and Tax Drugs

I’m not a fan of drugs. There are healthier ways to get and keep your high. But legalizing and taxing drugs gives us a double whammy. First, of course, we get the revenue. Secondly, we save on cop costs, and get rid of a significant motivation and revenue source for criminals.

And let’s admit it, the war on drugs - like many recent wars – are lost, and have created more problems than they set out to solve (http://www.bbc.co.uk/news/world-latin-america-10681249 ) . And, again like many other wars, could be laid at the feet of the US (http://www.telegraph.co.uk/news/worldnews/centralamericaandthecaribbean/mexico/8777235/Mexican-president-hints-US-should-legalise-drugs.html ).

Yeah, I know it’s not going to happen. Our self-righteous puritanical unwillingness to concede when we are wrong. We’ll just have to wait for the next generation to take control.

Ok, that’s three, and I haven’t touched on either the carbon tax or the mining tax. I’ll leave that up to you, dear Webdiarists. Over to you.