Just when we think we’re running out of things to write to you about, something or someone usually comes to the rescue…
So this morning we have a full plate on offer to us. But we can’t cope with them all, so the ANZ Bank’s $2.85 billion capital raising, Bendigo Bank’s $615 million tree exposure, and Rio Tinto’s iron ore negotiations can wait for until tomorrow and Friday.
This morning the subject is tax. We’re looking at it for two reasons, one is the “12-page lift-off Smart Tax Guide” from today’s Australian Financial Review (AFR), and the second is thanks to an email from Money Morning reader Graeme Beal.
Mr. Beal sent through an email last night to the Money Morning Mailbag [email@example.com] writing:
“Recently I felt moved to give the Tax Review panel my take on tax policies here and abroad which I contend contributed mightily to the recent shemozzle in financial markets.”
Mr. Beal sent a copy of his submission to us. It’s 26 pages long. Unfortunately, we haven’t had time to read it yet – but we will. Therefore at this stage we’ve got no idea whether we agree with Mr. Beal’s proposals or not.
But that’s not the point, we’re grateful he’s sent it to us as it’s highlights an important fact…
Australians pay waaaaaaaaaaaay too much tax. We’ve highlighted before that the government’s total tax intake is around 40% of GDP. We’re aware the government enjoys expressing things as a percentage of GDP, although we haven’t heard them mention that statistic too often.
Remember, this is the review that the omnipotent treasury secretary Ken Henry is running.
Take a look for yourself by clicking on the above link, it’ll only take you a few minutes to read.
It’s a perfect example of how government’s in general claim to be helping out, whereas in reality all their proposals (whatever the political party) will only succeed in destroying everything they claim they are building.
We don’t have the space to reprint everything here, but even the first paragraph serves up so many untruths it’s not funny:
“The tax system serves an important role in funding the quality public services that benefit individual members of the community as well as the economy more broadly. Through its design it can have an important impact on the growth rate and allocation of resources in the economy.”
Actually, let’s rephrase our comment above. It’s not that all their claims are untrue at all. In fact they are right. Only not in the way they believe.
The tax system does have “an important impact on the growth rate and allocation of resources in the economy.” It’s just that the government has a negative impact on growth, and ends up allocating the resources in all the wrong areas.
Thanks to government interference and meddling, more resources than necessary are diverted into parts of the economy such as construction at the expense of say, manufacturing.
Simply because the government taxes excessively but then provides tax breaks back to property developers and investors, capital is drawn towards funding those ventures.
Yet something of intrinsic value, say manufacturing, is hampered due to restrictive government policies (again, it’s all parties) such as the minimum wage. Who would invest in domestic manufacturing without the ability to freely negotiate the cost of labour.
In a free market neither the property sector nor the manufacturing sector would be assisted nor handicapped by the government.
But that aside, there was another paragraph in the tax review’s terms of reference that stuck out like a sore thumb. It was this:
“The review’s recommendations should not presume a smaller general government sector and should be consistent with the Government’s tax to GDP commitments.”
In other words, don’t even think about suggesting the government spends less. Although in reality the inclusion of such a clause is purely academic. As if a public servant would recommend less government spending.
But how can you have a tax review where one important part of the outcome is already decided. Namely government expenditure.
Therefore the review cannot possibly recommend an cut in taxes if it is to propose a balanced budget. The outcome of the review must and can only conclude that current levels of taxation – at least – are necessary.
The result will be not so much of a tax review, but rather a tax reshuffle.
And that’s not all, I mentioned above how government’s claim they are helping but only succeed is harming, well, here’s how they believe they can help:
“The review should make coherent recommendations to enhance overall economic, social and environmental wellbeing, with a particular focus on ensuring there are appropriate incentives for:
- workforce participation and skill formation;
- individuals to save and provide for their future, including access to affordable housing;
- investment and the promotion of efficient resource allocation to enhance productivity and international competitiveness; and
- reducing tax system complexity and compliance costs.”
We can sum this up very quickly. Workforce participation and skill formation become lower the more government is involved. The first home-buyers bribe and high taxes make it hard and for some impossible, to save for housing.
A government cannot by any stretch of the imagination promote “efficient resource allocation.” Do we really believe a government bureaucrat can better manage the allocation of resources than a truly free market? We don’t think so.
And as for the last point, that’s the double whammy. This will be Ken Henry’s coup de grace. It will be the recommendation that individuals not be burdened with having to complete tax returns every year…
That it takes up too much time and too much money, and that it is best for the individual to just pay tax and not have to worry about filling in a form.
This will ensure that many taxpayers lose complete control of how much tax they pay. But of course, it won’t be marketed that way. It will be marketed as a way to “help you” or in real government-speak “responsibly helping working families around the kitchen table.”
And you can bet the tax office will increase the number of audits and prosecutions of tax payers just to drive home the point that filling out a tax return is too hard. “Which would you prefer? A $500 tax refund, or a 6-month jail term? Your choice!”
The final point that drew our attention was this:
“The review should take into account recent international trends to lower headline rates of tax and apply them across a broader base, as well as domestic and global economic and social developments and their impact on the Australian economy.”
Well, that’s just another way of saying keep the rates as high as they can get away with, but increase the number of things that are taxed…
I mean, they state it clearly what their intentions are, “apply them to a broader base.”
The biggest tax grab will come from carbon taxes, or emissions trading, or greenhouse taxes – whatever they want to call it.
But to put it simply, just think of anything that isn’t currently being taxed, write it down and then look at your list in a couple of year. Because by then chances are the government will have found a way to tax it.
for The Daily Reckoning Australia