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Australians Pay More Tax Despite Tax Cuts

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 [moneymorning@moneymorning.com.au] 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.

So, we thought we would pay a visit to the Australia’s Future Tax System website, and in particular drop-in on the terms of reference for the review.

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.

Kris Sayce
for The Daily Reckoning Australia

Kris Sayce
Kris Sayce began his financial career in the City of London as a broker specializing in small cap stocks listed on London's Alternative Investment Market (AIM). At one of Australia's leading wealth management firms, Kris was a fully accredited adviser in Shares, Options and Warrants, and Foreign Exchange. Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. In late 2006, he joined the Melbourne team of the leading CFD provider in Australia.

9 Comments

  1. Nick Boorman says:

    G.K. Chesterton had a great quoten of this.

    “No society can survive the socialist fallacy that there is an absolutely unlimited number of inspired officials and an absolutely unlimited amount of money to pay them.”

  2. Pete says:

    Nice article Kris! You are right in every regard.

    Although from the Governments perspective, tax is definitely a number one requirement for general functioning. It’s just that now they think they are so clever at spending money they have got into all sorts of other schemes beyond building roads and making laws.

    So basically it is the extremes of ‘free market ideology’ vs. ‘Gov. intervention and regulation’. The sad thing is that the latter is imposed upon us whether we like it or not.

  3. JJM says:

    Just something to ponder…

    If the “headline rates” of tax were levelled and reduced for everybody (individuals, businesses etc), and there were offsetting reductions in concessions (allowances, expenses,offsets, rebates and direct subsidies like baby bonuses). Would’nt that direct the extra monies received to where there were real businesses and demand?

    Perhaps the headline rate needs to be reduced to say 10% and the GST raised to 12% to broaden the tax base. Would’nt this allow businesses and individuals to “earn what they earn” and spend according to where they receive the best value. It might end these pyramid schemes like ABC learning, Timbercorp and Great Southern Plantations. It may also save the “percentage of money” that sticks to the inside of the machine when the government tax with one hand, and then subsidise politically sensitive target groups with the other.

  4. Ross says:

    Noted today in the SMH that the NSW public service unions are pleading for their bloated membership not to be taken out. They are using the Keynes’ “let them dig holes and refill them” economic multiplier defence. Nice to hear the worst of the ticket clipping racketeers squealing on their skewers along with their political masters. Could we hope to hear squeals from the ranks of the NSW Premiers Department or at least from those dregs left that haven’t jumped ship to run with Rudd’s Kommissar of media management?

  5. Ned S says:

    Even if Ken Henry did come up with a half reasonable system of taxation, he obviously has no control over the fact that politicians will be busy rewriting it in no time flat to buy votes, satisfy the lobby groups that fund them and implement their ideologies on how the world should work.

    With the latter varying every few years. Or even more regularly with the current lot being capable of going from being a pack of hard nosed “fiscal conservatives” (in their own imaginations) to a herd of jelly-kneed “social democrats” in 4 months or less.

    And with every tax professional and payer of serious Oz tax ready to rearrange their strategies as necessary.

    The payoff will be in how many Ken Henry manages to catch short I imagine. We surely do know that the country has gotten itself into a hole where the government is desperate for the money.

  6. Joe says:

    jjm I share a similar point of view. Sorry the detail requires such length.

    The best system and one I have advocated for years is the flat tax system. No multi-tiered tax system. No replication of tax agencies. No complicated process required to determine the amount of taxation for basic individuals.

    As a computer systems developer I was taught in the early 1980′s about business process re-egineeringing. I am a firm believer in the principle. Not familiar, well, it states that in any process that involves a none value adding element should have that element removed. You then end up with a process completely streamlined for adding value only and mitigates costs to the bare bones.

    A customer order comes in. You send the customer by mail a confirmation of what they asked you to send to them in their purchase. From the invoice you raise a picking request for the warehouse. On receipt and collation of the picking request they raise a despatch note which confirms what has been packaged. A consignment note is then raised by the despatcher for the carrier, detailing the address and including a copy of despatch note. When the picking request is returned to sales from despatch, an invoice is then raised and posted.

    All of these internal processes have failure redundancy designed into them. The company does things because it expects to get them wrong. Why tell the customer what he has asked you to deliver to him. Surely he already knows, he asked for it. If you can’t get the order right when he is requesting to trade with you why bother being in business. All the additional internal work, costs, and efforts, generate even more opportunities to make mistakes. You don’t trust yourself to get the order right, so why should you trust yourself to pick the right items from your warehouse, and package them off to the correct address ?

    It is all waste designed to protect the incompetent.

    Same with the tax system. In the U.K GST (or VAT) is collected by one government department (Customs and Excise). Income tax is collected by another (Inland revenue). National Insurance (another income tax for health and social security protection) is collected by another (Contributions agency). Local rates are collected by your local council each of which is replicated up and down the land, so considering there is national coverage, for everyone there is a 4th agency collecting tax.

    Surely one tax collecting agency is sufficient ?

    Every individual has to complete a tax return if requested by the Inland Revenue. You have no choice, and you get very little assistance.

    Why do you need to tell the tax collectors how much tax you should pay ? Surely the system should be so simple there is no doubt, and if collected at source throughout the year would be no requirement to ‘calculate’ it at the end of the year. You’ve already paid it.

    Again more waste and more opportunities for empire building within the public sector.

    Employers have a wide array of rules and regulations that they need to account for. Companies have even more rules and regulations, they have accounting practices and proceedures designed to make the real job of determining a companies value, amount of tax it has paid, and what profit it made in the last year, almost impossible.
    A whole new career has been created to account for this ridiculously complicated system, accountants, and a whole new stream of auditors and commercial lawyers sucking off the company fat for no value at all.

    So, we have one tax (actually a second asset movement tax) and everyone pays it at the same rate.
    The country works out how much money it needs next year to do what government does, and sets the tax rate accordingly to raise that much money. The easiest way of doing this is to scrap all bar GST, rename GST TAX and away you go.

    For individuals:
    Tax is 25% you earn 50K you pay $12.5K in TAX 100K and its 25K.
    To aid lower income earners you could TAX exempt certain items, such as foodstuffs, and childrens clothing.

    For companies:
    Your company earns (in income) $100M you pay $25M in TAX.

    There is then the need to introduce the 2nd asset movement tax. This covers cash moved off-shore, and all inheritances. Again 25%.

    Local taxes are collected Federally and distributed for population demographics and weighted for geographical dispertion.

    Imagine how many civil servants, accountants, and auditors would not be needed. Imagine the competitive advantage that would give Australia. If accounting and auditting cost 2.5% of earnings, then instantly they are 2.5% better off.

    Because the collection system is so easy only a crook could possibly get it wrong, jail all defrauders of tax.

    If it costs 2.5% of an employers earning to account and audit itself, imagine what cost there is to government. How many people are employed to make sure they get the right squeeze from you. Again this is costs that are saved.

    Finally from a political perspective. If there really is only one way to raise revenue, then there is no hiding for bad politics or bad governance. If next year TAX comes down by 1% because the government has managed well, then this is a clear electoral advantage. If however they have managed badly, then they must raise TAX 1% and will surely be held electorally to account.

    Deficits can only be run up in the current year, and have to be paid back in the next year. This is to allow for a shortfall in earnings if there is an economic downturn.

    Here is my final ‘providing proof of reasoning’ point. In the last year of Margaret Thatchers Poll Tax (a local tax on people and not properties, replaced by system called Council Tax on properties), my last annual bill was itemised. Now whilst these numbers are not accurate, they do accurately reflect the ratio. Of the roughly 600 UK pound total bill over 170 pounds was itemised specifically as ‘Administering and collecting the poll tax’. In other words my council would have charged me 171 pounds to collect 1 pound of tax, and that in that year well over a quarter of this tax was spent collecting it from me.

  7. David Colquitt says:

    Anyone interested in formiming a political party whose policy would be to have expenditure set at 10% of GDP. The long suffering suckers who voted for the current 40% spenders may find the relief encouraging!

  8. Bargeass says:

    Australian taxes will spiral higher as the number of freeloaders increases due to socialist social engineering policies designed to create enough handout dependent voters to keep them in office.

  9. Pat Donnelly says:

    Didn’t we just see this in the USA and UK?

    Not too successful!

    Counter cyclical. Look it up!

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