A Two Percent Expenditure Tax
Presently Australians are concerned with the question what rises will take place in interest rates. Because the Commonwealth government and the media have been informing Australians that the economy is strong but that there are no immediate expectations of high inflation, Australians understand that the recent and prospective interest rate rises are intended to prop up the value of the Australian dollar.
This position is worthy of further analysis because there is a sharp contrast between the high values of the United States dollar, the pound sterling and the Euro, as against the Australian dollar, which has been falling dramatically. Why is it that, of these four currencies, the value of the Australian dollar is so seriously out of step? To discover the answer, if we first look at the natural wealth of the related countries, we find that Australia per capita is one of the richest countries on earth, so that in this sense it has a high asset backing for its currency. In sharp contrast, countries such as the United Kingdom lack substantial natural resources and have a low asset backing for their own currencies. Clearly the low value of the Australian dollar is not a natural resources issue.
Further analysis reveals that much of Australian industry and commerce is foreign owned and that the wealth generated in Australia by foreign ownership often serves the foreign owners, not the Australian community and not the value of the Australian dollar.
In general Australians are well educated, technologically advanced and with a demonstrated capacity in invention, design, and the creation of concepts in demand throughout the global community. Unfortunately however many Australians with high levels of knowledge, skill and productive capacity live elsewhere in the world due to a lack of opportunity in Australia. On an examination of the marketing of Australian products and services, including its rural produce and minerals and energy, the conclusion is evident that Australians are too often price takers and not price makers and that they substantially undersell the value of Australian products and services, many of which are worthy of market premiums. Further, many primary products are sold without the processing that would add greatly to their value. This inability of Australians to sell up reduces the value of domestic production and resources and puts critical pressure on costs, in particular of labour.
In short, Australia is rich in natural resources but does not control sufficiently the production and commerce of these resources. As a consequence Australian resources and production are sold below their potential value, and this loss of revenue denies Australia the ability to fund its own development, and, in particular, to increase the output and productivity of its people.
The starting point is to recognize that the gaining of market acceptance and achievement of fair value including premiums have to be won by being competitive in all elements of the cost structure of goods and services, as against those who currently enjoy dominance in the related markets.
An early discovery in the process of competitive global cost comparison is that all Australian costs are burdened by high taxation in all its forms, from Commonwealth, State, Territory and local governments, with this taxation including the non-commercial element of charges and fees by governments and their agencies.
This gross taxation distortion in Australia's global cost competitiveness necessitates a different analysis whereby taxation is excluded. This global cost comparison, excluding taxation, shows that Australia is capable of sustaining a competitive position in global markets and over time of securing fair prices, including premiums, by ensuring that the quality of its products and services satisfies global consumers as best value for money. To test this discovery we can turn to major foreign owned developments which have taken place in Australia over the past half century. What we find is that in both attracting these developments to Australia and retaining their ongoing presence, the Australian government provides substantial tax inducements and permits the repatriation of profits largely untaxed.
Since it is clearly evident that Australian governments understand the impact of their high taxation on Australia's competitiveness it would be reasonable and fair minded to expect that all levels of government in Australia are actively following policies and practices to reduce the burden of taxation, so as to provide a fair opportunity for Australian resources, and in particular for its people, to advance an economic presence around the globe.
But unfortunately analysis reveals that Australian governments year on year increase the burden of taxation in all its forms on the resources, production and commerce and people of Australia, whilst at the same time allowing foreign interests to escape this taxation. As this reality is not difficult to perceive it should be known and understood by both the political and administrative arms of government, and so the question arises - What are the politicians and bureaucrats doing to develop and implement plans for the future to redress the blatant imbalance where foreign interests are placed first and Australian interests, including those of the wider community, have to be content with the remnants?
The value of the Australian dollar is the ultimate barometer of how global interests see Australia and, by default, of how we as Australians see ourselves. The value of the Australian dollar has been falling for many years because although we are asset rich we are performance poor and give preference to foreign ownership and not to domestic ownership of our own country, industry and commerce.
This alliance between global interests and Australian government policies and practices can be broken only by implementing a policy which substantially reduces the taxation component of the cost of Australian goods and services as a prerequisite to Australian in dustry and commerce improving its global and domestic presence in global markets.
The present and prospective expansion of global trade through e-commerce provides Australia with a timely opportunity to shift from a high taxation regime economy to a low taxation regime economy with immediate and ongoing improvement in the living standards of all Australians.
It is time for Australians to reject government policies which say that the only way to support the Australian dollar is through high interest rates.
What in fact Australians need is the immediate introduction of a low taxation economy which will give Australian industry and commerce new global competitiveness.
This policy would complement Australia's high wealth in natural resources and offers to the Australian community immediate and ongoing prospects for much increased living standards and personal freedom of choice, with protection from government and political incursion.
The economic reality of Australia, when related to the best interests of Australians, is that with an expenditure tax system the Australian economy could be modified so as to need far less1 than the revenue the present Commonwealth government raises. Australia has lost control of the value of its currency due to government excesses forcing the underutilization of national resources, and in particular of its people. Australians as a nation are living beyond their means and survive by excessive foreign debt and by selling off public assets.
A Two Per Cent Expenditure Tax is the Answer
Politicians and media are still clinging to misrepresentations by certain economists and academics that a two per cent expenditure tax cascades at an unacceptably high rate.2
They base this view on the assumption that other taxes remain, in addition to the expenditure tax, because this is what happens under the G.S.T., which is imposed on top of income tax, profits tax, payroll tax, fringe benefits tax, superannuation tax, capital gains tax and their derivatives, such as withholding tax. But, in fact, all of these taxes are abolished under a two per cent expenditure tax.
In the case of a typical multi-stage manufactured product, a two per cent expenditure tax cascades to 13 per cent, half the total rate of the 10 per cent G.S.T. and other taxes which cascade to 28 per cent.
The objective of a two per cent expenditure tax is to make the prices of Australia's goods and services competitive internationally and domestically as the means to achieve the effective utilization of Australia's resources, and in particular of its people, for wealth creation in the hands of Australians.3 Amongst other things, this would enable Australia to buy back the ownership and control of its resources as a democratic community with freedom of choice. This would be achieved over a three year period by abolishing Australia's existing unfair and inefficient taxes so as to reduce the prices of all goods by up to 40 per cent and of all services by up to 30 per cent and so as to increase employment substantially. Clearly governments as well as individuals would pay therefore much reduced amounts for goods and services, and total government revenues could be drastically reduced.
A two per cent expenditure tax is a fair and efficient tax which would create the incentive to work, save and invest for a standard of living which would be expected to become one of the highest in the world. It would provide governments with the means to assist the underprivileged. It would enable the repayment of foreign debt, returning dignity to all Australians and putting value back into the Australian dollar.
The Example of Health Care
The recent debate concerning nursing home care and standards is representative of what appears to be presently an insoluble problem for governments and the Australian community. Whilst huge amounts of money may in the short term overcome the under-funding of nursing homes in regard to operating costs and capital costs including the need for major refurbishments, these alone will not fix the problem.
A more caring community has a high priority, and current social trends are, even for the optimist, heading in the wrong direction. A characteristic of care is the availability of time to meet the needs of the individual, including those needing much attention.
Australia's high cost of labour, due to its high personal tax rates, places a cost premium on time, forcing management to adopt standards of time per patient based on economic values that reflect these high rates of taxation. An objective of a two per cent expenditure tax is to cut the cost of Australian labour by abolishing today's high personal taxation.
As a consequence, a greater number of care workers would be able to be employed at the same cost of a smaller number today. Indeed, this effect would arise in all areas, such as education, law, accounting and industry: the elimination of high rates of personal taxation would enable salaries and wages to be reduced and employment to be increased correspondingly. Hence the significance of a low tax regime extends well beyond addressing the problems of nursing homes and critically addresses the needs of youth and future generations. Reinstatement of the family as the cornerstone of a healthy society is made possible by a two per cent expenditure tax by substantially reducing the levels of income necessary to meet both the necessities of life and a standard of living in keeping with the expectations of Australians.
Failsafe and Simple Implementation
The expenditure tax would apply to all transactions involving the provision of goods or other property or services, and the rate would be two per cent. It would not apply to deposits into, or withdrawals from, bank accounts. It would be implemented over a three year term with a range of controls and failsafe systems to ensure that its objectives are met and not circumvented by minority vested interests in Australian and overseas communities.
At the Senate Select Committee hearings on a New Tax System in early 1999, three representatives of Tax Reform Limited were presented with the unfortunate political dogma that the Commonwealth government must raise revenue, principally taxation, of approximately 24 per cent of G.D.P., for example, in 1998/99 ($146.5 billion or 24.7 per cent of G.D.P.) more precisely . Any reform proposal which would raise substantially less would not be considered by the Committee. A two per cent expenditure tax is estimated to raise a minimum of $83 billion or 14 per cent of G.D.P. with the $63.5 billion or 10.7 per cent of G.D.P. supposed shortfall not being required because of increased economic activity and because the abolition of $65 billion of existing taxes reduces the existing selling prices of goods and services in Australia and for export, and hence decreases government expenditure substantially. Consequently, Australia immediately improves its national and international competitive position.
This reduction in prices would increase the purchasing power of money, giving the individual and industry the financial capacity to buy and sell at lower prices and leaving surplus capacity to buy back the ownership of Australian businesses and property and to pay off net foreign debt.
Also of particular importance would be the substantial decreases in government expenditure that would follow. These decreases would arise, not only because salaries and costs would be lower in view of the absence of high rates of income tax, but also because, for example, welfare expenditure would be greatly reduced. In particular the lower cost of labour and increased levels of economic activity would greatly reduce unemployment relief payments and various other welfare payments.
Here refence should be made to the Table hereunder, "Statement of Commonwealth Government Funding with 2% Expenditure Tax", which includes the abolition of State and Territories payroll tax, which in 1998/99 amounted to $8.1 billion.
Feedback shows that the time is right for a low-rate expenditure tax. What is now needed is for leaders in all sections of Australian society to speak out and require the Australian Parliament to do what should have been done many years ago, that is, to make a fair and proper evaluation of a two per cent expenditure tax, which is eminently suitable for implementation in Australia as a matter of national urgency.
The implementation of a two per cent expenditure tax is easy for all parties, in particular for business and consumers, and, with its incentives for growth and increased earnings, can be expected to be willingly embraced. The political party that implements a two per cent expenditure tax may be expected to remain in power for a substantial period.
No other tax system can achieve this turnaround in Australia's economic position, with increasing surpluses to increase productivity and standards of living and to complete the repayment of foreign debt and put into the hands of Australians the wealth to buy back businesses and property in Australia.
Commonwealth Government Funding with 2% Expenditure Tax
Source: Final Budget Outcome 1998-1999. A.B.S. Labour Costs, and Tax Reform Ltd. Submissions to the Senate Select Committee on a New Tax System
Financial Outcome 2% Expenditure Taxes Wealth Creation
1998-1999 Tax Outcome Eliminated for Investment $Billion $Billion $Billion $Billion
Commonwealth Revenue From Taxation
Total Income Tax on Individuals 80.0 0.0 80.0
Company Tax 20.7 0.0 20.7
Superannuation Funds Tax 3.9 0.0 3.9
Sales Tax 15.2 0.0 15.2
Excise Duty 13.6 13.6
Customs Duty 3.6 3.6
2% Expenditure Tax -Public Sector 3.0
- Private Sector 54.0
Other Taxes, Fees and Fines 4.1 4.1
Total Taxation 141.1 78.3
Interest, Dividends and Other Revenue 5.3 5.3
Total Commonwealth 146.4 83.6
State and Territories - Payroll Tax 8.1 0.0 8.1
Total Revenue 154.5 83.6
Total of Taxes Eliminated 127.9
General Public Services 7.2 5.0
Defence, Public Order and Safety 12.2 8.6
Education 9.7 5.7
Health 23.3 9.7
Social Security, Welfare and Housing 54.0 20.5
Recreation and Culture 1.4 0.0
Industry Economic Support 9.2 0.0
Public Debt Interest 7.5 7.5
General Purpose Inter Govt Transactions 24.5 8.6
Total Commonwealth Outlays 149.0 65.6
Financial Surplus 5.5 18.0 18.0
Increase in Community Purchasing Power and Capacity to Save and
Invest to Secure Ownership of Australian Business and Property
Reduction in selling prices of goods and services by the elimination of the taxes as above 127.9
Add, reduction in administration and compliance cost
2.1 Add, reduction from increased economic activity 0.0
Lower prices of goods and services by 73.0
Deduct, Private sector outlays on a user pays basis
Recreation and Culture 1.4
Industry Economic Support 9.2
Housing and Community Amenities 1.2
State, Territory, and Local Government services 8.6
Increase in community purchasing power and capacity to save and invest 45.0
Total surplus to buy back ownership of Australian business and property and/or to pay off Foreign Debt 63.0
1. This economic effect is due partly to decreased costs to government of wages, salaries, services and goods and also to increased employment and economic activity. Details of relevant calculations may be obtained from Tax Reform Ltd., G.P.O. Box 2927, Brisbane, Qld. 4001.
2. In fact high rates of income tax have a much greater cascading effect than a low-rate
expenditure tax. Further, a low rate of expenditure tax would minimise occasions when producers brought about vertical integration in order to minimise taxable transactions
3. In regard to exports, the supplanting of the high cascading effects of personal income tax by a more moderate effect (in view of the low rate of two per cent) would be highly beneficial, and would enable Australian producers to be more competitive.
National Observer No. 45 - Winter 2000