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It's good, but it could be even better

By John McRobert - posted Tuesday, 22 November 2011

Two hundred years ago, revolution hit Great Britain - it was a strange revolution - it didn't involve destruction and bloodshed, it involved construction, and caused people to live longer.

While the birth rate remained relatively constant, the population rapidly increased because many of the causes of premature death were overcome - and people lived longer.

The revolution was led by industrious and peaceful men who developed assured supplies of clean water and efficient disposal of human waste, men who created the machines and factories of production, and men who developed a power source for machines which magnified human effort, harnessing energy infinitely more powerful and versatile than the windmills, water wheels and hay burners on which mankind had depended throughout all previous history to assist in production of food, clothing and shelter and in transportation.


This was the age of coal and iron; of canal and factory construction; of bridges fixed and floating - rivers were bridged not with stone but with steel; continents were bridged with railroads; oceans were bridged with steam-powered ships made of metal; and rapid advances in knowledge built bridges into the future.

This new-found productivity with the bonus of longevity caused the population explosion with its increasing demands on the food supply, and population pressures led to mass migration.

For the four centuries prior to 1750, plague and famine had regularly visited Great Britain, and the average population growth over that period was about 3 per cent per century. From 1750 to 1850 the population grew 300 per cent, and they all had to eat.

People fled that island of Great Britain in small boats and courageously sought a future in a new land. Many left involuntarily under a Government export program to 'assist' certain of the poor who were reduced to stealing a loaf of bread or poaching wildlife because they were hungry.

They spread to all parts of the globe. They discovered and invaded a vast under-populated country that had proven so rugged that its inhabitants had achieved zero population growth at a 1788 level of around 300,000 - after some 40,000 years, give or take a millenium or ten, of struggling to co-exist with nature, battling their own famines, plagues, bushfires, droughts, floods and storms. These inhabitants could not defend this land against the industrious boat people who had a strong personal interest in survival - and who wouldn't, after a 20,000 km voyage in a leaky boat? These people, our grandparents, took over the country, cultivated the land, worked hard and prospered.

The above introduction to my first book on tax reform is as relevant today as when it was written 28 years ago, and therein are lessons which we ignore at our peril. Today Australia is relatively prosperous, but not as prosperous as it could be as successive governments continue to attempt to tax prosperity to its knees.


Today we worry about pollution, yet prosperity is the answer to that problem. Productivity is the key to prosperity and efficient utilisation of the Earth's resources which to all intents and purposes are limitless (no matter how much you mine, the Earth still weighs the same). The foolishness of bringing in a carbon (dioxide) tax beggars belief, but the elephant in the room is the 'progressive' income tax which, since introduction across the western world just prior to WW I, has been an enormous impediment to employment, a huge barrier to prosperity and productivity, and a powerful tool in the hands of conniving politicians to buy votes.

There have been various attempts to dump this in favour of a flat tax - a current topic in the US Presidential election campaign. Half-thought-out ideas are being floated without any analysis of the ramifications. No wonder the tax reform process is constipated. The tired old shibboleth that the rich grow rich on the backs of the poor ignores the size of the economic cake. In unproductive attempts to tax the rich into 'equality', the resultant shrinking cake ensures that there will be many more poor people and fewer rich people.

What do the proponents of a flat tax propose as the basis for calculation of remittance? Is it on income before expenses or after expenses? What are expenses related to that income? What is the time period for the income to be measured? What is the currency in which the income was received? What is the inflation rate? Is it adjusted for inflation? Questions questions.

The only time the value of money can be accurately measured is at the moment of exchange of that money, when the Buyer and the Seller agree on the price of whatever it is they are trading (goods, services, property or labour). Immediately before or after the transaction, that price can change enormously (compare the difference in the value of a winning or losing ticket in a horse race as the finishing line is crossed). A nominal tax on that exchange is a fair, reasonable and consistently measurable way of funding government which, among its various duties of defending our life, liberty and property, is charged with the responsibility of providing a stable currency to facilitate fair trade. Too much money is inflationary, and too little is deflationary - both being inimical to motivation and to production and exchange. When the figures are run, a 2% tax on exchanges of ownership is not only sufficient to fund good government, but will give the government real-time information on how much money supply should be adjusted to meet the current market value of these multitudinous exchanges. ABS figures are notoriously unreliable and out of date, and the Reserve Bank and Treasurer are blundering about using dubious statistics to adjust the levers of the ship of state. A 2% spending tax should not be confused with a bank transactions tax which has major disadvantages.

Any radical tax reform requires a clean transition from what was to what will be. The worst feature of the current tax system is its surcharge on the cost of labour (group tax, payroll tax and superannuation levy plus complicated admin expenses) all carried by the employer. If reduced taxes are refunded to the employer to effectively decrease the cost of employment and thereby both reduce the cost of goods and services provided and increase the demand for employment, that is the best stimulation package possible. The employee receives the same take-home salary as before, but the purchasing power of the take-home dollar would rise along with employment. We have exhaustively modeled all of this and a simple 2% spending tax to replace 9 major income-based taxes could significantly reduce the cost of government and grow the economy by substantially removing existing churning taxes and restoring motivation and incentive to the engine room of production and exchange. Paradoxically the GST/BAS mechanism provides the perfect mechanism for change to the new system. The BAS return would become a simple 2 liner: What is the value of gross sales (including the 2% surcharge)? Submit the 2% surcharge; What are gross salaries paid to employees? Submit 2% on behalf of employees (who would simply submit a relevant Group Certification that the tax had been paid)

A 2% spending tax would eliminate the dreadful constriction on trade imposed by the financial year when decisions are delayed or advanced not by market considerations, but by the tax implications. With a 2% spending tax, there could be an ASX agency beside every TAB in every pub in the country, and it would be as easy to back a company as it is to back a horse. The company race is over when you sell the shares. The 100 Australian bankers now working in the Cayman Islands (where the Australian Futures Fund has 5 accounts to save on taxes), could return home to work in a continent sized tax haven. Australia could be the economic model to get the world out of the financial morass in which it is sinking fast.

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About the Author

John McRobert BE (Civ) is the Managing Director of CopyRight Publishing. He is the author of A Diet of 2%.

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