A CONCERNED AUSSIE'S PERSPECTIVE
We were told that we had a Global Financial Crisis.
1 who caused it ? 2 what was that crisis ? 3 who got hurt ?
Before we answer those questions we must consider what I will call Economic Value Added , Non Economic Value Added and Economic Social Value
A: RealEconomic Value : The dollar value added to a raw material or
product by the processing /servicing of that item by employing labour.
That value added has 2 components LABOUR and PROFIT
B: Non Economic Value (Capital Gain ): The dollar value added without the product being processed /serviced by employment of labour. That value added is Capital Gain ( referred to as Paper Profit )
C: Economic Social Value ( Government Services.)
Australia has a high standard of living supported by Government services including Healthcare , Hospitals ,Education ,Emergency services , Police , Armed forces and Social security benefits for those in need. The wages of the public servants providing those services is paid for by taxing the labour employed to create real economic value .
When economic activity will not sustain Government services those
service will have to become more cost efficient or be reduced.
Alternatively economic activity must be stimulated or the taxpayer
must be prepared to pay a little extra tax. This is not to say that
Government services do not have value. They have the most important
value : Economic Social Value which in turn is dependent upon Real Economic Value and reflects the countries standard of living.
* The Government of the day has the responsibility of finding the right mix to maintain the standard of living of all citizens.
The answer to questions 1 , 2 and 3
1 : Who caused it !
THE BANKS : banks all over the world loaned money to families and businesses to purchase Property and Shares .The problem was that they loaned excessive money and created false demand to purchase Property / Shares which added Non Economic Value being capital gains or paper profits to the value of property and shares.
In very basic terms it created a situation where buyers were borrowing money to purchase shares or properties the prices of which included a large component of Non economic Value added (paper profits )but they did not have sufficient Real economic Value in their pay packets to pay for the inflated price.
2 : What was the crisis ?
The economy is sustained by the wages and profit produced by adding realeconomic value. We go to work and add value to a product or service.
In return we are paid wages which provides the purchasing power to spend on food ,education and consumer goods plus hopefully some savings
to invest in a home or for our retirement .
When Non Economic Value exceeds Real economic value it creates a problem and is the answer to question 2 .
The crisis came about when the real economic value added to our wages simply could not keep pace with and pay for the NON ECONOMIC VALUE written into the vast amount of funds loaned to families and businesses.
3 : Who got hurt ?
Unfortunately those who suffered most were often families and retired persons who could not afford to repay the inflated loans to the banks who in turn repossessed their homes and shares and sold them at reduced prices to repay the loan. This had a snowball effect as the banks could not recover sufficient funds to repay the loans and they made huge losses which in turn limited their ability to refinance corporate loans. Corporations that were financially strong were able to call on their shareholders to inject funds into the company by issuing more shares which effectively diluted the value of a share and also contributed to the huge fall in the stock market .
The hangover part 2 !
We currently hear that demand driven by Chinese buyers, negative gearing and self managed superannuation funds is inflating house prices ? The banks benefit from larger loans and those least able to afford a new home suffer .
We hear in the news about unscrupulous financial planers employed by the major banks ..sound familiar?
Added to the problems associated with Non Economic Value and paper profits is the globalization of corporations impacting the economies of the countries in which they operate and which is not addressed and given little consideration by the ACCC.
The ACCC is only concerned with creating excessive competition to drive prices down regardless of the impact on Australian businesses creating Real Economic Value. ( petrol vouchers is a perfect example )
The ACCC and Foreign Investment Review Board should be divisions of and directed by ASIC.
Stop for a moment to consider Japan Post ( an SRO ) purchasing Toll Transport which also happens to be the largest transporter of vehicles in Australia and in the next breath we are told the Government is considering allowing the private importation of new vehicles.
The Government of the day has the responsibility of finding
the right mix to maintain the standard of living of all citizens.
TAX REFORM IS NEEDED NOW !
Taxation must now play catch up with changes to the way business is conducted on a global basis driven by the introduction of the internet 25 years ago .
A little history
The internet arrived in the early1990s and started a chain reaction with Corporations scrambling to become Global and reap the rewards .
Ten 10 years on in 2001 BHP merged with Billiton in the United Kingdom to create one of the largest mining companies in the world with a market capitalisation of $28 Billion . That market capitalisation is now $157 billion and a good deal of that growth has contributed to the wealth of Australians and funded the Australian Government to balance the books as it were.
A little history ...continued
At the same time companies that could not Globalise found it impossible to compete with cheaper imports and had no alternative than to outsource the manufacturing of their products to overseas corporations and effectively Australia became a reseller of overseas produced goods .In reality we exported our labour and the ability to add real economic value and left the government with a large hole in its revenue.
GST is introduced in 2000
It is no surprise that GST was introduced in 2000 to plug the ever growing gap in the budget due to the shortfall in revenue lost as a result of declining “ Economic Value added ” and the resulting decline in PAYG tax on wages.
The spend to save the economy mentality .
Surely it is not too difficult to comprehend that our standard of living can no longer be sustained by consumer spending on imported goods which produces GST revenue for the Government . The imports have to be balanced ( paid for ) by exports ( which by the way create Real economic Value added ) but unfortunately we have a situation where falling exports are not paying the bill...that is the economy is no longer driven by Global growth and demand is falling and especially for our resources which for so long have paid the bill.
GST revenue plus PAYROLL TAX and CONVEYANCE TAX collected by the State Governments finances the States . State Taxes need to be reviewed at the same time that the Federal taxes are reviewed . Payroll tax has a negative impact on employment as compared to application of Revenue Tax which will encourage employment rather than penalise employers .
Increasing the GST
Increasing GST is a recipe for disaster as it is based on consumer spending and hurts those who have the least discretionary spending including the unemployed , the disabled , retired persons and young families with large mortgages.
Claw back our lost economic value added !
The pace of growth over the previous 25 years cannot be sustained so we must look to maintaining our standard of living by retrieving some of the “ Economic Value added ”which the Global Corporations have pinched and are squirreling away in tax havens.
Corporations that have been mentioned in this regard are large overseas listed companies such as APPLE , MICROSOFT , IKEA and many smaller Global Corporations such as H and M , FRENCH CONNECTION , ALDI SUPERMARKETS but let these names not be a scapegoat for the many Australian businesses such as the BANKS , TELSTRA and others who are spreading their global tentacles and rightly so as Australia must do business on a Global basis but they also must pay their fair share of taxes and * Gross Revenue Tax will ensure they do.
Telstra is establishing its own call centre in the Philipines
NO Payroll Revenue tax rebate for them and no avoidance of Australian Tax !
This corporate behaviour is exactly why the revenue tax is needed RIGHT NOW !
We have all the tools so what are we waiting for … ?
Company tax stopped working 25 years ago.
Company tax is applied to the profit of businesses that with a bit of creative accounting may manipulate the bottom line and reduce taxation within the law.
At the time of introduction of the GST which increased taxation little regard was given to capturing the decrease in company taxation due to the Globalisation of Corporations and their ability to shift funds offshore.
It is common knowledge that global businesses operating in Australia are directing huge amounts of funds to offshore tax havens. The legal structure of these businesses varies and no doubt many are designed to minimise the bottom line net profit and resulting taxation paid to the Australian Government.
Before globalisation the sale and sourcing of products and materials was within Australia which reduced the opportunity to transfer funds overseas by inflating the cost of production or services. That has changed and it is quite easy for a Global Corporation to inflate the cost of materials/services purchased from an associated business overseas and thereby transfer funds/profits to that associate to avoid Australian Taxation.
The tax loss to the Australian Government is huge !
The good news is it can be stopped and we have the tools to do it.
THE BAS STATEMENT
The common denominator of all businesses in Australia is the requirement to have a registered Australian Business Number and lodge a Business Activity Statement. The statement includes details of sales revenue , GST ,gross payroll and PAYG tax deducted .
Gross Revenue Tax
Company Tax needs to be replaced with a Gross RevenueTax applied to the top end not to the bottom line profit and that immediately negates the impact on tax revenue by manipulating the profit and also reduces the incentive to transfer funds out of Australia .
Gross Revenue Tax will capture all registered businesses regardless of their legal structure and will be applied to the gross turnover of sole traders to International Corporations.
Applying Gross Revenue Tax :One tax rate does not fit all
Applying Gross Revenue Tax relative to the information submitted in the BAS statement provides an opportunity for the ATO to apply varying rates of taxation dependent upon the nature of the business and as such gives the Government another lever to adjust the economy rather than interest rate adjustments.
Gross revenue tax based on labour to turnover ratio.. more labour less tax
A manufacturing business relying heavily on the employment of Australian labour which adds “real economic value” to the economy may receive a rebate based on the gross PAYG payroll submitted in the BAS statement . The rate of tax and rebates for varying businesses relative to the proportion of Australian labour will be assessed by the ATO.
For example Gross Revenue tax may be applied at the rate of 5% to a farmer with the ability to also claim favourable rebates relative to payroll as compared to the major banks where the tax rate may be set at 35% or a manufacturer set at 20%
The present Company Tax provides no flexibility in rate or application and the Government cannot estimate the total anticipated gross tax revenue subject to fluctuations in the economy and manipulation of the bottom line profits.
A Revenue tax will provide a degree of certainty.
Business will be certain of the amount of Revenue Taxation it will pay and will be able to budget accordingly knowing that Australian and Global competitors will be paying the same rate. That is levelling the playing field : competition will keep prices under control .The Government will have more accurate assessments of forward incomes and the levers to adjust the economy .
Audit of returns
Analysis of data provided by like businesses will make it easier to track those that are not playing the game and in particular it will not be difficult to establishcorrectness of gross revenue figures submitted with comparison of funds bankedleaving little room for manipulation of turnover.This will close the door to international companies manipulating profits to avoid tax and remove the incentive to shift profits to tax havens.
To sum up .
Flexibility in application is designed to assist businesses having a larger Australian labour content at one end of the scale and the ability to reduce rates for primary producers and small businesses.
The implementation of such a tax would be quick , efficient and easily adjusted to suit changes in the economy.
As a citizen I do not have the access to data required to further assess the application of Revenue Tax to varying industries or estimate the total tax revenue as compared to current company taxation. It is my view however that the increased taxation revenue would be so significant that Government services would be able to be sustained and improved particularly in Health and Welfare
The implementation of such a system of taxation provides continuing/ongoing opportunity for the Government to make future effective adjustments to the economy efficiently and timely. The majority of BAS statements are lodged quarterly. That effectively provides the Government up to the minute data as compared to Company Tax returns lodged Annually and often 9 months after the end of the financial year.
Notes for thought.
Australian citizens must accept the statement :When economic activity will not sustain Government services those services have to become more cost efficient or be reduced .Alternatively economic activity must be stimulated or the taxpayer must be prepared to pay a little extra tax.
If as the States are calling for the GST is increased it will hit those least able to afford it and in particular young families who also suffer with the use of interest rates to dampen the economy.
Businesses will have to account for the proposed Gross Revenue Tax in their pricing but an importer of Cane furniture may for example be faced with a 40% revenue tax as compared to a milk farmer who with payroll rebates could be in line for a refund.
The outcome is that with the introduction of a Gross Revenue Tax your cane chair will cost more and your litre of milk may well reduce in price. And guess what … if the retailer of the cane furniture happened to be a major overseas business shifting funds offshore to avoid tax that retailer would now be contributing Revenue Tax to help maintain Government services.
The Reserve Bank is at its wits end as the adjustment of interest rates is not creating the desired effect upon the economy.
GROSS REVENUE TAX
is flexible in its application , will stop the shifting of profits to avoid tax and be fair.
THE BOTTOM LINE
Are you prepared to pay a little extra for your cane chair ?