Beware Ken Henry’s Tax Reforms

“I have great confidence in the common sense of individuals and families around NSW and indeed Australia to work out what an appropriate level of debt for them is, given their circumstance.” - Nathan Rees, Premier, New South Wales

That’s nice of him. It’s a shame that he doesn’t have any confidence in the common sense of individuals to spend or save the money they earn. If he did there wouldn’t be any need for Federal and State governments to swipe half your gross income through various forms of taxation.

The government takes your money on demand, and then makes you fill out a multi-page form every year just for the privilege of getting some of it back. Of course there’s always the chance that after filling out the form you’ll end up having to give the government more money.

There’s nothing like being forced to dob yourself in eh?!

A report in yesterday’s The Age perfectly illustrated the modern view on taxation with the opening sentence of Ian Verrender’s column:

“FORGET women and scorn, hell hath no fury like a taxman bilked.”

In other words it’s suggesting the money that YOU go out and work a 40-hour week for is the Taxman’s money and woe-betide you if you don’t give him everything he deserves.

That’s the consequences of a so-called ‘progressive’ tax system. What they should mean by ‘progressive’ is that the pendulum is progressively shifting towards government and away from the individual.

How long will it be before the taxman just takes everything and gives you a monthly allowance? Treasury Secretary Ken Henry is working on a project to revamp the tax system. All the special interests groups are having their say.

One thing can be guaranteed, the tax burden for all Australians will increase.

Ken Henry was at the Melbourne Institute yesterday, and in today’s Australian Financial Review (AFR) it reports a speech given at the institute by Professor Peter Whiteford from the University of New South Wales.

The article claims that:

“Australia had the most progressive tax system in the Organisation of Economic Co-operation and Development, redistributing more tax from rich to poor than any other country.”

The problem with this claim is that it actually isn’t true.

When you think about it, the redistribution of wealth doesn’t go from rich to poor at all. It doesn’t even go from rich to middle class. And, amazingly enough, it doesn’t go from middle class to poor either.

In reality wealth is redistributed from rich, middle class and poor in one direction only. And that direction is always to the government.

The poor are merely used as a convenient foil by governments to argue for increased taxes and an increase in government. The middle classes are typically made to feel guilty for being more fortunate than others and are therefore told that their tax dollars are being put to good use in schools, hospitals, public transport, etc.

And the rich? Well, no-one need worry about them, they’ve got lots of money they should give almost half of it away to the taxman – it’s only fair!

The real fact is that no-one benefits from “progressive” taxation.

The rich are forced to forfeit almost half of their income, even if they set up fancy structures to lower the tax burden. In most cases people are rich because they have worked hard for it, or because they have invented, developed or marketed a product or service that people want or need.

They should be rewarded for that. And they are with high incomes. Yet they don’t get to receive the full benefit of that reward because the government grabs half of it before it even gets to their wallet.

The middle class are punished by “progressive” taxation because they too are faced with having to forfeit nearly half of their income. Once you add up income taxes, levies, surcharges, state taxes, local government taxes, and sales taxes, there is very little real disposable income left.

And then other government policies compound this by distorting the market to make the cost of living higher than it should be. No wonder so many middle class have to rely on “welfare” payments from the government.

And of course the biggest losers out of this whole fiasco are the poor. Government taxes and regulation provide the biggest hindrance to the poor.

Far from being beneficiaries of government welfare, they are the victims of it. Higher taxes and higher regulation make people poor by denying them the opportunity to be productive. Minimum wage legislation ensures those with low or no skills find it hard or impossible to get a job.

As for the quality of public services, you only have to look at the billions of dollars spent every year on welfare, health and education to wonder where all the money goes.

Is this really the best that can be done?

You see, a high tax burden just encourages waste. And there is nothing better at wasting money than a government. Public servants live in a closeted world. They don’t know the market rate when they spend money on products or services.

They have arbitrary budgets assigned to them and then spend as much as they want. Even when projects are sent out for tender, those responding know they can over quote as they are not trading with a for-profit organization.

The fallacious argument is that taxes are needed in order to pay for the public services we can all ‘enjoy.’

Naturally we don’t agree with that. Left to a free market, the quality of healthcare, education and public transport would be far superior and far cheaper.

There is absolutely no difference between how the market should work for providing healthcare than how the market works for buying cars, or buying clothes. It is the presence of government that causes prices within the healthcare industry to continually rise.

In a free market health and education providers would need to compete for your ‘custom.’ This, as in every other instance of market forces would drive the overall price of the service down.

The idea that the poor would be priced out of the market is incorrect. They would be priced into the market. If healthcare providers raised their prices too high a free market would make it easier for other businesses to price their service lower and therefore attract more ‘customers.’

Again, it is no different to how any other business works. You only have to look at products such as plasma televisions. Only a few years ago the cheapest one would set you back $10,000, yet today you can buy the equivalent standard for less than $1,000.

That is all down to competition. Newer entrants into the market can rely on existing technology and develop a cheaper product.

As far as we can see there is no reason why it shouldn’t work for public services. As always we’re prepared to be proven wrong.

But cutting taxes, having a completely free market and stopping the redistribution of wealth to the government is the best way to improve the standard of living and standard of services for everyone.

Kris Sayce
for Money Morning Australia