We need to stop asking the question, how stupid can Elbow be? Because it seems as though he’s taking that as a challenge.

Regular viewers will remember the talk fest that Elbow recently hosted in Canberra, laughably called an economic forum round. It was in reality just a tax fest with the government inviting their handpicked groups to come and tell them how to increase taxes and further destroy productivity.

Well, brace yourself because as of this week, it appears that Prime Minister Anthony Albanese is now laying the groundwork to create public acceptance of a thing called a cash flow tax, which was brought to the forum by none other than the government’s own productivity commission. But don’t be fooled because this reform is not a good idea for productivity at all. And we need to talk about it because unlike that empty bedroom tax which was also put forward by a think tank and I said correctly at the time that it was just a thought bubble from a think tank and was not going to be implemented by government but was rather a distraction to help us accept whatever other ideas would be implemented.

This idea, this cash flow tax, well that that is the other idea and it has all the hallmarks of something that this government will most definitely try to actually implement and it will be disastrous. My name is Topher Field. This is the Topher project and I help busy people like you to keep up with the world as it changes around you. I am 100% viewer supported. So if you appreciate what I do with the Topher project then please support my work by buying me a coffee via the button at topherfield.net and check out my books, DVDs, and merch at goodpeoplebreakbadlaws.com.

It must be said that most of what was put forward at the prime minister’s economic summit was pure thought bubble and we shouldn’t waste time worrying about any of that. The exception is when the prime minister himself then brings it up at an address to the business council of Australia. Specifically, what the prime minister is talking about is tax reform. And yeah, we do need tax reform. Australia is one of the highest taxed countries in the world in real terms, including, by the way, the highest company taxes. Per the ABC, only Colombia has a higher effective company tax rate than Australia among OECD nations. And Australia’s 28.5% rate is much higher than the OECD average of 21.9%.

So, don’t believe anyone who says that businesses don’t pay enough tax in Australia.

But it’s more than just the tax rates that are a problem here. We also have over 100 different tax types. Now, most of those taxes raise relatively little money and aren’t actually worth the trouble they cause to implement them because every single tax comes with its own paperwork burden and compliance costs and bureaucratic overhead that in the case of these smaller taxes often outweighs the revenue raised. So, we are overt taxed and our tax system is over complicated. So, in principle, tax reform, hell yeah, let’s go. But the devil’s in the detail.

And this specific tax reform being discussed by our prime minister isn’t to eliminate any of our myriad of mostly useless taxes. Nor is it to substantially reduce overall tax rates below their current absurdly high levels. Don’t be silly. He’s not going to do that. What he’s planning to do. His idea of tax reform is to introduce a new tax, a world first cash flow tax introduced in exchange for a modest reduction in the corporate tax rate and only on the condition that the combined taxes raised are at least as high, if not even more, money for the government.

Or as the ABC reported it, Treasurer Jim Chalmers said any changes would have to be affordable in line with the government’s request at that summit for reform proposals to have a neutral or better impact on the budget. Now, that’s not better for you and me. That’s better for them, which is to say tax reform only on the condition that taxes are even higher. So, our prime minister’s idea of tax reform is to add a new tax on top of the existing ones on the condition that it raises more money for the government.

Like I said, we have to stop asking how stupid can he be because it turns out that the answer is a lot more stupid than we thought was possible. But let’s dive into the details here because a cash flow tax isn’t something that anyone has done anywhere else in the world and with good reason. Firstly, we have to talk about what is cash flow. Well, a cash flow statement is one of the three key financial statements used in business. And I’ll spare you having to get an MBA to understand it. It simply tracks all the money in minus all the money out, no matter what the reason.

So, money in for a business would include product sales, but also loans and finance and also capital raisings and share divestments and asset sales. Money out would include the cost of goods sold, suppliers and salaries, lease costs on real estate, plant and equipment, investments into new assets, and any other reason for money to be spent. So, it’s literally all money in no matter the reason, minus all money out, no matter the reason. And you get taxed 5% on the difference.

Why? What’s so good about a cash flow tax as opposed to our existing profits taxes? Well, the Productivity Commission of course wants to paint it in the best possible light. It is their idea after all. And one of the key selling points is that it is a de facto instant asset write off on all company investments. Let me explain.

If you buy a new forklift for your company, let’s say, and it costs, I don’t know, $25,000, and you expect it to last for at least 5 years. Now, to be clear, I’m not an accountant. This isn’t financial advice. This is just an example of how the numbers get crunched. So, in this scenario, you decide to depreciate the cost of the forklift, $25,000, over the 5-year life expectancy. Now, effectively, what happens is you pay for the forklift up front. Let’s assume you buy it in cash. $25,000 leaves your company bank account in year 1, paying for the forklift in full, but the forklift is worth $25,000 in year 1. So you then depreciate that forklift or on paper you say that it loses value by let’s say $5,000 per year down to zero at the end of year five.

So that scenario from a tax perspective says that forklift has cost you $5,000 a year for 5 years. That’s how much you get to depreciate or how much income you don’t have to pay tax on in each of those years because that cash is actually just offsetting the lost value of that asset, the forklift, as it heads towards the end of its service life. But from a cash point of view, it cost you $25,000 in year 1 and then cost you nothing in the following four years.

The end result at the end of year 5 is the same, but the timing of the tax deduction is different and that matters especially for smaller businesses which don’t have the financing or leasing options that larger businesses will have. Nor do they have the finance departments to play with the numbers. So they are more likely to have to pay cash upfront for every piece of equipment that they invest in.

Because in that first scenario where you’re depreciating it over 5 years, you as the business owner would still have to pay company profits tax on $20,000 in that first year. Because even though you paid out all $25,000 in that first year, on paper, you’ve only lost $5,000, which is the amount that the forklift has depreciated by in that year. So, that’s the only deduction that you get, which means on paper, you’re still showing a $20,000 profit because that’s what the forklift is still worth. What that means in practical terms is that you have to pay tax on that $20,000.

So, you owe just under $7,000 in taxes that you have to pay, but it’s tax on $20,000 that you don’t have because it’s tied up in the forklift. Now, again, if you’re a big business, this isn’t such a big deal. They can play with their numbers all day long till they get their desired result. But it’s very common for small businesses and micro businesses to invest in a new piece of equipment and then discover that they owe taxes on profit that they don’t have in the bank.

It’s tied up in a forklift or in a new computer or in some other asset investment that they’ve made back into their business, but on paper it still counts as profit. So, the Productivity Commission advertised this new cash flow tax as being better because it solves this problem. It allows them to depreciate the entire asset the minute they pay for it because they’re being taxed on cash flow. It encourages investment according to them. Or in other words, it avoids taxing businesses on profits that they don’t still have in liquid form.

The thing is, we already have a way of fixing that problem, and it is much simpler than having to introduce a whole new type of tax.

It is this thing I’ve mentioned called the instant asset write-off. And again, I’m not trying to give you an MBA or turn you into a chartered accountant here, but when it comes to tax reform, the details matter. And the fact is that the instant asset write-off already does broadly speaking the same job that this cash flow tax claims to do at least in the context of smaller businesses because it allows businesses to instantly depreciate the full value of an asset that they buy if it’s below a specified instant asset write-off threshold. And often that threshold is about $30,000.

So, in this example, that $25,000 forklift can already be fully written off, fully depreciated from a tax perspective in year 1 if a business wants to do it that way, which already avoids this problem of taxing people on profits that are tied up in new assets. So, it looks like this new cash flow tax, this experimental tax that doesn’t exist anywhere else in the world, we would be the guinea pig. It looks like this is a solution in search of a problem and the problem that it’s claiming to solve is already largely solved under the current system or could be solved with some simple reforms to the current system.

Now I am simplifying of course but in principle what I’m saying is correct. We don’t need a new tax to fix that problem with our current tax system and adding a new tax without removing any of the old taxes. They’re just talking about lowering the rate of the existing taxes and then adding a whole new tax on top. Well, that means that whatever the problems are with the old system, they’ll remain. So, all that a new type of tax will do is introduce new problems without removing any of the old problems.

It’s a backwards step, but just how regressive it is, is hidden in the language of this ABC report. Let me read you a few paragraphs and see if you can spot the misdirection. Leading up to the summit, the Productivity Commission proposed the taxes on corporate profits could be slashed and instead augmented with a new net cash flow tax. Its proposal was that company tax on businesses with revenue below a billion dollars, the vast majority could be slashed from 25 or 30% to a flat 20% rate. In exchange, a 5% tax would be applied to a company’s net cash flow with companies able to immediately deduct capital costs, encouraging more investment.

Did you catch it? Obviously, in the middle of those paragraphs is the issue of an immediate tax deduction for capital costs. We’ve already talked about that, the instant asset write-off. But that last line, encouraging more investment, it’s technically not a lie, but it is designed to get you to focus only on one side of this equation, the positive side, and to not look at the negative side.

Like a salesman wanting you to feel how nice that new handbag feels, instead of looking at the price tag and weighing up whether it’s really worth it. The unspoken cost here is that companies will be taxed for remaining liquid, for holding cash reserves, for capital raising things like selling shares to improve liquidity or doing anything really to prepare for a rainy day. Encouraging more investment is just a euphemism for punishing them for staying liquid. That’s the price tag on the other side of this equation.

What the productivity commission is saying here is that businesses will be held prisoner by the government’s tax policies to choose either between boosting GDP by increasing the velocity of their money or in other words spending their money as fast as they can or boosting tax revenue by paying taxes for the sin of holding liquid cash. This is just another attempt by government and their advisers to gain the GDP, that headline economic figure, to make themselves look good on paper, irrespective of whether that’s what’s best for businesses.

Back in early August, when this idea was first put forward by the Productivity Commission, businesses were quick to warn against it, and with good reason.

In a joint response, business associations, including the Business Council of Australia, warned that the Productivity Commission’s proposal was an experimental change that had not been tried anywhere else in the world. This tax increase risks putting more pressure on all Australians still struggling under cost of living pressures, the business groups said at the time.

Whilst some businesses may benefit under this proposal, it risks all Australian consumers and businesses paying more for the things they buy every day groceries, fuel, and other daily essentials. They said the cash flow tax would punish some of Australia’s most productive companies and industries. And that last sentence is correct. It’s the companies that can generate surplus cash that will get stung with this cash flow tax. And you might argue that’s the point of taxes. The more money you make, the more taxes you pay. But that’s already true under our existing corporate tax. We don’t need an entirely new tax requiring a new and different set of paperwork to accomplish that outcome.

So this so-called tax reform will achieve three things. Firstly, it will make our already insanely complex tax system even more complex. Now, this won’t really hurt massive businesses because they already have those armies of accountants and lawyers and they already complete cash flow statements as a regular part of their business operations. So for them, no big change. The people that it will hurt as usual are these smaller operators who are already sitting up at night burning the midnight oil, filling out their BAS, or reading the latest updates to the tax code to ensure that they’re compliant with the latest brain fart out of the Australian Taxation Office.

Second, it will punish businesses for keeping liquidity in reserve or for capital raising or for doing things that in any sane world would be considered prudent financial business management. Now, prudence will attract a tax bill. And third, and this is the whole point in my opinion, it will incentivize businesses to spend their money faster than ever before, divesting themselves of liquid cash, increasing the velocity of money, at least temporarily, until all the businesses have run out of liquidity and giving a temporary sugar hit to the GDP numbers. The government will then be able to point to that GDP uptick as proof that the reform has been good for the economy. Meanwhile, businesses will be cashless, stripped of their reserves and their resilience to any future economic downturns, and Australia will be one step closer to a proper recession.

This cash flow tax proposal is untested and unproven anywhere in the world.

It is unnecessary because the upside that it creates instant asset write-off can already be achieved just with some simple reforms to the existing tax system. And the extra tax, the additional tax on top of the hundred or so that we already have, just creates yet another distortion to the Australian economy on top of all of the others, leaving businesses on a razor’s edge should the economy suffer a downturn for any reason. This is what passes for tax reform in this country. This is what Prime Minister Anthony Albanese and Treasurer Jim Chalmers consider to be a good idea. How stupid can they be?

Elections have consequences, and I’m no fan of the Liberals at all, and I’m especially not a fan of Sussan Ley. But something has to give. We’re already in a per capita recession. Real inflation is double or more of the official CPI figure in my opinion and more Australians than ever before are going hungry or homeless or having to live smaller and smaller lives just to make ends meet. The government knows this and yet this is their grand plan to fix our economy. You cannot tax your way into prosperity or spend your way out of poverty. The real solution to Australia’s tax wos lies in slashing the size and spending of government, which will then allow us to simplify our tax system by eliminating most of the taxes and reducing the rate of the remaining taxes. And at that point, we will see the cost of living crisis finally end, our economy finally start growing in real per capital terms once again.

The solution? Well, it’s simple. We know what we need to do and yet we keep voting for and rewarding politicians who refuse to do it. So perhaps the real question isn’t how stupid can they be, but how stupid can we be? And how much longer do we have to suffer before we bring our own stupidity to an end?

My name’s Topher Field. This is the Topher project and I help busy people like you to make sense of the nonsense that surrounds us. You can help me to keep the Topher project going by buying me a coffee via the button at topherfield.net. And if you like my videos, then you will love my books. And you’ll find them along with my DVDs and t-shirts and hoodies at goodpeoplebreakbadlaws.com.

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