What about a transaction tax?

I get this question quite a lot and I know there’s a lot of videos out there about how a simple transaction tax with a tiny percentage of every transaction being taken by the government in tax would raise enough revenue that we could abolish the income tax, abolish the GST, and fund everything from just a relatively modest tax on every single transaction. And it sounds great. And other people make very convincing videos about it, but actually it won’t end up working in the way that you think it will. And in the end, there is actually a really good reason why we don’t have a transaction tax.

However, if we want to massively simplify our tax system and improve the incentives or the distortions to the market which all taxes create, there is something very similar to a transaction tax that has a few very important differences which could actually work. And yes, I know anytime a libertarian talks about a better way to do taxation, someone in the comments invariably goes, “Oh, that’s not very libertarian of you.” And you’re right. It’s not. I would love to abolish the state entirely and all taxes along with it, but people aren’t ready for that. Most people don’t understand how we would be able to pay for roads and for hospitals and for defense and for everything else because quite frankly, they can’t imagine a life without slavery yet. So, let’s work within the parameters of what we’ve got and see if there’s a better way to do taxation than the absolute mess that we have right now.

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. I am 100% viewer supported and supporting me is voluntary unlike the government who make their taxes mandatory. So if you’d like me to keep creating Australian focused content like this, answering your questions and helping you to make sense of the world, then please buy me a coffee via the button at topherfield.net and check out my books, DVDs, and merch from goodpeoplebreaklaws.com.

Okay, first let’s take a moment to understand just how complex and cumbersome our tax system is so that we can start to grasp just how much better our lives could be if we could just have a better tax system.

Even if the ultimate tax take were the same but the system was simplified that would still yield some fantastic benefits because in Australia there’s over 100 different taxes and excises in place but most of the money is raised by the top 10 taxes which is income tax. That’s what you pay out of your paycheck every week and that’s what keeps your HR department busy and requires you to hand in annual tax returns and keep track of nonsense like laundry and meal allowances and all of that stuff so that you don’t end up paying too much tax.

Then there’s the corporate tax. Now that’s essentially an income tax, but it’s on money that remains inside of a business instead of being dispersed to an individual. Now, it gets taxed at its own company tax rate. And if the money has already been taxed inside of a company first and then it gets dispersed to an individual, it gets taxed at a different rate. But people get a tax credit for the value of the taxes already paid under the corporate tax so that they don’t pay tax twice when their personal income tax is later calculated. It’s a thing called a franking credit. And already we can see that things are starting to get a little bit complicated. And we’ve only talked about the first two taxes.

The third biggest tax in terms of the revenue the tax take is the GST. And this is where things get really really complicated. Now the promise with the GST was that by introducing it, it would lead to the abolishing of other taxes like the land and payroll taxes, but that was a lie because those taxes still exist and they are in fact further down in this same top 10 list. The GST is a particularly messy tax because of the amount of paperwork and reporting that it creates. And what I’m about to explain to you about how the GST works, well, this is actually really important because it’s going to help us to understand why a transaction tax won’t work in the way that you think it will. But also, what I’m about to tell you is key to understanding the suggestions that I will be making at the end of this video and why I believe that’s a better option.

Okay. The GST is collected by businesses and handed to the federal government as a 10% tax on top of the price of basically everything.

There’s some exceptions, but they’re small enough and few enough that I’m going to ignore them for our purposes. Pretty much every good or service that is provided in Australia is subject to the GST. But here’s the thing. If you were to simply add 10% to the price of everything on every single step of the way through the supply chain, that would not increase prices by 10%. That would drive up prices by hundreds of percent. Now, this is really, really important to understand for our conversation later on about the transaction tax. So, stick with me.

The GST is what’s called a value added tax because it’s designed to be a tax only on the extra value, the increase in value that you and your business add to the product or service. It’s not supposed to be a tax on the entire value of the product at every single step of the way as it changes hands through the supply chain. So, let’s think this through. If we added 10% to the entire value of a product or service every single step, every single time it changes hands all the way until it reaches the consumer and the consumer buys the product in the end. Well, the problem with that is that by the time the consumer is buying the product, it’s been through the hands of five or 10 or 50 different businesses in the supply chain, which means that that 10% tax would by then have added up on top of the entire value to be, you know, 5 or 10 or 50 times 10% added up to hundreds of% of tax, not 10%.

If I buy this hairbrush and it was made 100% in Australia, so every part of the supply chain adds another 10% on top. Well, you get the manufacturers of all the different raw materials who have to add their 10% which increases by 10% the cost of the materials to the manufacturer of the actual brush who then adds another 10% on top of that which adds 10% to the cost to the wholesaler who’s then going to package it up and brand it so it looks pretty on the shelf. Then they have to add their 10%. Then it goes to the regional distributors who add their 10% then it goes on the shelf where the store adds 10%. Now we’ve added 10% six times which if you factor in compounding would mean something like 70–75% of the final purchase price will have been added on to what the price would have been—75% from what was supposed to be a 10% tax because it got added multiple times every step of the supply chain.

So to avoid that and to ensure that the GST is only a 10% tax on the finished value, they use something called an input tax credit. Now this basically means that each business along the supply chain can claim a credit for the GST that they paid to their own suppliers. So they collect GST at the current value when they sell that product or good or service and then they can claim back as a credit 10% of the value of the GST that they paid for all of the supplies and inputs into their business. So actually they’re only liable to pay the GST on the value that they added—the difference between the input value and the output value.

Okay, that is why the GST involves all this ridiculously complex reporting including these regular business activity statements and stuff because well it’s this crazy money go round where you’re paying out GST, receiving GST and reporting on GST so that you can remit the difference to the government and small business owners all over Australia are spending hours every month just making sure that all the paperwork is up to snuff and those are just the top three taxes. And already you can see that it’s pretty damn complicated and wasteful.

There’s also the excise on fuel and tobacco and alcohol. There’s a payroll tax where employers get punished for providing jobs for people. Go figure. There’s property taxes including land taxes and stamp duties. Then there’s the Medicare levy, the capital gains tax, which is basically trying to apply the income tax to income that comes from increasing asset values like a house that goes up in value or shares that go up in value. Then there’s the fringe benefits tax, which is a tax that tries to stop people from benefiting from the difference between the corporate income tax and the personal income tax rates. Yeah, I told you it was complicated, didn’t I?

Then there is the superannuation contributions tax which punishes people for saving for their own retirement which is exactly what the government said they wanted people to do.

But now they’re punishing people and they’re about to punish them even more with this unrealized gains superannuation tax that’s coming. And the list goes on. You get the idea. It’s a mess. And every single one of these taxes comes with its own complications, its own reporting requirements, its own enforcement issues, its own distortions in the market. And in fact, some of these taxes exist just to try and wallpaper over the cracks that have been created by the distortions that were created by the other taxes. Like the way the corporate tax creates a franking credit for the income tax, the fringe benefits tax taxing the difference and the GST having to give credits for itself. The whole thing’s a mess.

So, I completely understand why people find something like a transaction tax very appealing. At face value, it’s simple. It’s fair. It taxes everyone equally, whether the transaction is for business or for private purposes. And it can be calibrated just right so that it could in theory raise a similar amount of revenue compared to what the current taxes are raising but without all of the complications because in the end it’s just going to be the banks that have to ensure that they are compliant and the remittance of all those tax revenues it’s all a bank problem. We as consumers and businesses well we don’t have to do a thing. Perfect.

Except for one gaping flaw. A transaction tax will add up just like the example I gave with the GST earlier. And even if the actual percentage value is really low, let’s say it’s 1% or a half percent transaction tax, if that adds up in transaction after transaction, as something is manufactured and transported and distributed and retailed here in Australia, it is going to have the effect of making anything that is made in Australia much more expensive than anything that is imported.

Imagine an Australian-built car with all the transactions involved in the mining, refining, transporting, manufacturing, fabricating, assembly, painting, packaging, marketing, selling. If all those little 1% margins are being added every single step as this car moves through the supply chain, then in the end, an Australian-built car will easily have, let’s say, 50% added to its price compared to an imported car which has only gone through the hands of an importer, a distributor, and a car yard in Australia for a combined total of 3% taxes.

See, the problem with the transaction tax is that even if the tax itself appears to be really small, it adds up over the length of the supply chain. And the more of that supply chain is in Australia, the more you are punished and the more uncompetitive the price of a finished product made in Australia becomes.

So that’s the disadvantage of a transaction tax. But there are a lot of advantages to it as well. I’ll certainly give you that. And a radical simplification of our tax system, bringing it down to a simple single tax that is administrated by banks rather than with mountains of paperwork for every single business owner. Well, that would be a great improvement over what we have now.

So, let me make a suggestion. And again, I’m a libertarian. I don’t want there to be any taxes, but we live in the real world.

And a less bad tax, a less bad tax system than what we have right now would still be a good thing. So hear me out. A transaction tax, but it only applies to money that is leaving Australia. So if the money is moving from one account to another account in Australia, there’s no tax at all. Nothing. But if the money is moving from an account located in Australia to an account located outside of Australia, then this tax will apply.

Now you may ask, how big would that tax need to be? What would the percentage have to be? And the honest answer is that I don’t know because I haven’t yet been able to find the data that would tell me how much money is moved from within Australia to outside of Australia each year in total. But I will come back to that question. How big does this tax need to be? Will this tax really work? I’m going to come back to that right at the very end of the video. But first, I want to talk through the logic of it.

It is effectively a blanket tariff on all imports. And I don’t like trade tariffs. I’ve made that very clear in discussing the tariffs that Donald Trump has been imposing. But when you think about it, the income tax and things like the GST are effectively trade tariffs on you and I doing business with each other and our next-door neighbors. So if we could eliminate those trade barriers, those tariffs that are making it more expensive for us to do business with each other inside Australia and we could replace those with a de facto import tariff into Australia, then I still think that that would be an improvement over what we already have. Even though yes, absolutely 100% I am opposed to tariffs in the same way that I’m opposed to all taxes. And yet here we are.

But where I think this concept is particularly good is that it will cause a lot of money that is currently leaving Australia untaxed, no taxes applied at all, to become taxable. Which means there’s a lot of money that’s currently taxed in Australia, which will no longer have to be. And a lot of that money that’s going to become taxable, it’s leaving Australia, it’s money that relates to those dreaded and evil multinationals. Now, I don’t actually think that multinationals are inherently evil. Some of them do do some pretty bad stuff. But actually overall, I’m really glad that we have multinationals operating in Australia. But right now, it is true that many multinationals are gaming the tax system to shuffle their profits out of Australia without first paying any tax at all and moving that money into another country where their tax rates are lower. So they’re shuffling their taxable income, their profit out of high-tax jurisdictions like Australia into low-tax jurisdictions like for example Ireland or the UAE or others. And who can blame them?

So it’s not that they don’t pay any tax anywhere. It’s that they don’t pay tax here in Australia. Now how do they do that? What’s the mechanism by which they can legally shift their profits? Well, there’s lots of complicated ways that they do it, but I’m going to give you just one relatively simple example. Now, this particular example is kind of mostly outdated now because it has been cracked down on and companies have pivoted to using other schemes, but the basic idea of this still applies and it’s easy to understand as an example of the kinds of schemes that are used by multinationals and by wealthy people as well to shuffle their profits to low-tax jurisdictions.

Okay, these multinationals will find reasons any old reason why the parent company which is set up over there in some tax-friendly place needs to invoice the Australian company for something. This is often for things like intellectual property licensing or similar, like a fee to use the company name and logo ’cause the company name and logo are owned by the parent entity over there in the tax haven. And that fee, that licensing fee, could be millions or even hundreds of millions of dollars per year. And all they’re doing in reality is creating an expense on paper for the local branch of the company so that they have to pay that bill. They send that money overseas tax-free because this isn’t profit. These guys are paying a bill, and that income becomes income for the parent company over there in the low-tax jurisdiction, and it’s therefore taxed at a much lower rate than what it would have been if they had kept that as profit here in Australia.

Now, like I said, that example is actually a little bit outdated and simplified, but modernized and more sophisticated versions of that are what companies are still doing to this day because it saves them a fortune in taxes. I don’t blame them. But this outbound transaction tax has two key benefits. Firstly, it means that all outbound money is taxed regardless of the purpose for which it’s being sent overseas. Yes, the tax rate would be relatively low as a percentage, but it can be relatively low as a percentage because it’s capturing every outbound transaction, even the ones that used to be tax-free. Secondly, and in my opinion, actually more importantly, Australia becomes the tax haven. If there’s no corporate tax and there’s no income tax, then why wouldn’t these multinationals bring their headquarters to Australia? And if they leave their headquarters where they are now, well, we benefit because what used to be tax-free money for them is now being taxed as it leaves Australia. All good. And if they shift their headquarters here, then we benefit as well because now their money is staying in Australia, creating investment and opportunities here.

The incentives of such an outbound transaction tax are mostly much better than the incentives that we have right now under the current system. It will create a small incentive to buy locally rather than importing. It will create a small incentive to keep money in Australia instead of sending it overseas. But actually, more importantly, getting rid of income tax and corporate taxes and GST and the list goes on will create a huge incentive for Australians to work and earn for ourselves because all of a sudden we will actually get to keep everything that we earn. Plus, we’ll be able to eliminate a huge amount of unproductive work that is currently consuming all of us with the need to be constantly reporting and providing paperwork for the Australian Taxation Office.

Whereas under this outbound tax system, all the compliance and remittance is on the banks themselves and is relatively tiny compared to what’s involved now. All of that though the payments, etc. can all be automated. Every time money moves from an Australian account to a non-Australian account, a percentage gets held back by the Australian bank and remitted to the ATO. Problem solved. There’d be no more personal or company taxes. No more business activity statements and GST calculations. No more of any of that nonsense. Which sounds really nice.

But we come to the pointy question. Will it work? Honestly, no. Not unless we also at the exact same time dramatically cut government spending, which is something we should do anyway. But an outbound transaction tax cannot provide enough revenue to support Australia’s current government spending. I don’t have the details. I haven’t been able to find the exact numbers, but just doing back-of-the-envelope calculations, I am very confident that such a tax could not single-handedly bring in as much revenue as what the Australian government is currently taking from us. But the change in the incentives and the resulting increased opportunity and economic activity and therefore the reduced need for government spending on things like welfare and education and healthcare, etc. because people will be wealthier. We will be able to pay for a lot of these things for ourselves. The amount of charity that’s required will be radically reduced down to a fraction of what it is today. And the combined effect of all of those things is what I believe can make this work.

Or alternatively, we just keep doing what we’re doing drowning in unsustainable debt, being crushed by complex and onerous taxes, and spending a fortune in time and money on all the compliance paperwork. Yeah.

To sum up, what we are doing today with taxes is stupid. A straight-up transaction tax won’t work and will create terrible incentives. But an outbound transaction tax also won’t work without a huge reduction in government spending. But because an outbound transaction tax creates better incentives, then such spending cuts could actually become possible. And if we get the people of Australia on board an idea like this, then it could actually work.

Now, 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. And in this case, to better understand some of the ways in which we should be actively trying to change the world. I am 100% viewer supported. So, please buy me a coffee via the button at topherfield.net. Check out my books, DVDs, and merch at goodpeoplereakbadlaws.com.

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