Cascading sales tax – again

Must be a very slow news day – Pauline Hanson is in the media describing what she would do as PM (for a start she is in the wrong house for that).

The One Nation leader said under her vision for a “better Australia,” she would, she was Prime Minister, also cut the number of politicians, limit migration, introduce an Australian identity card, and axe the GST and consider a flat two per cent tax rate.

Whatever.

This particular idea keeps raising its head:

… axe the GST and consider a flat two per cent tax rate.

Like a return to the gold standard and the evils of fractional reserve banking, so bad ideas just never die.

What Mrs Hanson has in mind is a cascading sales tax. The government would tax every transaction at two per cent. Now that may sound like an improvement on taxing every transaction at 10 per cent. But the fist thing to note is that the government does not tax every transaction at ten per cent – it taxes the value add of every transaction at 10 per cent with the consumer paying 10 per cent overall at the end. With a cascading tax very quickly we would be paying tax on tax.

We have covered the problems of a cascading tax before, but it well worth revisiting that coverage.

~~++~~

I often get asked about various proposals for tax reform – defined here as proposals for new and or different forms of taxation. The yardstick that I always apply is Adam Smith’s four criteria of a good tax:

  1. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
  2. The tax which each individual is bound to pay ought to be certain, and not arbitrary.
  3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.
  4. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.

Recently I was asked about the idea of a cascading sales tax. By this the person meant a tax on each and every transaction in the economy. The basic idea is that a x% tax on every transaction would raise a lot of money very quickly and easily and if x is low enough (say 2%) the excess burden of taxation would be very low. This idea isn’t new – in Adam Smith’s day the Spanish had such a tax, called the alcavala.

This is how Adam Smith described that tax:

It was at first a tax of ten per cent, afterwards of fourteen per cent, and is at present of only six per cent upon the sale of every sort of property whether movable or immovable, and it is repeated every time the property is sold.1 The levying of this tax requires a multitude of revenue officers sufficient to guard the transportation of goods, not only from one province to another, but from one shop to another. It subjects not only the dealers in some sorts of goods, but those in all sorts, every farmer, every manufacturer, every merchant and shopkeeper, to the continual visits and examination of the tax-gatherers. Through the greater part of a country in which a tax of this kind is established nothing can be produced for distant sale. The produce of every part of the country must be proportioned to the consumption of the neighbourhood. It is to the alcavala, accordingly, that Ustaritz imputes the ruin of the manufactures of Spain. He might have imputed to it likewise the declension of agriculture, it being imposed not only upon manufactures, but upon the rude produce of the land.

I suspect it is fair to say he wasn’t a fan.

The criticism that Smith levies against the cascading sales tax is that it is arbitrary. While collecting a sales tax would have been a complex administrative task in those days the charge that a cascading sales tax is arbitrary remains the case today.

  1. The amount of tax paid on any good or service becomes a function of how long the production chain is. For any service with a short production chain the tax is lower, for goods with longer production chains the tax is higher. This is a violation of condition 2.
  2. Firms then have an incentive to either misrepresent the length of the production chain, or engage in pricing behaviour that minimises taxes. (See below for more detail). The tax becomes distortionary – a violation of condition 4.
  3. In practice the tax would manifest itself as a tax on turnover. Those firms with a lower profit margin would bear a higher burden than those with a higher profit margin. Tax considerations would drive many small businesses out of business. Again a violation of condition 4.

Okay – so what would happen? First tax avoidance schemes would include vertical integration and offshoring. Tax evasion would include mispricing and various kick-backs. The ATO would have to expand its transfer pricing division to include the domestic economy as well as the international economy. In short, the incentives to rort the tax would be massive compared to the value-added tax that we currently have.

Some US states have similar taxes and a Tax Foundation study is scathing.

In short, it’s not really a good idea.

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46 Responses to Cascading sales tax – again

  1. A H says:

    But returning to the gold standard and eliminating fractional reserve lending are good ideas :).

  2. Jeremy says:

    It would be nice if we didn’t have to pay tax on tax now.
    State Government levies on building permits are based on the contract price – including federal GST.
    The public pays 10% GST on the cost of building and then the state government charges 0.128 cents per dollar (0.00128%) on both the cost of the building work and on the GST.
    If the GST were to rise, so would the take of the Victorian Levy.
    This should be changed immediately.

  3. Zyconoclast says:

    If this was:
    1. literally the only Commonwealth tax
    2. and did not exceed more than 20% of GDP,
    it might be ok.

  4. Zyconoclast says:

    Or how about this.

    I think I have read that 90% of tax collected comes from 10 taxes.

    Just as a simplification method, adjust these 10 taxes to collect 100% of tax collected.

    Once this’s is done reducing taxation should be easier.

  5. Driftforge says:

    The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

    These seem to be poorly formed – basically wordy versions of ‘tax for the least squawking’.

    The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to the value the state provides to them; that is, in proportion to the additional benefit which they respectively derive from the protection of the state.

  6. RobK says:

    On the face of it a cascading tax seems inefficient, as it probably is. I’m not sure it is very simple to model. An item that changes ownership 5 times without changing value would get to 10.4% (@ the suggested2%tax) but many inputs are low value. It would effect how business is done, but every tax does. The case for change would need to be well laid out.

  7. Robber Baron says:

    I guess people have stopped taking PM Trumble seriously and are considering alternative potentially great leaders such as Pauline. I stopped listening to all politicians a long time ago because they are all full of shit.

  8. RobK says:

    It is fair to say the cascading tax is a disincentive to change in ownership and in that sense a disincentive to trade (and middlemen).

  9. Jannie says:

    If PH and team ever get any leverage over economic policy, the Australian economy will be in trouble. However its probably not worse that Labor will do, when they next get in. Who knows what the Libs will dream up, but it will be trouble.

    Looks like the economy is in trouble either or any way. But the PH way has the benefit of preventing the importation of a civil war, or at least whole classes of allies to fight for the Left.

  10. Philippa Martyr says:

    IS this what she meant, or was it a flat 2% income tax rate?

  11. Infidel Tiger says:

    A 2% income tax is still far too high but we could start there.

  12. RobK says:

    IS this what she meant, or was it a flat 2% income tax rate?”

    I’m not sure(don’t have subscription). In a past election I thought she suggested 2% on everything-bank transactions, shares, income…the works.

  13. Oh come on says:

    Still not ready for prime time after all these years (mind you, it seems none of them are).

    IIRC, wasn’t it One Nation’s “Easytax” that did critical damage to their economic credentials during the 2001 federal election campaign, when it was demonstrated that the tax did not raise nearly enough revenue to cover government expenditure? And after that epic fail on the national stage, the party’s disintegration continued at a quickened pace.

    So PHON is going with the same tax policy that proved electorally disastrous for them the last time they were supposed to be the Next Big Thing? Is this Groundhog Day or what? It’s all unfolding (and unravelling) in almost exactly the same way it did last time!

  14. mosomoso says:

    A political vacuum (aka liberally minded, charming and intelligent Turnbull) sucks in a lot of funny and desperate ideas, doesn’t it? Especially now that Turnbull himself has given up on his solar powered agile mini-cities etc and is just dozing when not spending.

    It will all be resolved by a Labor government. Soon there will be even more taxing and spending, but the corporate media – as with the Democrats warmongering in the US – will assure us it’s not happening, or, if it is happening, it’s okay.

    Labor just needs to find its millennial-friendly pin-up to ace the deal: some hottie from South Australia maybe, who dreams of inviting Elon Musk and Richard Branson to attend his/ her first gala explosion of a coal power station.

  15. RobK says:

    I looked on this website: http://www.onenation.com.au/policies/economics. But was only able to find general, motherhood statements.

  16. Zulu Kilo Die Onuitspeeklike says:

    IIRC, wasn’t it One Nation’s “Easytax” that did critical damage to their economic credentials during the 2001 federal election campaign, when it was demonstrated that the tax did not raise nearly enough revenue to cover government expenditure?

    I don’t have a reference, but to the best of my knowledge and belief, it scuttled their whole campaign.

  17. . says:

    IIRC, wasn’t it One Nation’s “Easytax” that did critical damage to their economic credentials during the 2001 federal election campaign, when it was demonstrated that the tax did not raise nearly enough revenue to cover government expenditure? And after that epic fail on the national stage, the party’s disintegration continued at a quickened pace.

    So what? You cut spending!

  18. RobK says:

    “IIRC, wasn’t it One Nation’s “Easytax” that did critical damage to their economic credentials during the 2001 federal election campaign, when it was demonstrated that the tax did not raise nearly enough revenue to cover government expenditure? “

    I think that maybe the case however I don’t believe she was given serious concideration and treated with much disdain and disrespect from quarters I thought had more ability to argue a point than the person.

  19. Oh come on says:

    Dot, we’re talking One Nation here, not “starve the beast” Reagan, ffs.

  20. Dr Faustus says:

    In short, it’s not really a good idea.

    Right up there with promising to raise “hundreds of billions annually” by somehow taxing overseas commodity/currency/insurance traders, and creating a new government-owned Peoples’ Bank.

  21. RobK says:

    In short, it’s not really a good idea.

    Right up there with promising “…..
    Quite a few of the ideas need a bit of work.

  22. Roger says:

    PHON is the suppository of wisdom.

    Hanson’s only political value is as a disruptor.

  23. Linden says:

    So what is the Ross Greenwood formula, tax free threshold up to around $45000, and after flat 15% on every $ earned no deductions across the board, said something it would wipe out the accountancy industry, which when one comes to think of it, that little ‘entity’ would fight tooth and nail to protect their ‘MASSIVE’ earnings!!

  24. Linden says:

    Well at least she is throwing up some ideas which will cause debate, something that neither LNP of Labor seem capable in any meaning full way these, it’s a power crab for them.

  25. . says:

    Ross Greenwood is good. His policy is even better than the LDP’s.

  26. Linden says:

    I caught the tailend of it listening to him on the radio a few months back, I think he is quite correct in saying any tax revolution that see the accountancy curtained would meet with strident resistance, can anybody imagine them saying oh we are happy to ride off into the sunset,

  27. Tim Neilson says:

    Just as a simplification method, adjust these 10 taxes to collect 100% of tax collected.

    Once this’s is done reducing taxation should be easier.

    You’re probably right in principle, but history tells us what would happen. When the GST was introduced, a lot of other taxes at State/Territory level were supposed to be abolished. Abolition was deferred. True, some of them have been ditched since, but in the interim State and Territory spending went up to match the dual revenue streams, and the additional spending never gets cut back. Hello Tasmania/SA style “Federalism”.

  28. Infidel Tiger says:

    Ross Grenwood is great. It should be the goal of every person in Australia to make sure 99% of lawyers and accountants are made redundant. The people in these industries are all scum and are parasites that have ruined our nation.

  29. JABL says:

    IIRC it was not the 2% tax per se that sank One Nation last time but rather the confident assertion when confronted with the likely shortfall in revenue that the government could just print money. This lead to a lot of comparisons with Whitlam and that was all she wrote.

  30. Zyconoclast says:

    Hanson’s i have been murdered video did not help.

  31. Habib says:

    The inly good tax is a repealed tax.

  32. Motelier says:

    Sorry, but I am on the phone.

    Some time ago the Doomlord had a session on economics where I replied that all pollies should do a course in economics.

    M’Lord,
    The prosecution rests.

  33. Dr Faustus says:

    The 2% tax, the endless money printing, the ‘by the time you see this I will be dead‘ video, and general policy unsophistication were certainly the outward manifestations of One Nation’s previous credibility pox. However, Ms Hanson’s major problem is that she attracts the most florid nutters and toxic main-chancers like a picnic attracts green ants.

    It doesn’t seem to have been a ‘learning experience’ for her; mildly observant Queenslanders notice that things seem to be following the exact same playbook this time round.

  34. Habib says:

    Tax on tax is endemic. GST for example is charged on landed cost of imports- value plus duty plus freight and insurance. Charging tax on a cost incurred offshore is probably unconstitutional, but the turds do it anyway. The worst part is we tolerate this thievery.

  35. Oh come on says:

    things seem to be following the exact same playbook this time round

    You noticed too?

    Yes, the coalition stinks. No, don’t vote for them. But don’t for a second think Hanson is Australia’s Trump. She’s nothing of the sort. A vote for her and her oh-so-familiar, hastily assembled ‘party’ IS a vote for the Thelma and Louise solution.

    I’m not voting to go over the cliff. No idea why anyone who hasn’t taken leave of their senses would.

  36. memoryvault says:

    the coalition stinks. No, don’t vote for them . . .

    So, just what voting strategy do you advise, OCO?

  37. Sydney Boy says:

    The other point is that GST is only a tax on new goods. There is no GST applied on selling second-hand goods. I buy a car from Toyota, and I pay an extra 10% of the value of that car on top to the government. I then sell the car to Sinc and no tax is payed. Under a 2% transaction model, both transactions would attract a 2% tax. The paperwork and administration and compliance would be problematic.

  38. Mark A says:

    Sydney Boy
    #2286312, posted on February 6, 2017 at 6:29 am
    The other point is that GST is only a tax on new goods. There is no GST applied on selling second-hand goods. I buy a car from Toyota, and I pay an extra 10% of the value of that car on top to the government. I then sell the car to Sinc and no tax is payed. Under a 2% transaction model, both transactions would attract a 2% tax. The paperwork and administration and compliance would be problematic.

    I think it’s not quite as simple, read this, and there are several other links, you are probably right in private transaction, they would be too hard to follow up by the ATO, but business transaction where GST is claimed are easy.

  39. sabena says:

    “Pauline Hanson is in the media describing what she would do as PM”.
    And Peter Fitzsimons is in the SMH saying it won’t happen:
    http://www.smh.com.au/comment/pauline-hanson-as-pm-in-three-years-heres-why-it-wont-happen-20170203-gu4zeg.html
    So Pauline is certainly in with a chance based on that.

  40. JohnA says:

    cut the number of politicians, limit migration,

    If the migration were limited to exporting the cut politicians (better whole rather than in pieces, though, Katisha), we might actually be better off.
    (NADT)

  41. JohnA says:

    Fractional reserve banking is bad and it could be eliminated carefully over ten years, within the existing structure of the banking system, but it would be a very courageous RBA that does it, so I doubt that it will happen.

    To do it, the RBA would need to progressively lift the reserve ratio (currently around 7%?) in steps of 1% per month towards 100% of free deposits (those available for customers to draw in the following month: all at call funds, overdraft limits, special deposits and TDs due to mature – that sort of definition).

    A courageous RBA could sell this to the banks as assisting them with their asset-liability matching task, which constitutes a big part of their basic risk management function (I am excluding the asset quality assessment systems here, which represent a separate headache).

    It could be done.

  42. Rather than criticise the 2% spending tax proposal, may I suggest Sinclair Davidson question hoary old shibboleths taught in Economics 101, and perhaps he could take the time to read and understand the 2% tax concept.
    Yes the 2% tax cascades, but on close analysis nowhere near as much as the cascading taxation buried in the dog’s breakfast of taxes under which we labour today.
    A model of the cost of producing and distributing a loaf of bread shows that approximately half of the final product is tax. e.g. the taxes on the labour component drive up the price of seed and fertiliser, and as each stage of the production process of growing the wheat, milling the flour, and selling to the final consumer where the bread disappears from the economic model but lives on in the lives of people thus nourished, those blinking taxes cascade. A recent independent study of the cost of housing exposed the tax surcharge on this vital industry as again about half.
    The GST/VAT model is an academic dream, but an administrative nightmare. It too cascades with cascading complexity.
    We have carried out detailed computer modelling of the 2% tax proposal, details summarised in Your Future in Your Hands but who takes the time to read these days?
    Get a degree in economics and you can sit back and criticise but please never stop learning. To gain my engineering degree, I was taught how to design a brass stop valve (but this excluded the essential information of where the brass came from and the political climate which allowed the market to supply the brass).
    This is not Spain in the middle ages, and the 2% tax conforms to Adam Smith’s four canons of a good tax, but with a 21st century modus operandi.
    The marketplace needs money to lubricate the machinery of commerce. The government issues money using out-dated and inaccurate ABS statistics to measure inflation and fiddle with interest rates AND the money supply.
    The only time anything has a monetary value is at the moment of exchange when the Buyer and the Seller agree that price in the agreed currency.
    A 2% tax is simply a predictable charge for the use of money. It is little different in fundamental principles governing the cost of any other component in the production chain. You could equally say the cost of fuel and electrical power, and human power (and the taxes on these) cascade.
    I have long vowed that if anyone found a flaw in the logic or the maths of our 2% tax proposal I would publicly apologise and support the better system. Schoolyard name-calling (bad ideas just never die) is not valid criticism. Maybe a learned study on churning taxes would be more informative.
    John McRobert

  43. . says:

    It would be easier to stomach that if you weren’t so condescending and offered a link to the modelling.

  44. A comprehensive summary of the modelling was published in my book, Your Future in Your Hands – total tax reform, which is still in print and readily available. The model was built under the direction of Derek Smith and myself by Unisearch operating out of QUT in Brisbane. It has never been challenged, faulted, nor to my knowledge, equalled.

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