Critique of the Debits Tax and Turnover Tax
By Gavin R. Putland
It has been claimed that all Federal taxes, which together amount to more than 25 percent of GDP, could be replaced by a 2 percent turnover tax. How so? Because the low tax rate would be applied many times on the way to the consumer, so that the final price would contain, on average, about 25 percent tax (I say “about” because I am uncertain whether GDP, as measured in those circumstances, would be inclusive or exclusive of indirect tax).
Compare this with the GST, which the promoters of the turnover tax regard as iniquitous, and which makes up only 9.1 percent of final prices of taxable items.
Of course a turnover tax would encourage businesses to avoid taxable transactions, and the reduced number of transactions would require a higher tax rate, which in turn would be a stronger incentive to avoid transactions, and so on. All this avoidance would lead to a final rate much higher than 2 percent.
One method of minimizing transactions is vertical integration — that is, keeping the entire chain of production in-house. This strategy is obviously available only to larger businesses. Some small businesses would be lucky enough to be bought out by their biggest customers or suppliers in pursuit of vertical integration. Others would not be so lucky, and would be crushed by the competition.
But even for big businesses, vertical integration means being jack of all trades and consequently works against economies of scale and economies of specialization, making it harder to compete against foreign counterparts. Moreover, the cascading effect of an Australian turnover tax would inflate prices of Australian exports and import replacements, while competing foreign products would largely or completely escape this effect (yet advocates claim that a turnover tax would force multinationals to pay their fair share!). The tax would also inhibit start-ups, because capital costs and input prices would be inflated by compounded turnover tax.
Turnover taxes are not new. They were once used extensively in Europe, but were abandoned in favour of the VAT. The much-maligned stamp duties levied by Australian states are narrow-based turnover taxes. In 1978, the economist James Tobin proposed a tax on foreign exchange transactions as a means of slowing down international capital flows, making it easier for national governments to implement monetary policy. Tobin likened his proposal to “throwing sand in the wheels of international finance”. A broad-based turnover tax would amount to an extension of the Tobin tax to every productive transaction across and within Australian borders, throwing sand in the wheels of the entire national economy.
Turnover involves purchases. And if the purchasers keep their money in banks or other financial institutions, purchases mean debits. So a tax on debits captures almost as many transactions as a turnover tax. In addition, it captures transactions of a purely financial nature. Hence it is claimed that for the purpose of replacing all Federal taxes, the required rate would be lower for a debit tax than for a turnover tax; estimates of the required debit tax rate range as low as 0.33 percent (see e.g. The Debit Tax Concept and http://www.overflow.net.au/~nedwood/gst.html [dead link]).
To the extent that a debit tax applies to turnover, it is subject to the same objections as a turnover tax, including price inflation, avoidance of transactions and its effect on the tax rate, vertical integration and exclusion of small business, loss of international competitiveness, discouragement of start-ups, and inhibition of commerce. In addition, a debit tax encourages further avoidance techniques such as paying cash, avoiding purely financial transactions, and processing transactions through offshore financial institutions. State debit taxes (known in Australia as Bank Account Debit tax or BAD tax), are already routinely avoided by hosting one’s bank account in a State without the tax. If the entire Federal tax system is reduced to debit tax, it will be avoidable by hosting one’s bank account overseas. That may explain why those who promote tax avoidance by challenging the legality of Australia’s entire tax system (on the ground that Australia has been independent since the foundation of the League of Nations while its Constitution has allegedly remained colonial) are also among the most vociferous promoters of the debit tax!
Mercifully, neither the turnover tax nor the debit tax has any chance of political success, because those voters who understand the cascading effect know that the real tax rate is much higher than the nominal rate, while those who are too stupid to understand cascading are also too stupid to see how a tax at such a low rate can raise enough revenue.
Hence, when the 2 percent turnover tax (now inaccurately and confusingly described as an “expenditure tax”) was championed by John McRobert’s Tax Reform Ltd (http://www.skynetconsultants.com.au/taxreform/site/ [dead link]) and adopted in the 1998 Federal election platform of Pauline Hanson’s One Nation Ltd, even Hanson’s supporters rejected it as wacky. If it had been a debit tax at an even lower rate, they would have thought it even wackier.