Eliminate income tax, adjust VAT and watch spending rise
The truth is that the ponds from which the government can fish have diminished and continue to do so. We have little choice but to cast our net over a wider dam.
There was no choice but to increase value-added tax (VAT) in the budget. The increase from 14% to 15% is, of course, a 7% increase, not 1%. Compounding that with other consumer tax increases such as excise duties and the fuel levy, while still also increasing the marginal tax rate for individuals, doesn’t bode well for those who are already overindebted — and that’s most of us.
Perhaps the Reserve Bank should have reduced interest rates to accompany the budget tax increases?
There has been almost universal condemnation of the decision to increase VAT, and some of that may be due. It certainly doesn’t help with inequality, as it works today.
Think of it differently. Structurally, VAT (or some similar construct) might well be the solution to an efficient budgeting process. Every year the required VAT to be applied to the constituent goods and services in our economy could be scientifically and accurately determined to balance the budget. The upside of effective budgeting would result in a lower cost of capital for the country. Dropping the cost of sovereign debt by 1% has a better than 10% positive effect on the economy.
At issue is that VAT should be instead of, not in addition to, other personal taxes such as income tax.
Eliminate income tax completely (imagine the increase in spending – selective as it may be) and increase VAT accordingly. VAT would have to increase substantially, at the top end, but with alternative rules and grades, an equilibrium could be found that behaves exactly like progressive tax. We need to go beyond the simplicity of zero-rated items and consider baskets of goods and services that factor in the need to tackle economic inequality.
Sure, the highest VAT rate (applicable to top-end luxury and imported goods) may be a big multiple of what it is today (even over 100%), but the consumer has the choice whether to buy the goods or not.
I’d be curious to know what the all-in, effective tax rate for luxury purchases already is.
By the time you’ve paid income tax, fuel levy, VAT on your car, interest you earn on your already taxed savings, the capital gains tax and transfer duty paid on the sale of your property, the after-tax cost of educating your family, the food you buy out of after-tax earnings (plus VAT) — I could go on –
10% positive impact on the economy will come from the cost of sovereign debt dropping by 1%, the upside of effective budgeting
there will be plenty of scope to pay VAT instead.
Across the earnings spectrum from the poor to the wealthy there are enough statistics, aided by real-time access technology, to work out a scientifically fair distribution of VAT levels applied such that inequality begins to be tackled.
VAT collection is simple to administer and is collected in real time. There is something virtuous and feel-good about a pay-as-of choices for the individual. You decide whether to spend or save — there’s no tax on savings, remember. Tax revenues would be collected in real time with no delays, which would have an effect on the value of receipts to the fiscus. We pay today, we know what we paid, we paid it on purpose, the revenue service has its cash.
With continuing advances in electronic transacting (and the ability to monitor these, with the necessary privacy caveats) the need for and cost of oversight and administration would be almost eliminated, as would opportunities for cheating and tax evasion.
I can’t imagine how much revenue is lost to the government through tax evasion. An entire industry of advisers and tax havens thrive on it. More tax is paid by the compliant, hardworking middle class than the super-rich corporates and individuals, I’ll bet.
After satisfying basic infrastructure and social imperatives, if we then spent tax receipts in the industries from whence they came, we would create a virtuous loop that would lead to the creation of local centres of excellence (voted for by the consumer tax rand) that can aspire to become global competitors.
VAT structures could also replace import tariffs, encouraging consumers to support their local industries.
We’d have more discretionary disposal income to spend on what we wanted. That has to grow GDP.