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Tuesday, September 25, 2007

Turnover Tax-The Second Best Tax System

Most libertarians will tell you that the best tax system is no tax.

But what if we acknowledge that most citizens support at least a minimal state and for the forseeable future that state will have to be funded in some manner?

What then is the SECOND BEST taxation system?

Here is my answer.

In the early '80s, friends of mine in the Tax Reduction Integrity Movement (TRIM) promoted Turnover Tax (TOT).

The idea had been mooted by an Auckland accountant, Bruce Grierson and was seized upon by my paleo-libertarian friends.

The idea behind TOT is very simple.

Basically EVERY financial transaction would be taxed at a very low rate, while ALL other taxes would be abolished.

At the time, Bruce Grierson, calculated that a TOT of 7.5% would have given the government as much revenue as did all the then existing taxes-Income Tax, Stamp Duty, Company Tax, Excise Duty etc etc etc combined.

Basically TOT is the free market plus X per cent.

I don't know what the per centage would have to be today, to replace GST, FBT, PAYE, Company Tax etc, but the principle remains the same.

TOT is extremely easy to calculate and administer.

For example, if you sold your house for $400,000 you would pay $30,00 in tax (assuming 7.5%)

If your salary was $1,000 per week, you would pay $75 TOT.

If you bought $200 worth of groceries you would pay $15 TOT.

If your business turned over $1,000,000 pa you would pay $75,000 TOT.

Assuming, as I do, that the free market is the most efficient provider of goods and services, you want a tax system that interferes as little as possible with market forces.

Currently we have a highly distorted economy because many people pump all their spare cash into real estate to secure a tax free capital gain. That starves the rest of the economy of capital to undertake more productive activity.

TOT would treat all transactions equally, minimising distortion. Therefore property transactions would be treated the same as any other economic activity. This would eliminate the current distortionary problems and encourage people to invest more widely. That would be better for us all, in all manner of ways.

Currently, huge amounts of productive energy are wasted by businesses trying to minimise profit and taxable income. This is also highly distortionary and wasteful.

TOT would eliminate that problem, because businesses would be taxed on their turnover (NOT THEIR PROFIT).

If your business turned over a million dollars but made zero profit, you would pay 7.5% TOT on that million.

If your business turned over a million dollars but made $300,000 profit, you would still only pay the 7.5% TOT on the million turnover.

The incentive to make profits would be huge, because you would only ever be taxed on your turnover. Profits, which any sane system would want to encourage, would go completely untaxed.

Tax evasion would be pretty pointless. It might be worth risking heavy penalties to avoid paying 39% on your hard earned profit. Few would take the risk to avoid paying a measly 7.5% on their turnover.

Everybody would benefit by adopting such a simple, transparent system, except of course the many IRD officers who would be forced to find honest employment.

Some accountants and lawyers might have fewer overseas holidays for a while, but even they would do better off in the long run as business boomed.

The rest of us would prosper as an efficient, productive economy delivered as an ever expanding and ever cheaper array of goods and services.

In the 66% top rate income tax Muldoon era, pushing anything as radical and simple as TOT was like pushing the proverbial uphill.

Even in today's climate its still pretty "out there".

However, I thought it was about time that someone started talking about TOT again.

What do you think?

Does it make sense? What are the drawbacks? Is it pure nonsense? Could it be "sold" to the public one day? Should I be committed for even suggesting it? Have I missed a basic flaw? Could TOT revolutionise New Zealand and make this country an economic wonderland?

Your views, criticisms, questions and suggestions are very welcome.

6 Comments:

Blogger Tomás Estrada-Palma said...

Still too many beans to count and too many bean counters. The smartest method would be to adopt Henry George's single tax - the site value tax. All tax would be abolished except a tax on the value of land location. The closer in your property to the urban areas the more your location value rises along with your tax. The farther out it drops to zero at the farm lands. Basically it remove tax off labor investment housing business output import export, etc. and put it on land. It forces us to share the land better, stops land hoarding and speculation. This is the best tax system if you have to have one.

4:56 AM  
Anonymous Stu said...

I can't see this working Trevor.

It seems very similar to the alliance’s financial transaction tax

The tax would fall inequitably on firms with high turnovers and low profit ratios – eg supermarkets compared to say professional service firms who have much higher profit margins.

Your example also has the tax being applied to an individual’s outputs – salary and to their inputs – groceries. Is this correct, or is it the supermarket how pays the 7.5%, as sales of their groceries contribute to their turnover?

In any case, the end result of such taxes would be a distortionary increase in the vertical integration of business, as a single firm would avoid paying a compounding 7.5% charge through their supply chain.

Comprehensive value added taxes, such as GST, avoid such problems as firms in the middle of a supply chain can claim back the GST component of their inputs. The tax is on levied on the value the firm has added to the product/service – i.e. the difference between its inputs and its outputs.

Stu

1:16 PM  
Blogger Comrade MOT said...

I dont like the tax system cos it taxes the turnover of wealth rather than poduction.

For example If a work mate on the same income buys a house for $400,000 and I alos buy a house for $400,000, we both pay $30000 by TOT.

If then I move a few times, each time selling my house for $400,000
and buying another for $400,000, I would loose another 30,000 each time. Assuming my workmate stays in the same house I would be no richer than him but would have to pay $30,000 tax each time(not including agent fees etc) for "swapping houses".

As it stands "swapping houses" like that does cost but it should not be increace by the govt.

I dont see why turnover of wealth should be taxed. It takes each turnover rather than net profit. Particularly businesses with high turnover but low profit margins on each item, like stu said would be at a dissadvantage.

e.g. If Bill the green groccer buys 100,000 cabbages from a farmer, for say $1.00 and sells each one for $1.10, he will earn $10,000 before tax.
currently he will pay say 3,300 tax.
with a 7.5% TOT he will pay $7,500

Ted However, buys a Jap car at his dealarship for $5,000 and sells it on for $15,00 making a $10,00 profit just like Bill, paying the same tax under the current system, ted however would only have to pay $375 in tax under TOT.

Bill earnt that money fairly and squarely why tax him 75% of his profit, and Ted only 3.75% As unlibertarian as it is to tax profit if is more unlibertarian to tax discriminatorialy as to the means of achieving the profit.
Why does Bill deserve to pay 20 times more tax?

Im not sure that the current system is free of problems like that, but the variety evens out the anomolies for each one.
I do tend to agree however that minimal tax is best. (I wouldnt say none cos even a libertarian has to pay for an army police and justice system.)

5:19 PM  
Blogger Comrade MOT said...

Im not sure that my sums are 100% correct, but Ted would certainly pay a lot less tax than bill for the same profit. I think I calculated by how much was payed when they bought their goods, but I think it would be paid by the venddor, so Bill would pay 7.5% of $110,000 and Ted would pay 7.5% of $15, 000. Still a big descrepancy.

6:32 PM  
Anonymous Anonymous said...

Simple is sweet,
Change gst to goverment service tax(defense, justice)
business could promote gst like "buy nz made" and then people could choose to use business's which support collective security.
The more complicated systems always have loopholes or inequality.

8:38 PM  
Anonymous Reid of America said...

One unintended consequence would be to drive the securities industry offshore. It would effectively kill short-term trading in NZ if an exemption wasn't granted. And if you start granting exemptions then a large part of the plans appeal is lost.

Years ago when Japan instituted a 1 cent a share tax on stock trades it drove 20% of Japanese share trading to the London exchange.

10:58 PM  

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