Foundation for National Renewal     The "Model Constitution" Activity

Federal Election October 2004: Which Candidates Trust the People?

1. In this month's Task, we will tackle the vexed question of Taxation. But we will not be trying to resolve all the complex issues involved with this question. Rather, we will try and establish your views on several broad parameters.

2. Currently, it is fair to say the taxation system in Australia is extremely complicated, inequitable, and open to abuse. To succeed in this Task, we will need to provide for a system that is simple, effective, equitable, transparent and not open to abuse.

3. Some might argue that Taxation is not a subject that should be covered in the constitution but should be left to legislation. We will canvas this issue as well.

4. The current Australian Constitution has several things to say on the question of taxation. Section 53 includes the provision that, "Proposed laws...imposing taxation, shall not originate in the Senate". And..."The Senate may not amend proposed laws imposing taxation...." And, "The Senate may not amend any proposed laws so as to increase any proposed charge or burden on the people." But the Senate may request the House of Representatives to make amendments and can reject taxation bills in the same way as any other legislation.

5. Section 55 provides that, "Laws imposing taxation shall deal only with the imposition of taxation,..." And, "Laws imposing taxation,...shall deal with one subject of taxation only:...".

6. Section 96 is also somewhat relevant in that it is the Section that was used to introduce the uniform income tax scheme in which the States are prevented from imposing income tax.

7. Other Sections of the Constitution ensure that any imposition of taxation treats all citizens fairly but there is nothing in the Constitution regarding the level at which a government may impose taxation. Similarly, the Constitution is silent on the issue of 'deductions, concessions and exemptions' and tax avoidance, Tax minimisation, tax evasion, etc.

8. Financial commentators are notorious for one thing in particular - they rarely agree with one another! However, there is one subject on which it is fair to say there is total agreement - our taxation system is a mess.

9. Here are some examples, selected at random, of comments on our tax system by people who should know:

a. The head of the Australian Tax Office's international tax division, "..the vast majority of local and foreign multinationals paid little or no tax in Australia".

b. The Commonwealth Government's leaflet on tax reform, "What's worse is there are many people who aren't paying their share at all. Because the tax system is so complex and confusing there are always those who can pay clever tax advisers to find a way out of paying tax. As they get away with it, everyone else ends up paying their share for them."

c. The Prime Minister, "Any reform of the tax system must include the following,

(i) major reductions in personal income tax.
(ii) consideration should be given to a broad-based indirect tax to replace some or all of the existing indirect taxes."

d. The Canberra Times, "Murdoch faces global tax inquiry: report. An agreement to begin the inquiry involving tax officials from Britain, the USA, Canada and Australia was reached at a meeting in Sydney. The Australian authorities had been unhappy about Mr Murdoch's companies' tax payments since the 1980s."

e. The Weekend Australian, "Packer tax claim. Mr Packer said his corporate interests during the past decade had paid more than 2 billion in government charges (including licence fees, income tax, payroll tax and levies on spectrum). Mr Packer's claim does not stack up under the scrutiny of publicly available records. His accounts, filed with ASIC, reveal Mr Packer paid a total of $714.2 million in income taxes during the past ten years (an average of $71.42 million per year). Coles Myer, comparable with PBL in value terms, paid $1.73 billion over ten years (an average of $173 million per year). Mr Packer's comments were made following reports he had lost $34 million in a gambling binge."

10. The above examples are, of course, just the tip of the iceberg. It is indisputable that there is widespread tax-avoidance and questionable tax minimisation. And every avoidance of tax means the remainder must pay higher levels of tax to maintain the current level of government services.

11. Then there is the question of whether tax rules should be in the constitution or whether it is best left to legislation. The Packers and the Murdochs of this world will, of course, argue that it should be left to legislation. The arguments offered to support this stand will include; the need for flexibility, a constitution is too rigid, tax law is too complicated to be in a constitution, a constitution should be simple, etc.

They are also likely to use the ploy that simple rules in a constitution will disadvantage the poor. However, the real reason they insist tax law is best left to legislation is that they can influence the legislators.

12. The fact remains, tax law is currently handled using legislation without constraint by the constitution and it is a mess. If the fundamentals of our tax system can be incorporated into our constitution, this should prevent the legislators from using tax law to avoid transparency and to bestow largesse without obviously handing out taxpayers funds. Tax concessions for corporations are in fact a handout of taxpayers' funds and should be seen as such. The question we must resolve is whether our Model Constitution can incorporate some measures that will help ensure that taxes are collected in a fair, equitable and transparent manner.

13. Our constitution is the instrument with which the People establish how we will be governed. Having agreed to forego some of our individual autonomy for the good of the community as a whole, and having agreed to be governed by democratically elected representatives, it is apparent we must provide the means by which our representatives can govern and provide the government services we require. The means are provided by way of taxes. It seems logical to me that our constitution should include provisions to ensure that taxes are collected in the best and fairest possible way. It seems reasonable to me that the People should establish the ground rules. And if it is possible for the People to frame the constitution to establish that tax avoidance is unconstitutional behaviour and subject to the severest penalties, then perhaps that should also be done. Furthermore, it seems reasonable to me that the People establish the level at which they will be taxed. That is, the percentage of our income we are prepared to hand over to fund those activities we concede are better handled on a collective basis. Any desire by the Government or the People to change that percentage could be decided at a referendum.

14. Although in Australia we have a universal income tax system, State Governments also collect taxes of various sorts and these taxes vary from State to State. This arrangement not only introduces inequities, it provides another avenue for competition between States instead of more productive co-operation.

15. Another reason our tax system is so complicated is that welfare, employment, production (such as primary production), research & development, tariff and export policies, etc, are implemented using tax concessions. Tax reform must include the removal of these issues from the tax system. Welfare, production, tariff, export and other policies must be implemented in such a way that tax laws are not affected and that they remain simple, fair and transparent. In practice, that would mean even very low-income earners would pay tax and adjustments to offset their low income would be made by specific legislation providing them with welfare payments. Similarly, if government wanted to subsidise an industry for example, that would also be accomplished by grants authorised by the Parliament.

16. There are a number of alternatives available to us to raise revenue for the activities of government. Some of these alternatives are explored in the following paragraphs.

17. Income tax is a system that works well for wage and salary earners. In Australia, income tax is calculated and collected by employers and paid to the tax office. There is no incentive for employers to collect more tax than is established by government policy and collecting less than appropriate can be subject to severe penalties. However, this system is complicated (and therefore open to abuse) in that employers can use other incentives (such as cars) in remuneration packages. Such abuse is difficult to control. For example, a travelling salesperson needs a car to do the job and it is fair and reasonable that an employer provide that vehicle. However, if the employee is allowed private use of that vehicle, then that should be calculated as part of the remuneration package and subject to income tax. This is a simple example of one of the many problems that arise when income tax is used to tax wage and salary earners.

18. However, even more complex problems occur when trying to impose income tax on self employed people and business people. A simple illustration of this extremely complex problem follows. 'Joe Blow' is a self-employed gardener. Every month he receives thousands of dollars from his customers. This is all income but it would be unfair if Joe had to pay income tax on all this income because most of it is immediately paid out for supplies, fuel, repairs, tools and equipment used in the conduct of his business. These expenses must therefore be deducted from his 'income' before tax is calculated. The difficulty arises in separating expenditure for private use and for business use. The bigger the business the more complex this issue is until it becomes impossible to accurately establish net income. Hence we have the ludicrous situation in which Packer (one of Australia's richest persons) pays only a minimum of tax.

19. Another problem with income tax is that persons who acquire income illegally are not taxed at all.

20. An alternative is some sort of consumption tax. In Australia, we have a combination of income and consumption taxes. And although the GST went some way towards simplifying the collection of consumption taxes by eliminating complex and inequitable wholesale sales taxes, the combination is still a very complicated mess that invites non-compliance. It is argued by some that abolition of income tax and the use of only consumption tax, would be a fair and simple taxation system. Using only consumption tax would mean taxing spending rather than income.

21. The advantages of a 'tax on spending only' system are:

a. there would be no need to establish net income,

b. there would be equal tax whether or not income was gained legally or illegally,

c. there would be no requirement for income tax returns and no opportunity for the unscrupulous claiming of illegitimate deductions,

d. there would be more incentive to earn more income. (Currently, income tax is regarded as a disincentive to earn more income.),

e. those with more money to spend would pay more tax than those on lower incomes, and

f. overseas visitors spending money in Australia would pay a share of tax, as they should.

22. The disadvantages of a system whereby only spending is taxed is that:

a. those on lower incomes are required to spend a greater proportion of their income just to survive than do those on higher incomes resulting in 'the rich get richer and the poor get poorer',

b. any attempt to compensate for the above by applying a higher tax on 'luxury' goods complicates the system and encourages avoidance, and

c. income spent overseas provides no tax revenue in Australia and this also advantages high-income earners.

d. the problem in 'c' above could be overcome by placing a tax on money going overseas but other rules would be necessary to collect tax on the 'suitcase full of money' being taken on a flight,

e. spending tax would also have to be applied to the purchase of shares and other forms of investment otherwise much of the spending of the rich would not be taxed.

23. The organisation, 'Australians for Tax Reform', (PO Box 2149, Logan City, DC 4114), describe the Debit Tax System as follows. "Every hour of the day, money is withdrawn from savings accounts, insurance companies, businesses, investment organisations and financial institutions, etc, of all kinds. Indeed, all monetary transactions are withdrawn from some type of bank or financial institution that holds money in trust.

The Federal Debit Tax Formula is a simple and moderate debit tax of one third of one percent (0.33%) charged on all monies withdrawn from these institutions. This tax is simply collected by financial institutions and forwarded through the electronic funds transfer system (EFT) direct to the National Treasury.

This fair and simple system replaces all current Federal Taxes such as Personal Income Tax, Company Tax, General Sales Tax and many other hidden and inequitable taxes that we are currently paying while raising sufficient revenue to fund our federal requirements."

24. Another organisation, ' The Australian Taxation Reform Group', (PO Box 199, Wonthaggi, Vic, 3995, website, www.one-fairtax.org.au) promotes the same concept but at a rate of 1% as follows:

25.

The High Taxes You Are Currently Paying In AUSTRALIA Will Be Abolished

A 1% DEBIT TAX ON ALL FINANCIAL WITHDRAWALS WILL ELIMINATE EVERY OTHER TAX

What will the debit tax eliminate?

Income Tax
State taxes
Federal Taxes
Council rates
GST
Fuel tax
Excise tax
Company tax
Capital gains tax

A DEBIT TAX WILL MORE THAN FUND THE FOLLOWING

Hospitals
Medical care
Increased pensions
Nursing homes
Education
Unemployment
Socially disadvantaged
Law enforcement
Medical research
Irrigation
Dams
Natural resources
Roads and Highways
Railways
Airports
Harbours
Flood mitigation
Defence & Natural disasters

26. I was, initially, very skeptical of the prospect of this tax solving our problems. However, I have been persuaded it is the best way to go. In correspondence with the Federal Government in the discussion period prior to the introduction of the GST, I was sent a document compiled by the Parliamentary Library Information and Research Services. Although this document was designed to discredit the Debit Tax System, it contained the following statements:

a. "The debit tax system is currently used by State Governments to collect Financial Institutions Duty (FID) and is the tax system used in Norfolk Island (a part of Australia)."

b. "The Debit taxes levied as above are a good source of revenue."

c. "So long as the rates are low, Debit Taxes do not do too much damage."

d. "Debit Tax is easy to collect."

e. "Low rates of Debit Tax are little more than an annoyance."

27. The above means that the Debit Tax system is not an unknown quantity. The Debit Tax system is currently used extensively in Australia and has revealed no unforeseen outcomes.

28. The Parliamentary Library report also explained that one initiating foreign exchange transaction usually gives rise to 20 other foreign exchange transactions and declared that this would be an intolerable tax burden. Personally, I have no difficulty accepting a 6% tax on foreign exchange transactions (.3% x 20 = 6%) or even a 20% tax on foreign exchange transactions based on a Debit Tax of 1%. A hefty tax on money going out of Australia would be required in any case, to offset the abolition of income tax.

29. The Parliamentary Library report then proceeded to argue that a Debit Tax would result in a tax component of 25% on 'final product' of the average item. In view of the aim that a Debit Tax would replace income tax and all other taxes, I find such a tax component very acceptable. Currently, most taxpayers pay at least 30% in Income Tax plus 10% in GST and a range of other taxes.

30. On the question of tax-avoidance or tax-minimisation, the Debit Tax concept seems to me to excel when compared with any other system. Firstly, there would need to be a legislative requirement that all wages and salaries be deposited into an account (as is currently the practice in a wide field of industries). The debit tax would be levied as the citizen withdrew those funds for whatever purpose. Because the debit tax is levied on a percentage basis, it would not matter whether the citizen withdrew his wage in one transaction or several. Thus the bulk of the tax-avoiding 'cash economy' would be eliminated immediately. The remaining loophole, that is cash dealings in the business sector, could be eliminated by simple legislation requiring cash businesses to deposit takings on a daily basis.

31. It would be naive in the extreme to expect all tax avoidance to disappear overnight. However, it is argued that few people would indulge in a lot of effort to avoid a tax of only 1%.

32. There appears to be consensus among advocates and detractors alike, that a 1% Debit Tax on all withdrawals from financial institutions would raise sufficient revenue to replace all current taxes and still maintain current revenue levels. However, it is obvious that a reduction for the average taxpayer from 30% to 1% will mean someone else must pay more to maintain current levels of government services to the People. That 'someone else' must be large corporations and financial institutions. If that means large corporations must forego current obscene profits and executive salaries, then so be it. If it also leads to multinationals getting out of Australia then so be it. I don't have a problem with any of those outcomes. It would provide Australians with the opportunity to 'buy back the farm'.

33. Even though there are many more options than the three main tax systems explored in this paper, it seems to me that the Debit Tax system is the best option. It also seems to me that the only way to ensure that our tax system remains equitable and transparent and controlled by the People, is to include certain provisions in the constitution.

34. Q 1. Do you agree that taxation is a subject that should be included in the constitution?

35. Q 2. Do you agree that the system to be used to collect taxes should be included in the constitution?

36. Q 3. Do you agree that the Debit Tax system be specified in the draft FNR Model Constitution? It is appreciated that this may be a difficult decision if one must rely just on what has been possible to include in this paper. However, including such a provision in the Model Constitution will put the onus on any opponents to prove that the system is not viable.

37. Q 4. Do you agree that the level of taxation (that is, the percentage of your income that should be diverted to government) should be included in the constitution and not left to legislators to decide?

38. Q 5. Do you agree that adjustments to taxation levels such as that required to help the needy, super-tax the rich, reward exports, reward Research & Development, promote investment, etc, should be the subject of separate legislation and not complicate the tax system?

39. Q 6. What percentage of the average income do you believe should be diverted to government for the provision of government services?

40. Q 7. Should our constitution include a provision that tax-avoidance is unconstitutional behaviour and subject to severe penalties?

41. Q 8. It is proposed that the National Government be the only organisation collecting taxes and that the distribution of taxes to Regions be specified in the constitution. Do you agree?

42. Your response by the end of August would be appreciated. Please do not be constrained by the above questionnaire. There are more sides to this debate than are included in this paper and they all must be aired.

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Last updated: 3 May 2006