Sunday, April 12, 2015

Taxing The Use of Money

Summary: Modern developed economies now consist of three sectors - manufacture, service, and finance. Current tax regimes primarily collect from the first two sectors, leading to an impoverishment of both those sectors, and the government that uses that revenue. The proposed tax on the use of money would effectively and efficiently tax all three sectors. Such a tax is feasible due to the high level of computerisation of the banking system, and the decline in the use of cash in day to day transactions.

* Manufacture includes all the ways things are processed and transformed;
* Service includes activities that support manufacture and society itself;  and
Finance includes all the ways money is used as a commodity and a source of profit, rather than money being the lubricant to facilitate manufacture and service processes.
The tax system evolved along two principles - identify the processes that generate wealth, and find a way to efficiently collect a part of that wealth. This revenue was then used to finance processes that support the population as a whole ( according to the dominant social model for that time ).

Early taxation identified manufacture as the dominant source of wealth creation, and the goods created, excavated, or grown could be measured, valued and a tax collected on their transfer as property.

As society evolved, services grew, first as a part of manufacture - bookkeeping, goods handling and freight, machine servicing, labour support, etc. And these services were efficiently taxed by taxing the goods that they supported.

As ex-manufacture services grew - health, education, personal services - and as the previously internal services became outsourced, the concept of a GST developed to capture these less concrete sources of wealth. These taxes still relied on the practicality of taxing the transfer of goods, but the concept of an invoice enabled a form of virtual taxation that was equally effective and economical to collect.

Now it is estimated that Finance transactions are approximated 10% of the GDP ( and growing at around 3% pa ) and that these predominantly use money as the commodity of wealth generation - trade in money, debt, and securities being used to earn money.

This source of wealth is very poorly taxed - only declared profits being measured. Yet the impact on society ( and the environment ) of this use of money is a profound as strip mining or irrigation on the natural environment, or industrialisation on human society and towns.

This might sound an extreme analogy, but the use of money to generate money means that only those chosen to participate by the managers of those financial institutions, get any benefit, for the wealth generated by money debt today, comes by bringing future concrete wealth into the present, impoverishing those who did not gain ownership of that concrete wealth.

Proposal: Tax the Use of Money
Almost all financial and business transactions now involve a digital exchange. Most involve the deposit and withdrawal of a money amount in a legally defined and regulated financial organisation.
It would be relatively inexpensive to require all these financial organisations to modify their computer systems so that a percentage of these transactions are passed to a government account(s).

This source of revenue could replace all current taxes and levies, simplifying both the tax payment and the tax monitoring systems.

It would not have to be an exclusive tax - in fact, a gradual introduction, with concurrent reductions in other forms of taxation would ensure a smooth transition, and opportunities for industries and social organisations to monitor and adjust to the change.

The advantages of taxing the use of money would be:
government budgets would be easier to formulate from the smaller number of data inputs from financial organisations - much available in real time.
short term budget needs could be met with tiny increases and decreases in the transfer percentage.
the payment of tax would be daily or hourly ( or less ) in tiny amounts, so much easier to match to cash flow for business and individuals.
low-incomes could be supported by similar tiny frequent deposits from the government account(s)
over-seas purchases and transfers would be taxed as withdrawals in the local regime.
currency speculation and micro-trades would be taxed, and discouraged unless truly of value, leading to reduced volatility in the markets.

The disadvantages would include the taxing of investments, cash used to establish a business or venture, and research and development costs. But these could be treated as special investments in the common good, and supported by government grants.

The primary advantage would be that the tax burden would be more fairly shared across all three sectors of the economy, and the tax revenue would strengthen the sovereign government, and reduce the negative impacts of globalisation on society and the environment.

Tuesday, April 7, 2015

Structural Change in the Australian Economy

This employment graph is typically used to illustrate the change in the Australian economy over time.  But the services industries are very labour intensive, and there have been significant changes in the mix of services included in the data. The graph below shows the long term change in percentage contribution to GDP.  ( Note: Service and Distribution are grouped as Services in employment data )

The large growth in Services ( excluding Distribution ) reflects three trends.
Firstly - the growth of two income families has created demand for services that previously were conducted in the home - child care, pre-schooling, home maintenance and servicing, aged care, and cooking - and hence not previously included in the GDP data;
Secondly - there has been an increased demand for health, educational, recreational and financial services with increased incomes, and pressure for employment;
Thirdly - many activities that used to be run in-house in manufacturing, agriculture, mining, construction, and distribution, are now outsourced and re-classified as services.

So from a structural change view, the growth in services is not as dramatic as it first seems, but from a taxation or government finance point of view, it is a significant change with long term consequences.

Around 1900 - it made sense to tax goods as this collected the bulk of the financial activity in a format that made assessment easy and collection efficient.

Around 1950 ( and later ) - the growth in combined services encouraged the additional of a VAT or GST to both goods and services, as a practical way to tap into the increasing share of financial activity that was service based.

Around 2000 - it seemed appropriate to increase the VAT/GST rate, and/or extend it to include previously exempt services and goods - typically education, fresh food, and some health services.

However, Finance and Insurance currently contributes about 10% of GDP ( and is growing at around 3% ) and a VAT/GST typically fails to collect tax revenue from this activity. Part of the reason is the strong political lobbying from the industry in general, and the small number of powerful and wealthy individuals who benefit from the trading in finance. Part is also the difficulty in defining the service that should be taxed.

This problem has encouraged proposals for an alternative tax on the use of money - a tax that would replace all current taxes - VAT/GST, sales taxes, and levies - and be based entirely on the interface of money exchange. ie: levied at the point of deposit and withdrawal at financial institutions.

The argument is that this captures the true overall economic activity as based for taxation ( as revenue for government ) and is capable of responding to any future structural change in the economy.

There are also moral and environmental arguments for such a tax on the use of money, and these will be discussed in later posts.