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.