Yves here. It’s hard to imagine that a speech like this would get any kind of hearing in the US. And in the US, lawyers serve as liability shields; “My lawyer said it was OK, so I’m not to be blamed.” So for any serious tax-dodger-busting regime to be serious here, the laws would need to allow attorneys who walk on the wild side to be targeted too.
This post does focus, correctly, on the distributional uses of taxes. Even though the Federal budget processes still operate as if the US were on the gold standard, the uses of Federal tax are really to manage inflation, determine the distribution of wealth and income, and create incentives and disincentives. Targeting monopolies and oligopolies through taxes might be easier and faster than using anti-trust, for instance.
By John Passant, a former Assistant Commissioner of Taxation, former tax academic and is currently a PhD candidate in the School of Politics and International Relations at the ANU. This is an edited version of a speech he gave at the National Law Reform Conference at the ANU on 15 April. You can follow John on Twitter @JohnPassant. Originally published at Independent Australia
Has the time come to consider criminalising tax avoidance and making boards and senior officers liable for prison sentences, asks former ATO Assistant Commissioner, John Passant.
In a speech in 2013, Barack Obama labelled inequality “the defining challenge of our time”.
Oxfam has argued that 85 people own as much of the world’s wealth as the bottom 50%, i.e. about 3.5 billion people. In Australia, according to ACOSS, there are about 2.5 million Australians living in poverty, including over 660,000 children.
Australia’s inequality is above the OECD average and has been growing above average over time. Two processes are in play. One is the growing income disparity between the top and the rest of us. The increases in real wages and other income for example have gone disproportionately to those in the top ten percent of income earners, and even more so to those in the top 1%.
Our tax system has also become less progressive. This is because of reductions in top marginal rates, legislated tax havens for the rich like superannuation tax concessions and capital gains tax discount and our focus on regressive consumption taxes.
The revenue forgone from tax concessions such as superannuation and capital gains tax and the losses from negative gearing is about $40 billion a year. About $17 bn of that goes to the top ten percent.
So one task of tax reform would be to restrict these benefits to those in need, or to abolish them and use the extra revenue for socially useful purposes.
Another task should be to reverse the reductions in income tax progressivity by increasing income tax rates on higher income earners, those for example earning more than $130,000.
The top 10% of wealth holders in Australia own 45% of all the wealth, or about $3 trillion. A one percent annual wealth tax on them would raise by my back of the envelope calculations about $30 billion annually from them.
An alternative would be for the Commonwealth to tax net wealth transfers, for example, by reintroducing estate and gift duties.
The Panama Papers have re-ignited debate about the tax avoidance activities of high wealth individuals and big business. In two recent ATO tax transparency reports on big business, the Commissioner of Taxation revealed that 36% of those entities did not pay any income tax in 2013-2014. On top of that one third of ASX 200 companies have an effective tax rate of less than ten percent. More than half those ASX companies also have subsidiaries in tax havens.
Maybe the time has come to consider criminalising tax avoidance and making Boards and senior officers liable for prison sentences for any tax avoidance their companies undertake.
More prosaically, it might be time to consider a minimum company tax, based not on actual taxable income but gross revenue. A tax of three percent on the $454 billion gross untaxed revenue of big public businesses alone would yield more than $13 billion. That is before we tax those companies whose effective tax rates are well below the company tax rate of 30%.
There are many other taxes we could consider that could reintroduce equity to the tax debates. Levying rent taxes on the monopolists and oligopolists making super profits, taxing the big greenhouse gas emitters, (while denying them the ability to pass on the costs to consumers,) investigating financial transaction taxes, considering land taxes, and urging the A.C.T. Labor/Greens government to do a Colorado and legalise the personal use of marijuana and tax the cultivation and sale, are but a few other options we could debate.
That no serious systemic progressive tax options are on the agenda is indicative of a wider political problem. The ruling elite and their major parties are keen to make the tax system less progressive. This is part of the wider 33 years to date neoliberal program in Australia of shifting wealth from labour to capital to address what Marx identified many years ago as the tendency inbuilt into capitalism of the rate of profit to fall.
That further regressive tax proposals such as increasing the GST are now off the table is a response to an untapped underlying anger with politics as usual that ordinary working people feel. Therein lies our hope. It is time to put progressive tax reform back on the agenda. Growing inequality threatens our democracy. It is time to tax the rich.
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Tax avoidance is perfectly legit – from Wikipedia “The United States Supreme Court has stated that “The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted.””
Now tax EVASION is illegal – and has criminal sanctions – it is, after all, how Al Capone was jailed, as no other criminal charges could be proven.
The problem, IMHO, is lack of will to enforce existing laws. The IRS has been under attack by the usual suspects for years, and its enforcement abilities severely limited. However, with worldwide surveillance and data gathering abilities, the IRS could have technology tools available to catch the big fish who hide their money and evade taxes in foreign jurisdictions. We don’t need new laws – we need better enforcement using modern technology.
The IRS could start by hiring some expertise with big data to cast a wide net. Greedy tax cheats need to be exposed, made to pay their taxes, heavily fined, and perhaps put in jail. (I’m conflicted on jailing – why jail someone who could better pay their fines if out and able to work? OTOH, parading a greedy cheater in leg irons on his perp walk serves as an example to the others.)
I should have changed the headline from the Aussie version. Fair point re nomenclature.
Since you mentioned Al Capone — according to him “Capitalism is the legitimate racket of the ruling class.” Laws are written to benefit those who ‘rule’.
Tax that which you want less of and tax less upon which you want more of. It is an unjust revenue system that has caused the net worth divide, infrustructure decay, privatization schemes, etc.
If you tax unearned income at a high rate or levy upon high frequency trading to the point that it is less profitable than investment in research or actual production…….dollars invited will flow toward actual research or production.
Taxation is the least understood but, most powerful tool available to direct capital towards constructive use.
Tax the money out of casino capitalism and private hands and until productive companies and labor. A land tax is an old and good idea but, a massive over-valuation in land values with its associated debt overhang will need to be addressed before implementation.
The rise in the cost of living and doing business has risen due to the gambling in real estate and associated rise in land value Boom and bust
In modern economy, there is no reason for a complicated tax code, except politics. Tax avoidance is unnecessary if the taxing is simplified (nothing to game) and tax avoidance is suppressed by withholding by employers (this has worked since WW II). Have 50% withheld by the employer on wage income, then get a refund once a year. No reason why you can’t treat management the same way. The tax code could be reduced to a couple hundred pages at most. Oh, the poor bleeding tax accountants … who will take care of their pain!
Really, that is kind of humorous. So, you pay $100 million dollars to purchase a conglomeration of assets then how do you allocate the proceeds. That is just one simple example that if you worked in the area you would encounter. Another one is did a purchase really take place or is this some type of financing transaction. How about if you are business making estimated tax payments. I am sure you think that is easy especially when someone is going through a system conversion and the numbers get so screwed up. Then there is recognizing revenue. What if it is one contract that stretches over several years.
the laws would need to allow attorneys who walk on the wild side to be targeted too.
Yves this happens all the time. I remember listening to a guy telling me how great his tax practitioner was and how he had not paid any taxes in a couple of years. After he got through I told him he should fire the guy and get over to someone new. He laughed at me. About a year later I saw that practitioner was sentenced to prison and the guy I was talking to was bankrupted by back taxes he owed. I do not prepare taxes but I consult on complicated areas sometimes. There is lots of pressure put on people but most practitioners I know would walk than do something illegal. They look poorly in an orange jump suit.
So you are proposing someone earning 20k a year should have 10k withheld because even though they might owe taxes even at their low salary, it will be some tiny fraction of this. Meanwhile their wages are reduced below the poverty line, but this is ok because somehow if they were budgeting wizards they would be able to live on 10k in wages because they will get the money back a year from now (maybe they can take out a tax day loan to hold them over until then?). I don’t think this dog is going to hunt. Wage income is reported right to the IRS anyway, there is no hiding it and very few people if anyone pay 50% tax rates even including payroll taxes.
I do agree that taxes need to be massively simplified in the US. The code is a spaghetti mess due to all kinds of special cases and carve-outs. Just IMHO and I am far from any kind of financial expert:
-Unearned income should be taxed at a much higher rate than earned income, similar to gambling. This particularly includes capital gains.
-No social security cap
-Eliminate corporate tax altogether.
-No tax at all on foreign earnings
-Use tarriffs similar to a hundred yrs ago
-Speaking of tarriffs, unwind the various trade deals and use reciprocal trade policy.
-Eliminate carried interest loophole
-Outlaw CxO compensation in the form of stocks of any kind. Or at least penalize it the same as unearned income. Cash salary + health coverage just like everyone else.
IMHO the above steps would do wonders for our society, even if only partially implemented. The real trick would be to restrain Congress and put a *very* short leash on the Appropriations Committee.
Just so you know, one of the main reasons the code is so complex is because it is written to maximize the benefit to the federal and state govts. There are few what I could call loop holes. Sure there are things called tax shelters where you might get a tax loss now for financial gain later (most of these have been eliminated) but I have a saying after being around such deals for 40 years “Tax losses have a habit of turning into real losses.” The reason many of these tax shelters have been carved out in the past is because they are high risk.
If there were many loopholes here people would not be attempting to transfer money to Ireland, Malta and other such places.
What is considered Tax Avoidance in the US is not Tax Evasion mainly because the rich and the corporations have written the tax codes.
There has been much press about the massive and record “tax burden” paid by the richest Americans. About how estate taxes and capital gains are double taxation. About how we are taxing the people who drive our economy and are “wealth makers”.
Of course, less is said in the same articles about why they are paying so much tax; they are making record amounts of money. Capital gains are tax evasion once again and are rarely paid at the full rate anyway.
Go to a flat tax of 25%. Tax-free up to 40k. No deductions for anything. If billionaires want to flee, we have provisions for that already.
We will save hundreds of billions in accounting and legal fees. We can save about ten million trees a year for the forms alone!
and a pony for Christmas, please.
Flat tax is regressive. Disproportionately hits low and middle-income people. Consider this – you propose that my 50k dollar, that I worked damn hard for, be taxed at the same rate as the 30 millionth dollar Mitt Romney “unearns”? I will spend my 50k dollar and keep the economy rolling – but Mitt’s 30 millionth dollar is a blip and probably will never enter the real economy.
Middle income people who support a flat tax that only benefits the wealthy are deluded.
Absolutely. However, the concept of regressive taxes is not understood by most Americans.
Agree with both of you. The flat tax is a regressive nightmare, but it’s appeal lies in its alleged simplicity. It’s not all that. It’s not a good solution.
The Laffer curve demonstrates how good the wealthy are at hiding money when income tax rates are high.
They need to be taxed on things they can’t hide land, property and other hard assets.