Taxation A Boon To Society
[Reprinted from Progress, March 1996]
The obvious function of tax is to collect revenue for the needs of
government. The function is understood immediately by most people.
Government identifies an activity, finds a means of measuring it and
then raises the money. Ingenious? Elegant? Precise? Not really.
The problem with the above simplification is that it ignores the
second function of taxation. Taxation has a less obvious, but
important role of directing the flow of wealth within the economy.
How is it so? The following analogy may help. Imagine all Australia's
wealth was put in a giant bucket. Connected to the bucket are a number
of pipes down which wealth may flow. There is one pipe going to wages,
one to business, one to land values, and so on. Government can leave a
pipe open, in which case the flow is free. Alternatively, it can put a
clamp on a pipe. The tighter the clamp, the less the flow. These
clamps are called taxes.
Why does taxation direct wealth away from an area?
The reason is, that people try to satisfy their desires with the
minimum effort. If government takes part of the return from doing
something, such as working or running a business, then doing that
becomes less attractive. People seek a different way of satisfying
their needs. If taxation approaches 100%, people give up on that
activity entirely. This is why, in communist societies, people often
cannot buy basic necessities.
This leads to two statements which government should engrave in
Tax what you want less of. Don't tax what you want more
To have a healthy society, we should direct wealth to useful areas
and away from harmful areas. Does this seem self-evident? Then let's
see what happens today and what are the results.
A basic wage is around $25,000. Of this, government takes $5,000 in
direct taxation. About $5,000 more is taken by hidden taxes such as
sales tax, excises and duties. This leaves $15.000 to live on.
What is the effect on society?
People on a basic wage live in poverty. They require assistance with
health, education and other subsidies to survive. A new class of
society has emerged -- the working poor. The Smith Family, a
charitable organisation, says a family with two children is better off
on welfare than living on an income of $40,000. Losing a large part of
your earnings, lowers motivation and enjoyment of work. Some people,
who realise how hard it is to get ahead, stop trying.
Business is treated as a cash cow! Before a profit is made, there is
compliance and taxation to overcome. Examples are payroll tax,
superannuation guarantee levy, training levy, fringe benefits tax and
sales tax. If a profit is made, the government takes one third. Beyond
a profit of $48,500, the tax rate for a business owner rises to one
This has a sapping effect on businesses. Debt must be used to pay for
expansion, which should have been funded out of profits. Owners of
businesses are worn down. People are discouraged from starting new
What is the effect on society? Official statistics say there are
about 750,000 unemployed. To rectify this, a strong business sector is
vital. The lack of vigour caused by taxation stops this. The Treasurer
often says how many jobs the government has "created". In
truth, businesses create jobs in spite of, not because of government.
Land taxation is light in Australia. Rates and land tax are a small
part of total revenue.
What follows from this?
Wealth flows into land, causing prices to rise.
People buy land for investment. A property may return rent or unused
land held for price increase. Because of light land taxation, these
are viable means of becoming wealthy. Holding land in this way denies
opportunity to others.
People buy homes. Residential prices account for 75% of Australia's
land values, or about $400 billion. Buying land for housing,
especially when prices are high, works against people. Borrowed money
takes years of work to pay off. Money tied up in land prices produces
Do we have things backwards?
What would happen if the situation was reversed? Let's say there was
no tax on people or business.
- People would have more to spend. Prices would be cheaper. The
well-being of the community would improve. People having more to
spend would help business and employment.
- Business would flourish. Starting or running a business would
be easier. Existing businesses would expand and new ones would
spring up. Jobs would be created.
What of land?
Taxing land would lower land prices. For land investors this would be
bad. For people who need land to use for business or housing, this
would be good. Empty land, held for speculation, would lose most
value. It would become available for useful purposes.
Land is no less useful when its price falls, only more affordable.
Money is freed by a land-price decline. This money would flow to
employment and wages.
Taxes as a boon to Society.
Let's return to the title of this article.
Some taxes produce poverty and unemployment. Conversely, sensible
taxation brings land into use and opens opportunity.
Which system do we want?