You see, the antidote to The Killer takes on a whole new way of thinking about tax. I’ll need to take you back to my own learning to make some sense of the antidote.
Where it all began
In the late 1980s, I was thrust into my first General Tax Principles class at RMIT in Melbourne. These were the days of buying cigarettes in packs of 15, eating hot dogs from Druids Duck Inn under Building 39 and listening to that incredibly passionate tax teacher, Norm Rosenbaum. Norm was a super smart fella and if you could avoid him laying Coca Cola burps on you in the 2 front rows you were witness to a man who brought tax to life. I would say Normie initiated my interest in this most fascinating of subjects.
In the earliest of lessons we were taught in tax that Assessable Income (read: Sales) less Allowable Deductions (read: Expenses) equals Taxable Income (read: Profit). Income tax would be applied to this Profit figure and, voila, these income tax amounts paid to the government have been arguably the key driver in driving up standards of living in Western Democracies.
The importance of income tax
All key societal assets such as wonderful infrastructure, learning facilities and people, are financed in a major way by income tax. Roads, public transport, power/telecommunications hardware, teachers/police/fireies/ambos and health workers are the engine that enable tax accountants to ply their trade.
Income tax is paid by individuals, small and large business under jurisdictions of nation states. The politicians and people of those nation states, for example Australia, set laws around how this is to be paid and how much is to be paid.
Income tax paid into nation states has served the people of the Western World well for many years, however over the last 30 years and especially over the last 15 this income tax is escaping and is instead inflating the lifestyles of the mega rich.
This inflation comes in a number of guises, so for clarity I will list them below:
- Inflated share prices of multinational companies.
- Inflated property prices of luxury locations, for example: the Hamptons in the USA, Monaco in France and Portsea in Melbourne.
- Inflated personal wealth of CEO’s and Boards of these multinational companies.
How the heck has this income tax escaped? It is an absolute KILLER and is affecting the ability of our Western Democracies’ Societal Assets staying up to date.
Where does the problem arise?
How the Killer works is easy to explain. Many multinational companies establish their “main operations” in Nation States that have extremely low income tax regimes. They then shift the profit of their activities from thriving Western Democracies such as Australia to these tax havens. They pay little or no Income Tax in Australia and little or no Income Tax in the Tax Havens. This is all “legal” and performed by very smart Lawyers and dare I say it Tax Accountants. I’m not sure how they sleep at night but where they sleep is far more salubrious than the rest of us.
The Killer is like Polio in the 1920’s. It needs a cure asap, and although the solution is in front of our eyes, no one can see it, let alone deliver it.
Putting an end to the issue
Exacerbating the problem is the castration of Nation States to rein the Killer in. Australia have been tightening their transfer pricing (profit shifting) rules over the last few years but it’s having limited affect because other countries are not doing the same. We are castrated even though it looks like we have the gonads required to fix the Killer.
In fact, the United States have added to the problem by making a huge drop in their Company Income Tax rate from 35% to 21%. The Federal Government in Australia is trying to get our Company Income Tax rate dropped substantially as well.
This adds to the problem of the Killer because they are setting a tax rate that is tempting these multinational tax cheats to shift their “main operations” back to where they started.
Hence, it will likely result in more tax being taken in the U.S., but the rate is far too low to fund the upkeep of our society. It may also result in nothing happening and these parasites keeping their “main operations” in the tax havens.
The PR machines of the political parties pushing for these company tax rate drops throw around bulls*** like, “trickle-down effect of the economic growth flowing” and “the increased confidence of the business community“.
Some nice, slow, gentle, friendly work is being done by the OECD to combat multinational tax cheats, however, a cancer like this requires aggressive, painful and risky treatment administered without fear or favour.
If you think this is a political statement sent from the left, think again. This is a statement sent for all of us living in the Western World.
In my next article I’ll set out the solution, which if administered at the OECD level is surprisingly easy to construct and administer.