Income tax: 'The fine you pay for being productive'
As far as bold marketing strategies for accountants go, labelling income tax as “the fine you pay for being useful” is one of the more intrepid manoeuvres you could implement. But that’s precisely what one Aussie accountant has done.
In the accounting world, practitioners are used to being told about the power of social media. Practices are encouraged not only to have an online presence but to inject personality into their business profiles.
But then again, most professionals are also aware of the pitfalls of social media. Personality is great, sure – but in business, it’s probably best to err on the side of caution.
Samuel Lee, who runs Atlas Chartered Accountants in Sydney, has a different idea of online propriety, however. Atlas Chartered Accountants posted a photo on Facebook of a construction worker alongside the words “Income tax: The fine you pay for the crime of being productive and useful.”
“We make sure all deductions legally available are deducted to minimise your tax,” Lee added. “It’s not like the government will spend it wisely.” The post drew substantial criticism, with Facebook users criticising Lee’s advert.
By all accounts, the criticism has done little to dampen Lee’s anti-taxation fervour. When contacted by the Daily Mail Australia, he said: “Why should a person who made all the right choices in life and put in 50 or 60 hours a week at the expense of his family to earn more money be punished by paying almost half his income in tax?”
Instead, Lee argued, taxes could be better used for expanding businesses and hiring more people. “The government is just trying to fund its bloated and wasteful programs.”
Taxation is theft
Lee’s post isn’t just an attempt to elicit a reaction, however. As his comment to the Mail illustrated, it’s drawn from a seriously held, personal belief about how taxation punishes success and curtails entrepreneurialism.
It’s not just a case of cutting income tax, he argued – it should be abolished. And instead, Australia’s general sales tax (GST), the Aussie VAT equivalent, should be doubled to 20% and the Australia Tax Office workforce should be slashed by 90%.
This idea, he claimed, would deflate the government’s size while offering citizens more freedom. “Then 100% of what you earn, you keep, and you pay taxes when you choose to because you choose when to spend your money through GST,” Lee told the Mail.
Without inferring too much about Lee's politics, his proposals indicate a libertarian streak. Taxation, as the old libertarian saying goes, is theft. The proponents of taxation as theft run an ideological gamut from right-wing libertarian to full-blown anarchist.
Lee isn’t arguing for the abolition of the state, it seems, but rather a radical shrinking of it. What taxation there would be is essentially voluntary as it people would pay GST or VAT when they willingly spend money in the free market.
In essence, the idea is that productive activity shouldn’t be taxed, and unproductive activities – like consumption – should be taxed.
We’re not in Kansas anymore
Lee’s pessimism towards taxation – specifically the income varietal – is not unique. Here in the UK, our own prime minister, while not in favour of abolishing income tax, of course, has been open in his plans to raise the higher income tax rate threshold from £50,000 to £80,000. Other candidates for the Tory leaders also made similar tax-cutting promises.
The central premise behind these plans is that lower taxes will stimulate growth, in essence paying for themselves by lowering the barriers to producing goods and services, the so-called ‘supply-side’ of the economy.
Economist Arthur Laffer is often held up as the intellectual doyen of supply-side economics. The Laffer curve is a simple graph that illustrates the economist’s logic. The curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100% (since a 100% tax rate would completely disincentivise working).
Simply put, the Laffer curve argues that if tax rates are above a certain level, it actually causes tax revenues to fall since higher tax rates discourage productive activity. The logic, then, is that cutting taxes can lead to higher tax revenues, as people are incentivised to work and businesses are incentivised to hire.
It was under Laffer’s tutelage that the Kansas governor Sam Brownback initiated a particularly notable experiment in supply-side economics. In 2012, Brownback signed the Kansas Senate Bill Substitute HB 2117 into law. The bill represented one of the largest income tax cuts in the state's history.
The cut would, Brownback claimed, be a "shot of adrenaline into the heart of the Kansas economy". Kansas eliminated taxes on business income for the owners of almost 200,000 businesses and slashed individual income tax rates. By stimulating job growth and consumer spending, the logic went, the cuts would be off-set.
That’s not what happened, however. As The Atlantic put it, “What followed were nine rounds of budget cuts over four years, three credit downgrades, missed state payments, and an ongoing atmosphere of fiscal crisis.”
The Republican legislature of Kansas eventually voted to roll back the cuts, despite the governor’s disapproval. The experiment was seen as a disaster, but as far as Laffer was concerned the failure was down to Kansas not going far enough.
The logic is crazy
Ask Richard Murphy, the chartered accountant and tax campaigner, about Lee’s plans, and it doesn’t take long to get an answer. “The logic is crazy,” Murphy told AccountingWEB. “It gets wrong what the purpose of tax is. It’s not just to fund government activity: tax has a social purpose.”
The social purpose Murphy refers to is redistributing wealth. “That’s because societies that are deeply unequal are also deeply unproductive because there are fewer individuals with money to spend,” Murphy said.
As for Lee’s plans to double GST, Murphy was dubious. “The simple fact is that those who pay the lowest rate of VAT are those on the highest incomes. The ones who spend the highest proportion of VAT are those on the lowest incomes.
“The tax burden would be shifted from the well-off onto those in poverty, many of whom are in work and many of whom have children. He’s essentially arguing that the tax system should increase inequality.”
As for the idea that income tax is somehow penal and paid by the most productive members of society, again Murphy disagrees. “Those on high earnings aren’t necessarily the most productive members of society,” he added.
“The laffer curve simply doesn’t work. There’s no relationship between the profit motive and tax. In Kansas, we saw this clearly. Businesses received a tax cut but the economy flagged.
“Reducing your tax bill is a cost minimising motive. By slashing taxes, businesses don’t spend or hire, they pay themselves rewards.”