It must be a measure of age when you start complaining about the things you recall your father used to complain about. The next measure of age is when you start seriously considering the same solutions that your father used to bang on about. I appear to have reached that point…
This all came about as a result of a NZ Herald article pointing out the amount of money being made in NZ by overseas domiciled companies, and the amount of tax those same companies pay. This is important to you and me (as it was to my father), because if someone else doesn’t pay their fair share, then you and I will be forced to make up the balance. Personally, I would rather that Apple pays.
The figures at issue are astounding. Apple was cited by the Herald as an example – and I have no idea whether these figures are correct. But Apple sales in NZ were said by the Herald to be $732m. Tax paid is said to be $8m. That is 1.09% of turnover. As the tax rate is 28%, this suggests that Apples profit on a turnover of $732m is $28.57m, or 3.9%. If you or I were making a return of 3.9% from trading activity, we would probably regard it as borderline. Apple is, at time of writing, the most profitable company in human history.
So something is clearly wrong here.
What is happening, we suspect, is that the trading profits are stripped out by a series of costs, paid from NZ to tax haven domiciled entities that form part of the Apple group. Tax is then paid in those other countries, on money earned in NZ. Because these form part of Apple NZ’s costs, they are expenses, and no tax is payable on expenses.
But what if tax was payable on every transfer of funds? Tax on transfers, not on “profits”?
As you would expect, economists have already considered this option, called an Automated Payment Transaction Tax (APT).
The basic principle is something that is similar to GST. The principle with GST is that each time to buy a goods or services, you pay a tax at a flat rate. That rate is currently 15 %.
With an Automated Payment Transaction Tax, each time money moves, it is taxed. So it replaces GST. It also replaces income tax. In fact, it replaces Gift Duty, estate taxes, land taxes, customs duty and everything else. Every time money moves from entity A to entity B, it is taxed. The rate of tax is suggested by on economist to be as low as 0.3% (Google for Edgar Feige, “ The Automated Payment Transaction(APT) tax” if you wish to see a more detailed explanation).
I think I would vote for that. Replace GST at 15% and income tax at 30%, for APT at 0.3%.
No more tax returns or GST returns, as tax is collected by your bank, each time you make a withdrawal. Cash withdrawals are taxed at a higher rate, so that the cash economy also ends up paying its fair share. Every withdrawal of cash is taxed at a suggested rate of 5%. That is still a lot better than GST.
What this means is that when Apple earns its turnover of $735m, it will have paid tax of $2.2m. When it sends it overseas to another entity, it will pay a further $2.2m. That only makes $4.4m, which is less than Apple is paying now, so it will not be unhappy with that outcome.
However, the Herald also says that 20 companies operating in NZ collectively had a turnover of $10 billion, and collectively paid $1.8m in tax. Apple is clearly an exemplary corporate citizen by comparison. Under an APT, those 20 companies would have to pay $30m in tax. At which point, we seem to be winning.
But even the global companies have reduced compliance costs. No tax returns are required. It is a “pay as you go” system, and the only tax collectors are the banks. I don’t think there will be any sympathy for them. Indeed, it may simplify the compliance banks are already required to perform under the current Resident Withholding Tax requirements.
So everyone gains something.
Whether the proposed 0.3% rate is correct is, of course, a major issue. But anything less than the GST rate will seem a win for those who spend all their income. It is because every transfer is taxed, that the rate can be so low. But that means capital purchases such as a house, and financial transactions that were never caught in the GST net are also part of the revenue system.
One objection is that a flat rate makes the poor pay a higher proportion of the total tax take. That is not true with APT. This is so, because the rich have a surplus on income over expenses, and as a result, move the surplus around more – investing it. Each time the funds move, they are taxed. So the same money can be taxed multiple times. Whereas the poor receive it and spend it – so are only taxed effectively once.
This is what makes a flat rate amount to a progressive tax system. Simply because poor people spend all they receive, they pay a lesser amount of tax proportionately. Because the rich hold and invest, they keep paying tax on the same money, so thus pay proportionately more tax. By earning more, more tax is paid – but still at very low rates.
Perhaps, instead of fiddling with more income tax and GST rules (where each rule creates more loopholes and considerable compliance costs) we need a fresh and comprehensive consideration of how we tax and what we tax should be considered.
An APT seems to solve the riddle of global companies with tax havens engineering how much profit they make, and minimising the tax they pay. It can also be imposed unilaterally in NZ, without the need for International tax co-operation (which will be a long time coming).
Simple to apply, simple to collect, with minimum compliance requirements, and a very low rate. It looks like a magic bullet to me. As I recall it did to my father, some 30 odd years ago…
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