Income tax with tax deductibility invites cheating and corrupts honest people

Tax Fraud - TimeToday I heard of someone who in the process of defrauding the tax department. I won’t go into the details of it on this occasion.

We have all heard these tax evasion stories. It’s because the tax system invites fraud like that. I can remember sitting in the accountant’s office at tax time and noting the way the accountant asked his questions. My husband was a GP and we had both written books, so our expenses for our book writing were tax deductible. The accountant would say, “And this $480, was that for travel associated with your book?” It was in the days when you had printed bank statements posted to your homes and it was a matter of labelling each sale and matching it up with a cheque. There was no internet banking then, and it was easy to forget to record a cheque properly.

The time with the accountant was a cross between a conspiratorial plot and an open honest discussion. I know never felt comfortable any way. We usually ended up so that some expenses were declared correctly and some dishonestly. I got the impression that the accountant had to run a fine line between pleasing his clients and keeping a good reputation with the IRD, so the atmosphere was palpable.

Just imagine this occasion multiplied a few thousand times by couples all over the western world. Is it or isn’t this item tax deductible? Such a waste of time. So many hours spent by so many on tax avoidance. Why? Because we have income tax, a completely illogical tax. We should tax what we hold or take not what we do or make.

Apart from the occasional saint, we all have tendency to get away with what we can and the system just brings out the dishonesty in us. Accountants will be more familiar than I am with all the various ways people can cheat – by declaring family gifts as tax deductible capital items and other forms of false deductions, as well as having offshore bank accounts and making false invoices. Then there is the straight “cash job” indulged in by a range of tradespeople and others.

Just as a welfare system based on your relationship status invites you to cheat, so a tax system based on what you earn invites you to cheat. Cheating is an inevitable result of a wrongly targeted tax system and an outdated welfare system.

In contrast a land rental cannot be avoided. There are no tax deductions. You pay for what you use of the commons and that is that. You can’t take your land offshore and hide it in a tax haven. You can’t cheat. The tax is simple and cheap and hard to evade. Likewise if you use water commercially for irrigation or other purposes, you pay for the use of the water. Simple. No tax deductibility there either.

Inflation or Growth Ridiculous Options

We have just sent out the following media statement (but have left out my phone number for this version)

Media Statement

13 March 14

Inflation or Growth Ridiculous Options – New Economics Party

The unproductive arguments raging among economists and central banks about when and how much to raise interest rates to curb inflation illustrates the complete failure of conventional economic theory, according to Deirdre Kent, spokesperson for the New Economics Party.

“Here we have the Reserve Bank putting up the official cash rate to keep inflation below 2 percent and the manufacturers saying that will slow productivity and put people out of work. Economists argue themselves round and round.

“It seems then that under the orthodox economic theory, you can’t both avoid inflation and have a thriving economy. A small child can see how stupid this is. Surely, the child will say, intelligent adults can invent an economic system where there is no inflation yet there are jobs at the same time?
“The problem is that governments and central banks are relatively helpless when they allow banks issue 98% of the country’s overall money supply as they do in New Zealand. They have few tools at their disposal to curb inflation. We end up with this inane cycle of inflation one minute and unemployment the next.

“During the Depression, Wörgl, a small town in Austria, created its own money and charged a circulation fee. Every month the holder of a Work Certificate had to buy a stamp and place it on the back of the note to keep it valid. So the money circulated fast. At one stage there was inflation, so some notes were withdrawn from circulation. Over 15 months, unemployment in Wörgl dropped 25 per cent, when in the rest of Austria it had risen 10 per cent during the same time period.”

The New Economics Party supports a return to state seignorage, where the country’s legal tender is issued by the Treasury and not by commercial banks.

Zero Interest Rates aren’t the root cause of housing bubbles – wake up it’s the tax system

imagesJesse Colombo is a great person to follow on twitter (@thebubblebubble). He posts information on bubbles – housing bubbles, commodity bubbles, any sort of bubble. He is a young man who was one of a handful of people to forecast the Global Financial Crisis. He has a superb website.

So when he drew attention to an article by him in Forbes Magazine I was an eager reader. Entitled Why Singapore’s Economy is Heading for an Iceland Style Meltdown. Page after page of interesting facts, graphs, and the usual good analysis of what is happening…

But then I came to a sentence which said “Ultra-low interest rates are the primary reason why credit bubbles inflate” and I realised that my much admired Jesse Colombo hadn’t gone the step further in his understanding. He was so focussed on his bubbles he didn’t allow himself time to think of the illogical tax system we all use (and which of course suits the banks very nicely thanks).

Of course zero interest rates will cause bubbles of all sorts but only when there are no land taxes or resource taxes to stop them. So the zero interest rate isn’t the root cause, it is the illogical tax system.

Unfortunately most of the world is completely unaware of this and my hero is no exception. They assume unthinkingly that there is only one tax system regime, and that is income tax, corporate and sales taxes! England existed completely on land tax from 1066 to 1216 and progressively declined since then. Income tax wasn’t introduced in England till 1799. It is half a lifetime since a New Zealand government legislated against having a land tax and people have forgotten. A thirty year old in this country can’t even remember that we once had no sales tax.

If there is no charge on the holding of land, of course the price of land will escalate. A land rent, ground rent, land fee paid regularly to society will stop housing bubbles in their tracks. If there is no charge on the holding of a commodity, the price of that commodity will rise. But with a tax system that taxes what you hold or take not for what you do or make will set this right. Finally the liquidity in the system will flow into productive enterprises not speculation.

Bernard Lietaer says our relationship to money is like a fish’s relationship to the water in which they swim. They don’t notice it. Well the human species has two large issues yet to notice in the environment we live in – the design of our national currency and the tax system. If awareness is half way to solving it, we had better become conscious of our tax environment and currency design environment and we had better raise that consciousness mighty quickly.