Putland Uncensored
Letters — including some that didn't get past the Editor
Friday, June 29, 2007:
VAT vs. Retail Tax: An open letter to Messrs Howard and Rudd
Gentlemen,In all economic circumstances, red tape is waste and waste is bad. If skilled labour is in short supply, we cannot afford to squander it on unnecessary paperwork. If, on the contrary, jobs are in short supply, we cannot afford to deter employers with unnecessary paperwork. If one part of the economy has a shortage of labour while another has a shortage of jobs, red tape is bad for both.
What then is to be done about the GST?
The broad-based indirect tax proposed by Mr Howard in 1979 and 1981, like the one "preferred" by Messrs Hawke and Keating in 1985, was to be a single-stage retail tax. It would have imposed paperwork only on retail businesses, and would have required records of sales only — not purchases.
But the GST that we now have is a value-added tax (VAT), which imposes paperwork on retail and non-retail businesses and requires records of sales and purchases.
The alleged advantage of a VAT over a retail tax is, or was, that the VAT is more resistant to evasion because it creates two records of every transaction, and because it encourages businesses to declare their sales so that they can claim the associated input credits. But we now know that some businesses claim false input credits. Presumably, if they get caught, they falsely accuse their alleged suppliers of failing to declare sales. The mirror-image of this scheme, of course, is to under-declare both purchases and sales and, if caught, accuse one's customers of forging input expenses.
Turning the GST into a retail tax would eliminate such abuses. It would reduce compliance costs for retailers. It would eliminate GST compliance costs for non-retail businesses and, in so doing, remove the long-running legal uncertainty about the point at which exported goods become zero-rated. The tax rate, the (Federally imposed and Federally repealable) procedure for changing the tax rate, the rules for determining which items are taxable and which are not, and the pro-rata rules for small businesses with both taxable and non-taxable product lines, could all be left as they are. Enterprises that are currently input-taxed could remain so: sales to them could simply be classified as retail.
In short, here's an opportunity to cut red tape with no political or fiscal downside. Which one of you will promise it first?
All replies, in the absence of explicit instructions to the contrary, will appear with this letter at putlandletters.blogspot.com.
Yours sincerely,
Gavin R. Putland.
