In recent months there has been much talk in the United States of the possibility of introducing a National Sales Tax (NST) to replace the existing income based tax system (stories on Fox News, CNN Money). The proposal has been steadily gathering support in Congress and has the backing of Federal Reserve Chairman, Alan Greenspan (stories on Chicago Tribune, Fox News).

The proposal for an National Sales Tax would replace all forms of taxation, including income tax, capital gains tax, corporate taxes, and other duties and levies with a single sales tax, or Goods and Services Tax (GST) for the Australians amongst us.

As a long-time advocate of a completely consumption based tax system here in Australia, I’ll present my own take on this issue and why I think it would be an extremely beneficial policy. The main points in favour of a NST, in my opinion, are as follows:

• Increased investment and employment
  The present income based tax system has the following effects:
  • Investment is strongly discouraged through Capital Gains Tax (in fact investment is doubly taxed: first in the form of income tax and then again on the capital gains earned on the investment).
  • Employment and promotion are discouraged through Income Tax.
  • Entrepreneurship is discouraged through Income Tax and Corporate Tax.
  • Consumption is encouraged, since it is, on average, taxed at a much lower rate than income.

  A consumption based taxation system would have the converse effect. Namely, people would be encouraged to seek employment, to seek promotion while in employment, and to invest their money rather than spend it. This would have several consequences:

  • Employment levels would increase. As a result of the elimination of disincentive to work we could reasonably expect unemployment levels to decrease. This would be further exacerbated by the fact that with increased investment and a decreased tax burden, companies would have more capital available with with to take on employees.
  • Interest rates would be lower. With a higher percentage of peoples’ disposable income going into savings, banks would have a greatly increased capacity to lend money, resulting in lower effective interest rates. An important point is that these decreases in interest rates would not have an inflationary effect, since they come about as a direct result of people’s consumption abstinence.
  • Economic growth would increase. As a result of massively increased investment and decreased growth disincentive, economic productivity (i.e. GDP) would increase.
• Elimination of bureaucracy and complexity
  The present tax system necessitates a massive bureaucracy to support its processing and collection. In the United States this costs almost $11b annually. Under a simplified consumption based tax system this bureaucracy and its associated maintenance costs would be slashed, representing a significant saving to the tax-payer.

  In addition to bureaucratic simplification, a NST would represent an enormous simplification to the individual. I’m sure anyone who has filled in a tax return, whether it be here in Australia, the US, or anywhere else, would concur on that note.

• Less tax evasion
  A NST would eliminate tax evasion, which is rife under the present system. People often argue against sales taxes on the basis that they harm the poor and favour the rich. I would argue that in fact quite the opposite is true. It in an undeniable fact that the bulk of the income tax burden falls on the shoulders of the middle-class, not the extremely rich. In fact, the very wealthy typically have the means by which to avoid income tax altogether through a variety of mechanisms which are not accessible to the working class. Under a consumption based tax system this could, to a large extend, be mitigated, and everyone would pay tax as a proportion of how much they consume.
• Ideological reasons
  From an ideological point of view, I’m sure I’m not alone in being critical of how materialistic society has become. For this reason I believe a NST is a better alternative to the present system since it would encourage people away from living materialistic lifestyles, towards ones which place more emphasis on the importance of saving, investment and long-term financial planning.

Perhaps the most common criticism of consumption based tax systems is that they represent an increased burden on the poor. There are two rebuttals to this criticism:

• Under the NST proposal a rebate on tax paid would be offered to those below the designated poverty threshold.
• Unemployment levels would be reduced, resulting in many people at the lower end of the poverty scale being drawn out of poverty and into employment.
• The effects of the NST would be partially offset by an increase in disposable income.

In summary, a National Sales Tax would be pro-growth, pro-employment and pro-investment, which is in stark contrast to the present system which seems to discourage all the things we should be encouraging and discouraging all the things we shouldn’t.

Sources:

• “The Economic and Civil Liberties Case for a National Sales Tax”, Stephen Moore, Cato Institute.
• Americans for Fair Taxation.
• “A National Sales Tax is what America needs, Jeff Brewer, Political USA.
• “National sales tax gains momentum”, Jon Dougherty, WorldNetDaily.

Today the government put the controversial “Higher Education Support Amendment (Abolition of Compulsory Up-front Student Union Fees) Bill 2005” before Federal Parliament, which would ban compulsory student unionism (CSU) throughout Australia. Over recent months this proposal has been subject to countless protests by activist student groups and much bad-press. Consequently, as a staunch supporter of voluntary student unionism (VSU), I’ll present the supporting case from my personal perspective.

From my point of view, there are four main supporting arguments in favour of VSU:

• Freedom of association
  One of the fundamental tenets of Democracy is freedom of association. When a student is forced to belong to an organisation which they do not want to belong to, this is a fundamental violation of our personal freedoms. This criticism applies to any sort of forced affiliation, but particularly to student unions since they are not all-inclusive and not representative of the majority (refer to my next point).
• Student unions are not representative
  Student unions is Australia typically pursue blatant political agendas, usually including socialism, feminism, environmentalism, drug-law reform and countless other leftist ideologies, typically in extreme form. While people are certainly more than entitled to any or all of these points of view, the fact is that they do not represent a majority perspective. I should clarify that I am not suggesting that student unions instead start pursuing right-wing political agendas. Rather, they should pursue strictly apolitical agendas and focus on providing services which are available and useful to all. So long as student unions promote any ideology over any other, they are not, and cannot be the all-inclusive, representative bodies they should. However, student unions are so universally plagued by the problem of partisanship, and the political affiliations so firmly entrenched, that most students, myself included, have no faith whatsoever they will change on their own accord.
• Students should not have to pay for services they do not use
  At the University of Queensland, where I study, I pay approximately $300 per year in Student Union fees, and I should reasonably be able to expect something in return. Unfortunately, rather than using their massive budget to provide services of benefit to everyone, the money is funnelled into countless causes which are of no benefit to the vast majority of students. Following are a few examples of ways in which Student Union money is spent ‘representing’ students at UQ:
  • The Women’s Collective, a small group of activist feminists, receive approximately $150,000 per year in support from the Student Union. This money is spent on activities such as sending members to surf and meditation camps on the New South Wales North Coast. Needless to say, ‘services’ like this are an extravagance and of no benefit to the average student.
  • The Queer Collective, a group open to gays and lesbians on campus, receives similar levels of funding and spends it in similar ways.
  • The Food and Wine Appreciation Society, a small group of people who regularly eat-out at some of Brisbane’s most expensive and elite restaurants, at the expense of the University of Queensland Student Union.
  • The High Society, my personal favourite, is a group of marijuana smokers whose stated goal is to promote drug-law reform, but in fact organize for drug dealers from all across Brisbane to gather once a week on-campus to sell to UQ students. One of their trading sessions was recently stormed by the police, however they still meet regularly and still actively deal drugs to students on campus. Needless to say, this ‘essential service’ is subsidised by the Student Union.

  In the meantime, facilities like the refectories, which are used at some stage by the vast majority of students, are not subsidised and run at a large profit. In light of this, arguments in favour of CSU, which argue that it facilitates essential student services are not credible.

• When membership is compulsory, student unions are run inefficiently
  In the absence of competitive forces, student unions have no incentive to run themselves efficiently. As an example, my purchases at the Union-owned refectories are approximately 20% more expensive than if I walk 10 minutes down the street to the nearest supermarket. The same applies to other Union-owned enterprises. Not only is the Union uncompetitive, but it actively seeks to stifle competition. In fact, the Union has regulations in place which forbid non-Union-owned enterprises from operating on Union premises, if they are in direct competition with a Union-owned enterprise.

In summary, the argument in favour of VSU is not one which ruthlessly opposes the existence of student services or student representation, as much of the media, and certainly the CSU supporters, have been making out. In fact, the argument for VSU is that it is in the interests of openness, transparency, competitiveness and personal liberty, to allow every individual the right to choose for themselves what is best for themselves.

If you’ve got five minutes to spare, try the World’s Smallest Political Quiz, made by the well known Libertarian organization, the Advocates for Self-Government. The quiz asks 10 multiple choice questions and gives you a graphical representation of how they rate your political persuasion, on a scale of Conservative, Statist, Liberal and Libertarian. Needless to say, as with all such quizzes, especially political ones, the results should be taken with a salt mine. Nonetheless, it’s a good way to get people interested in political issues and get the conversations rolling.

Here’s my result:

This post was inspired by, and refers to, an article I read by CNN on the US Congress’ recent passing of a bill to increase the federal borrowing limit by $800 billion.

As one of his first actions since re-election this month, President Bush has increased the federal borrowing limit from $7.38 trillion to $8.18 trillion. The cap places a legal limit on much debt the government can amass, and, as a result of Bush’s ongoing record deficits, which are rapidly approaching the half trillion dollar mark, the existing cap has been reached. This raises some very serious concerns for both the US economy and the world economy as a whole.

Ordinarily, running a significant deficit on a temporary basis would not raise too much concern. In fact, many economists argue that during periods of economic stagnation, which has recently been the case, this is a favourable approach, sometimes referred to as the Keynesian approach (after the famous economist John Maynard Keynes). This line of thought argues that increased government spending and tax reduction (i.e. deficits) act to stimulate the cycle of spending and consumption, thereby creating jobs and lifting productivity. In other words, large scale spending can serve to kick start a stagnant economy. However, the present situation is a very different one. The massive spending engaged in by Bush does not represent one-off spending. Instead, it comes about as a result of fundamental structural changes which imply that the magnitude of deficits will be on-going, and, in fact, probably increase further. Increased military spending complimented by on-going military commitments in Iraq and Afghanistan, the problem of an ageing population, record high oil prices, and the intention to make permanent, income tax cuts offered by Bush in his first term, all contribute to this expectation.

By my calculations, if deficits continue to be of the same magnitude as they are now, then in about 2 years time Congress will have to increase the borrowing limit again to avoid defaulting on its debt (which would have absolutely catastrophic consequences). Clearly we have a situation that is not sustainable. At $8.18 trillion, the federal borrowing limit represents about 70% of the GDP of the Unites States. If the government continues to adopt the band-aid solution of simply increasing borrowing limits whenever they hit the limit then eventually paying off the interest on the debt will become untenable and large scale spending cuts and/or tax increases will be necessary. The approach presently adopted is akin to a credit card user hitting his credit limit, and then rather than paying off the credit, increasing the credit limit further to go on another shopping spree. It may work fine for while, but eventually, and inevitably, the level of debt becomes unsustainable. Clearly we all hope the US economy will not reach such a stage. However, unfortunately this is a very real concern and one which would have very serious implications. From the Australian perspective, things would be very bleak indeed, since Australia’s economy is both highly dependent upon foreign direct investment, which comes, to a large extent, from the US, and foreign export markets, of which the US is one of our largest.

With the recent US election yielding a totally unsatisfactory result there remains only one thing to do… try and laugh it all away! The funny chaps at JibJab have made many a great Flash cartoon, including the now famous This Land!. You’ll need Flash player to watch them. For a more direct laugh, check out the endless list of Bushisms, or, for another favourite of mine, CretinWorld.