Tax, the Enemy behind our Backs! (B)

This article is a sequel to a June 1992 article. The text was sent as a submission by Quintessence to the Inquiry by the Joint Committee of Public Accounts of the Parliament of the Commonwealth of Australia into Internet Commerce, as well as to a study by the Australian Taxation Office into the Internet. The article argues that developments such as the Internet will make it increasingly hard to raise tax. As well, the way such tax revenue is used to fund things such as education is increasingly out of step with such developments.

A. Telecommerce and Tax

An Inquiry is under progress by the Joint Committee of Public Accounts of the Parliament of the Commonwealth of Australia into Internet Commerce. One of the things the Committee is looking at is the treshold under which goods can enter Australia without incurring sales tax, customs duty and other levies that are charged on goods that are imported into Australia. Increasingly, people in Australia are ordering goods such as books and CDs over the Internet for delivery by mail or courier from abroad. Of course, Australian shopkeepers still have some advantages, as shipping costs are substantially lower for bulk orders. But, as usual, calls for protection have some populist appeal.

In a move to avoid spooking local Net entrepreneurs, Australian Taxation Commissioner Michael Carmody recently said that Internet transactions pose no immediate threats to the tax revenue base and that the greatest danger was that the Australian business community might miss opportunities from the boom in Net commerce. Nevertheless, Mr Carmody proposed a regulatory straightjacket including compulsory display for all businesses of their national registration number on their sites, and compulsory registration of Net enterprises and their hosts with the Tax Office. Such proposals are typical for bureaucrats who believe that in life one can be sure of two things, death and taxes.

Developments such as advances in Information Technology and deregulation of telecommunications make that distance is increasingly irrelevant in electronic commerce. As long as books and CDs are imported in bulk by wholesalers to be sold through shops, the Taxation Office could easily impose tax on transactions. But when customers place their orders directly with overseas suppliers, this becomes more difficult.

B. Costs outweigh Benefits

Australia's Prime Minister, John Howard, recently said that the information revolution was potentially the greatest transformation of the world economy since the industrial revolution. Yet, many believe that simple changes in regulations will patch up the system. In the case of books and CDs, goods are entering Australia that can be checked by Customs. Therefore, imposing tax on books and CDs is technically feasible, but one can question whether the amount of money raised that way will outweigh the cost.

Importantly, it will be even more difficult to check online suppliers that operate through branches in overseas tax havens to provide services and deliver information to online customers. Note that such operations are not restricted to the Internet. As telecom prices continue to fall, especially for international services, one can simply dial up overseas suppliers directly at negligible cost.

Even if tax and customs officers could get away with the intrusion of privacy of tapping telecom lines, it will be virtually impossible to interpret the increasing number of messages and identify a single transaction. In electronic commerce, an offer may be made, an order may be placed, authentication, verification and checking of credibility may follow. Communication between bank and client may occur, as well as between bank and supplier. Many pieces of evidence will have to be collected to prove that a single transaction has taken place. Messages may come from many different sources, be temporarily stored and rerouted, to arrive at different times and in different packet order, perhaps encapsulated within other messages, partly or entirely encrypted.

Note that already now, the Telecom network carries more data than voice traffic. Internet traffic alone is set to overtake all other forms of telecommunications by the end of this year (APC, oct.97). Even without deliberate efforts to hide such transactions, it is a huge task to reconstruct even a single transaction before a court. Putting a tax officer next to each teller operator in each supermarket, with the instruction to make sense of all transactions taking place during the day, is simple in comparison with what takes place on the Internet, which is global and active 24 hours a day.

The rapid technological developments make many people concerned about privacy implications. Quintessence does not dismiss such concerns, but argues that it is actually becoming more and more difficult to use such information to exercise dictatorial control. To give tax officers dictatorial powers to invade people's privacy will turn out to be an expensive mistake, apart from the fact that such an idea is of course morally and ethically despicable. In short, Quintessence argues that the huge workload associated with taxing Internet transactions, both for public servants, suppliers, banks and consumers, will in itself be reason enough to realise that the cost of such taxes will outweigh the perceived benefits.

C. Stop Patching up the System - Embrace the Future!

Clearly, a tax system that tries to avoid any loopholes, will become increasingly difficult and expensive to administer. Such a system requires dictatorial powers to invade consumer privacy. Such a system will put local business at an uncompetitive disadvantage compared with overseas suppliers that can operate in a less restrictive and administratively demanding environment.

Even a complete overhaul of the system will not solve the problems it is likely to encounter in future. In particular, a move towards a broad-based consumption tax on sales of goods and services (GST) will be out of step with developments such as telecommerce. Increasingly, customers are contacting suppliers directly, cutting out the local retailer. In the face of globalisation of trade and without such local retailers, a GST will be hard to administer. The fact that Australia does not have a GST will turn out to be a major competitive edge in any large-scale introduction of telecommerce. The fact that software currently does not incur sales tax is a huge incentive for software developers to choose Australia as a base.

Quintessence argues against a national telecommerce straightjacket and instead recommends to embrace the future with confidence rather than fear. This argument transcends the issue of tax collection. This argument also implies that local CD manufacturers should not be given tax privileges and tariff protection. It also implies that publishers and record companies should not be given the power under copyright law to prevent competition and to enforce exclusive distributor arrangements within Australia. Internet commerce is a global issue and any national legislative framework is likely to disadvantage local business and consumers.

The Australian Federal Government recently appointed Senator Richard Alston as Minister for the Information Economy. Senator Alston said that electronic commerce would transform all industries and the faster industry embraced the information economy, the faster new jobs would be created. Senator Alston, launching a report by the Information Policy Advisory's Council (IPAC), rejected the use of incentives to attract hardware manufacturers. The IPAC report argues that it was more important that Australia become a sophisticated user of online technologies than a major hardware manufacturer. Quintessence agrees with such conclusions, but stresses the importance of painting the full picture.

D. The Full Picture.

In this context, it is sad to see education in Australia heading back to the dark ages of rote learning. In an agressive campaign focused on literacy, Federal Schools Minister, David Kemp, is using his control over funding to force schools to revert to methods of the dark past.

Some will argue that, in the absence of a rigidly-enforced tax system, Australia will miss out on tax revenue that should be spent on programs such as the Kemp literacy crucade. Such people will generally also claim that Australia needs to train children in literacy in order for Australia to be competitive in future.

Quintessence argues the opposite on both counts. Firstly, without such a tax system, business will flourish and many initiatives will evolve that will interact to open up new opportunities and create the associated prosperity. Secondly, it is better to shake off such a misguided educational focus on dinosaur literacy that is out to suppress creativity. Without such literacy programs, there is actually more chance of developing fluency in the multimedia world of the future - a world that will demand qualities such as initiative and creativity, rather than old-fashioned discipline and conformity!

Teachers who exercise a legally backed monopoly on education are supported by the tax system in many ways. Parents who want to prepare their own children in the best possible way for the future, are facing compulsory schooling laws that prevent them from doing so. Homeschoolers pay tax and thus pay for the education of other children, on top of the cost and effort of educating their own children. Such parents have to pay 22% sales tax on the computer equipment that they buy for their children, while schools pay no sales taxes. Parents cannot even subtract such expenditure from income tax.

It is important not to picture the Internet as a threat to a system that otherwise operates so smoothly. It does not operate smoothly! The Internet merely highlights the many problems that are inherent to the system. In essence, tax constitutes the legacy of a predatory system that once ruled Australia from afar, maximising revenues in order to put more jewels into a dictatorial crown. In modern times, such a system does not serve any purpose and it disadvantages business as well as consumers. Developments such as Internet commerce expose inherent problems with taxation and with institutions such as schools that feed on tax funding. Already now, such subsidies risk breaching international treaties. As education becomes more commercial, the local dinosaurs will be no match in the global market for educational services over the Internet. Holding on to taxation puts entire nations at risk of isolating themselves from future global markets.

There are many who will agree with Quintessence on individual points. Few, however, seem willing or able to draw conclusions that show the full picture.

The Citibank Visa TravelMoney card is a disposable card that does not carry your name.
By using your PIN, ATMs all around the world will give you cash in local currency up to the amount that you bought the card for.
(from a Citibank ad, August 1997)

The following lyrics by Don Paragon appeared in Optionality Magazine, January 1992.

Citizen of the World

Tax, tax, the enemy behind our backs;
tax, tax, the enemy behind our backs.

I'm a citizen of the World
and I go where I want to;
I've got money in my pocket
and a Visa in my hand.

I don't need social welfare,
I don't need protection,
I can do what I want
and I can pay my bills.

I'm a citizen of the world
because I live in the city
and I don't need a paper
to say I'm alive.

I'm a citizen of the world,
I don't need a passport
and I hate paying taxes to
the kings and queens.

I'm a citizen of the world
and I can call who I want to
I've got my phone in my pocket
and my money in the bank.

I'm a citizen of the world
because I live in the city
and I don't need a paper
to say I'm alive.

I'm a citizen of the world,
I don't need a passport
and I hate paying taxes to
the kings and queens.


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