Given the ongoing saga around “Pension Farce” or “Pension Force”, where the Coalition government is turning Centerlink into a punitive debt collection agency while letting multinational corporates away with zero tax bills, I thought frequent MB contributor Philip Soos’ analysis of the attack on the cash economy…
by Philip Soos
The Coalition government recently announced a taskforce to investigate and recommend ways to deal with the so-called black economy. This primary revolves around business transactions conducted in cash to evade taxes. Other justifications concern the illicit drug trade and welfare fraud.
The plan is to clamp down on this aspect of the black economy to make it more difficult for workers, businesses and households to evade tax, boosting taxation revenue. It is estimated the black economy accounts for about 1.5% of GDP or $21bn.
There is also speculation that the $100-dollar bill may be removed from circulation.
The Coalition government’s explanations seem sensible, with the mass media generally supportive. Yet, there are robust arguments why the Australian public should oppose this move – mostly because the government is trying to deal with problems it created itself.
The drug trade in Australia is thriving and constitutes a considerable portion of the black economy. This illegal trade, however, only exists because the government criminalises it. The primary reason offered is that it prevents the production and consumption of dangerous substances for recreational purposes. It clearly does nothing of the sort.
By criminalising drugs, product is manufactured in unregulated and uncertain conditions, leading to vastly inferior quality relative to that in the legal and regulated pharmaceutical industry. Huge monopolistic profits are reaped by drug cartels and those in the supply chain, leading to a significant loss of taxable income. None of this would happen if the drug trade was legalised – and there is growing acceptance that it should be.
In short, the government cannot use the pretext of clamping down on an industry which is presently illegal by claiming the cash transactions facilitates the existence and growth of it when it is the government’s own criminalisation policy which brought it into existence. By legalising, billions of dollars of taxes could be raised through the GST, income tax and externality/sin taxes.
Another area of alleged concern is welfare fraud. Recipients of welfare payments can work in the black economy, making a modest income without reporting it. If this were properly reported, welfare payments would be reduced. Again, this is a problem government has itself created.
While the government and certain sections of the mass media pretend Australia has an out-of-control welfare system, the facts demonstrate Australia has some of the smallest welfare expenditures relative to GDP, easily the most well-targeted and has the highest “target-efficiency” (each dollar in spending reduces income inequality the most) in the OECD.
When those on Newstart allowance, disability support and age pensions earn even a small amount, ie $150 per week, they start to lose a significant proportion of their modest payments. In other words, welfare recipients (the poorest) endure the highest effective marginal tax rates in the country. Depending on the type of payment and earnings, these rates can range between 40% to over 100%.
So, despite the government’s incessant pressure for recipients to work, people either remain unemployed on welfare, or work and have their payments severely cut or ended. Recipients can escape this by working in the cash economy and not declaring their earnings.
There is a solution – simply allow recipients to earn a lot more before their payments get reduced. Many recipients would be more likely to declare their earnings, though whether this would lead to a net tax increase to the government is debatable. The point is, given Australia’s meagre and tight social welfare system, with many recipients living in income poverty, not declaring modest earnings is hardly a threat to the integrity of the taxation system.
Other problems abound if the government were to abolish high-denomination bank notes and restrict cash payments above a specified amount, such as $1,000.
One is privacy. By forcing the public to use electronic payments, their activities and whereabouts can be tracked. Given the growth of the surveillance state and intelligence-industrial complex, this is a real infringement upon freedom and privacy if the authorities access this bank data.
This policy is also designed to generate inefficiency by forcing dependence on the banking and financial system. Where previously transactions may have been efficiently conducted in cash, the public are forced to use electronic payments, inserting a third party into the transactions: banks – to their benefit.
Worse, this move against cash makes it easier for the RBA to implement negative interest rates in a significant economic downturn to bail out the banking system. It would become almost impossible for the public to take their savings and other liquid assets out of the banking system as cash to protect themselves from being charged for having savings.
Australia’s banks are the most profitable in the world, primarily from having lent an ungodly amount of mortgage debt to households. According to the latest data, Australia has the third most indebted household sector in the world, at 123% of GDP. Policy should not be rigged to make them even more profitable.
Finally, just because labour income tax and GST revenues may be lessened by the cash economy is not an argument to criminalise it. Instead, it is a sound reason to shift our pathologically insane 419 tax and tax-like fees off economically useful activity and onto areas which do not result in deadweight losses and cannot be hidden – such as the land and mineral markets.
The leakages into the cash economy pale in comparison to the deliberate siphoning into the two largest tax havens in Australia: residential property and superannuation. The IMF demonstrated Australia has the largest tax expenditures in the OECD relative to GDP.
This move against the black economy and cash is ultimately a pretext to oppress the poor, welfare recipients, savers and the prudent to benefit the government’s campaign contributors: the banking and financial system, for both immediate and more long-term goals. It should be resisted.