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EasyTax redux

February 4th, 2003

Remember Pauline Hanson’s EasyTax? An identical proposal is being plugged in an Op-Ed piece in the New York Times. In essence the idea is a flat-rate tax on every transaction, without the system of input credits that distinguishes a VAT/GST.

The problem with a transactions tax of this kind is that people and firms can, at significant but not unbearable cost, economise greatly on transactions. For example, firms can produce all its inputs in-house rather than dealing with contractors and suppliers. This means the product is taxed only once, when it is finally sold, rather than at many different points along a supply chain. If a tax were levied at rates high enough to raise lots of revenue (enough say to replace the income tax) firms would certainly do this. Households have more trouble but can still manage.

A small tax on large-scale financial transactions, often called a Tobin tax, is a defensible idea (I’ve defended it here), but it would not produce anything like the revenue needed to replace income or sales taxes. In Australia at least, we already have taxes on retail financial transactions and the amount raised is pocket change in the governmental accounts.

Looking at my piece on the Tobin tax, from 1998, I can’t resist quoting the following.

Many commentators have seen in the US boom evidence of a new ‘miracle’ economy, in which recessions are a thing of the past. Two kinds of miracle have been proclaimed. One version is that the technological marvels of the Internet have fundamentally changed the nature of economic activity. The other is that the massive increase in flows of capital and goods around the world, commonly called ‘globalisation’ rewards free market countries like the United States at the expense of the sclerotic welfare states of Europe.

For those of us who don’t believe in miracles, however, the boom of the 1990s looks depressingly familiar. In every speculative boom, a theory is invented to show that this boom is different and will never end. The more appealing the theory and the longer the boom, the worse the subsequent crash.

The current economic crisis therefore provides something close to a crucial test. If the US economy comes through unscathed, it will be strong evidence in favour of claims of a free-market miracle. A slowdown or recession would add more support to the growing calls for a step back from deregulation.

The US did indeed come through the crisis I was referring to, arising from the collapse of Long Term Credit Management, but only by virtue of Greenspan’s willingness to pump unlimited funds into an already overheated system, providing a temporary fix at the cost of more trouble later on. As I said, ‘the longer the boom, the worse the subsequent crash.’

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