Capitalism breathes through tax loopholes

This was a keynote speech given to the Western Australian representation of the Students for Liberty conference July 30, 2016 at UWA. The conference sparked constructive debate and I drew on my wide knowledge and experience to talk about the importance of loopholes in an environment with a crushing tax burden on all.

The problems of Australia

I began by pointing out the main problem of Australia and its people before discussing Brexit, the role of think tanks and their role in societal change, as well as recounting conversations with a former Estonian Prime Minister.

This problem started worrying me back in 1977 when, as president of the Kalgoorlie Chamber of Commerce, I wrote a piece expressing my concern at the difficulty any Australia business or individual had in generating and accumulating capital to invest and grow.

I explained that by the time any business filled in the various forms, paid the countless taxes and accounts there was nothing left to invest in innovation, business improvement or growth.

Some of you might say, “why not just borrow the money?”

Yes, you can do that, as many companies and, in particular, as many governments have done. They have turned debt into a disease.

I can give you countless examples like the Australian Government borrowing $1 billion from China to give to Indonesia as foreign aid to build Islamic schools in Indonesia. I have nothing against Islamic schools in Indonesia but it is the absurdity of Australian taxpayers paying for them to which I object.

Quite frankly this makes as much sense as Australia sending foreign aid to Scotland to fund cooking schools for haggis.

Stay away from ‘debt for dunces’. Those who borrow, to piss it up against the wall, are no role models.

Back to my story.

Shortly after writing that 1977 piece, on the difficulty of generating capital, I was visited in Kalgoorlie by Professor Harold Dulan [University of Arkansas] who was writing a book that brought him to the same conclusion.

His book was called Capital Formation Perspective for Australian Resources Development. I spent considerable time with Professor Dulan, who was surprised at Australia’s lack of concern. He said in his paper:

“The lack of a forceful and directive public and private policy to maximize the development of Australian natural resources, the myopic view of foreign capital inflow and the naiveté towards the private enterprise system combine to place Australia in a holding pattern in which time works against her advantages. Australia’s participation in world industrialization is in jeopardy.

“The question for Australia is time. How long can she wait to form the requisite capital, allow migrant intake to accelerate, maximize the development of her natural resources and assume a more sophisticated role in world industrialization? It is a serious situation for Australia.”

The time I spent with Professor Dulan caused me to take this matter even more seriously and I regard that meeting as a significant business lesson – that as you run your business career always aim to generate a surplus that you can quarantine, and direct toward research, growth, expansion or whatever is your passion.

Always remember that your earnings are yours. You own the property rights to your earnings. No one else can have a prior right. It is for you to decide how they are distributed. Paying a fair rate of tax is acceptable but it is not why we were put on earth!

Yes, you can pay all the claims that other people make on you but prioritize these so that payments to those who create value come first. That lesson is just as important as deciding how much money that you actually need.

It depends, of course, on what you wish to achieve and how soon you wish to achieve the balance between earning money and achieving your major goals. Money is only of use if you can do something sensible with it.

Let me warn you that the cards are stacked against you generating that vital surplus. I’m talking about the importance of you looking for loopholes so that you can achieve your goals.

I’ll come back to loopholes later.

This year, for the third time, I was invited to participate in the Free Market Road Show in Europe, so I have recently returned from nine cities in three weeks, including the UK, Lithuania, Estonia, Poland, Ukraine and Hong Kong.

This annual road show is quickly developing into a significant European event, consisting of a panel of 400 speakers, split into small teams, visiting 40 cities in Europe over a period of 44 days. It brings participants into personal contact with so many interesting international speakers, giving each of us the opportunity to ‘test’ our own thoughts and solutions with more learned observers from so many countries.

In some way we resemble a swarm of bees collecting pollen from one source and distributing it elsewhere, with the occasional resultant blossoming. This often happens in surprising places, where people frequently feel overwhelmed by problems that they imagine are entirely restricted to their own country.

Opinions can change, as my opinion of Brexit changed. The Brexit outcome largely resulted from the electoral battle between those who have confidence in the UK’s ability to prosper under self-responsibility and those wishing to remain in the comfort of a European security blanket, which is often regarded as something of a ‘sheltered workshop’.

There are parallels between the UK’s position in the EU and Australia’s position in Asia. Let me explain that comment by simply saying that the UK is one step removed from the Russian threat that unites many EU countries, just as Australia is one step removed from the China/North Korean threat that concerns many East Asian countries.

The UK has much to offer Europe, without sharing Europe’s currency problems and without bringing Russia into their everyday lives as, unfortunately, is the case in much of Europe. Perhaps similar to Australia’s relationship with South East Asia, despite South East Asia’s reluctance to categorize Australia as an Asian country, perhaps due to our insufferable arrogance?

With regard to the UK and the EU, there is a very high price to be paid by surrendering one’s sovereignty and it is unnecessary to do so if it is possible to enjoy the mutual benefits of free trade without adopting minimum standards. The same principle applies to surrender our own individual responsibility.

A friend recently asked me why I was spending so much time analyzing the problems in Europe when we have so many problems of our own in Australia. On reflection one reason is that I see the dysfunction of Europe as being similar to Australia’s federal dysfunction in respect to Australia’s various states. In Europe, 19 of the 28 countries are technically bankrupt but are living in hope of a bailout from above. Our Australian states bear a striking structural resemblance and we continue to send our tax revenue to far away Canberra – and wonder why so little of it comes back!

The cost of ‘paying freight both ways’ on these tax revenues for the ‘return journey’ is prohibitively high but we allow the system to continue as we seek comfort by having someone else to blame for our inability to balance our own budgets.

We need to define our terms before continuing. The unfortunate trend to adopt the language of the left needs continued monitoring and rebuttal from those interested in the language of liberty. I refer to the use of the word ‘liberal’ which, depending on which side of the Atlantic you are based, has quite opposed meanings. In Europe, it’s more associated with classical liberal or conservative whereas in the US, it is regarded as being akin to being a socialist.

Progressive is another word used by the left, as it is difficult for anyone to attack progress. In my mind, a progressive system is where work and thrift results in prosperity and self-reliance. However, in the US it means exactly the opposite to progress as it describes ‘living at anyone else’s expense but your own’.

Capitalism is another word that is used as an attack term by some and with pride by others.
The inability of our captains of industry to defend the system which has lifted so many people from poverty has enabled its detractors to use the word in a derogatory fashion. This has been done to such an extent that a fellow speaker on the Free Market Road Show, Professor Deirdre McCloskey, called for a new term to replace capitalism. She suggests ‘innovism’.

Fortunately, a few days before my European visit Australia had come second in the 2016 Eurovision Song Contest, so I didn’t need to conduct the usual explanation of where Australia was on the globe. I learned so much from each country. In Estonia I had the opportunity to explain how an Australian, Sir Arvi Parbo, was indirectly responsible for introducing a flat rate tax to Estonia. Estonians delighted in explaining that they invented Skype but I scored one back by explaining that an Australian, John O’Sullivan, invented Wi-Fi.

I had the opportunity of spending an hour with former Estonian Prime Minister, Mart Laar. reminiscing about those events that led him to introduce a flat rate tax and we chuckled about it. He is a rare politician who understands the value and the benefits that flow from good policy.

He introduced two waves of reform, each with a different focus, each time successful.
His clarity of thought impressed me as he explained Estonia’s determination to solve budgetary problems without borrowing or increasing taxation. His reforms and his choice of very good people to travel with him has left a lasting legacy. He is, rightfully, acknowledged as one of the new Estonian ‘founding fathers’.

He followed the first rule of business – select and surround yourself only with very good people.

There have been some significant reforms in many former Soviet Union countries, with outcomes that remind me of a Ronald Reagan quotation: “There have been revolutions before and since ours, but those revolutions simply exchanged one set of rulers for another. Ours was a revolution that changed the very concept of government.”

Reforms often change the concept of government by limiting government to the very few tasks that we can’t do best for ourselves as individuals. Australia benefited from some economic reforms in the decade-or-so from 1986 to 1998. However, that push for reform has stalled and there is now insufficient political courage to continue the process—for example, by simplifying our incredibly complex tax structure. The idea of a simple flat rate tax is not even discussed in Australia.

I’d like to talk about the complexity of the overall tax regime in Australia.

Ode (Owed) to Those Lovely Fellows of the
Australian Tax Office

Their little souls wish us to be unhappy ─
It aggravates them to have us vigorous, efficient and free.
They would much rather have the feeling
that fate is disciplining you and me.

It gives their egos wings
when yours and mine are clipped ─
They like to see our skeletons
when all the meat’s been stripped.

We, whose lives could be ruined in an hour,
listening to their puerile point of view,
can still aggravate those little souls
by remaining vigorous, free and efficient ─
so now, dear friends, that’s exactly what I do!

Economist Ludwig von Mises once said that capitalism breathes through tax loopholes and author Trey Thoelcke expands on Mises’ insight as follows:

“Loopholes get a bad rap because they are perceived as ‘unfair’. But loopholes are the natural outcome of a political system controlled by the compromise of hundreds of politicians in a single room that have to agree and pass something. It is never a clean, loophole-free bill. Perhaps what is more unfair is the fact that a group of people who contribute nothing to a business can take away that business’s income at will just by agreeing to it through some loophole-ridden compromise.”

Complex taxation arrangements were well described around 500BC, 2000 years before Adam Smith called for a ‘simple system of natural liberty, by one of the first libertarians Lao Tsu when he wrote:

“The more restrictions and limitations there are, the more impoverished men will be. The more rules that are imposed, the more bandits and crooks will be produced.”

Australian taxation is so complex that I don’t know any Australian who can tell you exactly how much tax they pay. Several years ago I bought a new car and it took me a full day to work out how much tax I paid on the car. When I discovered how much tax I had just paid, I wondered if I should ever buy another car. It’s easier to explain to children the burden of taxation in Australia. Firstly, if a stranger politely asked if he could taste your ice cream what would you do? The children inevitably say, “I suppose I’d let them.”

Secondly, if a stranger comes along and takes half your ice cream what would you do? They think about it for a while before replying, “Oh, I’d hide it so they could never, never do that again.” I then congratulate them for understanding how taxation works. They get it immediately.

Following the successful introduction of flat rate tax to Estonia, in 1994, by 2000 there were 24 countries with flat rate tax and only eight of them were non-European countries—which illustrates what a significant revolution it was. I’d welcome the introduction of a flat rate tax in Australia because I’ve seen how well it works in Hong Kong. They have had a flat rate tax since 1940. One of the huge benefits is the abolition of the complexity of deductions. Tax accountants are almost extinct in countries like Estonia.

The title of one of our road show sessions was Death and Taxes. I can think of one reason why that title may have been chosen. I’m cynical of governments when they get too big. Governments then only excel at two things. One is stealing money from their own people through taxation. The other thing is killing both their own people and other people. History provides plenty of evidence of this.

Governments should simply get out of the way and let us compete with each other.

Business, and in fact the world, is so competitive right now that if you let anything get in the way of entrepreneurship and productivity, you will fail as a company or country. Therefore, non-essentials must be stripped out of both the corporate world and government. This puts intense pressure on people, like you, to come up with fresh ideas to facilitate changes and think tanks play a role in this.

Think tanks can develop ideas to replace the ones that have got many countries into the difficulties we see so clearly today. Always remember that it is the role of think tanks to develop these ideas on first principles and be very precise, but it is not the role of think tanks to modify the ideas to make them politically acceptable and politically attractive. That is the job of politicians.

At their core, think tanks bring ideas and policy options into the light and convey them to decision makers in the hope that these ideas are adopted, implemented or even stolen. In many ways, think tanks do the very opposite of intellectual property lawyers.

So it’s clear we need to bring on some change. But how? One of my mentors told me if we want change in our society then there are four main ways to bring about this change:

1. Education. This can be a slow process because while the world goes mad in herds, it only regains its senses slowly and one by one.
2. Peaceful civil disobedience. Courage is often needed to take a stand when you know and believe in something.
3. Physical violence or war. We don’t want this.
4. Political change. This often follows the above.

My preference and focus is on the first two options: education and peaceful civil disobedience. I’ll just mention a couple of examples of peaceful civil disobedience.

Sir John Cowperthwaite was sent by England to run the colony of Hong Kong in 1961. He was the finance secretary and made the decision not to send any statistics back to England. As a result, England had no idea what was going on in Hong Kong and instructed him that as he was responsible for Hong Kong he must send them all the statistics. Sir John again refused because he knew the minute they got hold of all those statistics they would start interfering with Hong Kong’s economy. Just remember that in the 1960s, the United Kingdom was a role model for prosperity.

As a result of Cowperthwaite’s intransigence, the economy of Hong Kong continued to prosper. Hong Kong’s secret was, and still is, to have minimum bureaucracy.

Peaceful civil disobedience takes many forms and sometimes takes an enormous amount of courage. We saw this with Ukraine’s young people three years ago when, at cost of 100 young lives, they were successful in removing the despotic President Yanukovych. We have seen the younger generation take the lead in so many countries, as shown through the various Arab Spring revolutions and now in Hong Kong and China.

If there is anything that overbearing governments should fear, it is young people realizing how such governments are threatening their future.

On a personal level, I’m much less courageous than the young Ukrainians. I don’t risk my life. I simply run a company has been going 120 years. This is a long time, in Australia, being six years older than the flag or the Australian Constitution.

I stated recently that our company would not have survived if we had filled in all the government forms expected of us or paid all the taxes that we were supposed to have paid. Simple as that. To survive, in business, you must exhibit a degree of civil disobedience and question things. I was running a mining company some years ago when I saw our people filling in government forms which requested all sorts of useless information. I calculated the cost of filling that government form at $15,000.

I informed the staff that we were not there to fill in government forms. We were there to find and produce gold which would result in paying their salaries and a dividend for the shareholders. The staff expressed their concern that if they did not complete the forms then we would be fined. I asked them to read the small print in the bottom line and the fine was only $100 so I instructed them to put the forms in the bin which resulted in a saving of $15,000 every time that form came due.

You must question all these unreasonable demands on your time. Don’t just go along with everything that you are handed.

I have an engineering background and I like measuring the success of different individuals, of different companies and, in the case of my recent trip, of various countries where we can pick up ideas and transport one idea from country to country.

To help us in our measuring there are many indexes published. Property Rights Indexes, Economic Freedom Indexes, all these indexes help us recognize that a good civilization is one people will flee to and a bad civilization is one where people flee from.

So learn the art of measuring as it will help you explain to other people that free people, dealing freely with each other, with minimum involvement of third parties such as governments or monopoly unions, can solve most of the world’s problems.

If we all continue liberalising and making it easier for us to deal with each other, without barriers, we will lift all levels of prosperity. Our worst enemy is the bad policies that will continually confront us. We wonder how bad people get to the top and how bad policies proliferate but there is a school of thought in the economics world called the public choice theory which explains the concentrated benefits going to the people who capture that legislation.

They spread the costs over a greater number of people, like us, so we never really march in the streets. We just put up with it. Consequently there is a huge responsibility and the whole future of ensuring a civil society rests on the shoulders of people like us. We must recognize those problems and stir ourselves and do something about it.

We must continue to fight any bad ideas with better ideas. One of my favorite economists, FA Hayek, left us with this challenge:

“We must make the building of a free society more an intellectual adventure, a deed of courage. If we can regain that belief in the power of ideas which was the mark of liberalism, at its best, the battle is not lost.”

Good luck and be relentless in your pursuit of better ideas.

Further references:
Tax Loopholes
Peaceful Civil Disobedience
Worst Rise to the Top

For a Peaceful, Piecemeal Revolution