The feasibility and hidden drawbacks of a debits tax – Elinor Hurst

An article on finance commentator Noel Whittaker’s blog back in September 2014 [1] discussed the feasibility of a debits tax, which he had been asked to address by a subscriber. Whittaker’s response revisited an article he wrote originally in February 1998, when the debits tax was raised with him at that time in the context of the GST debate.

The proponents of a debits tax claimed that a tax on bank withdrawals of just 0.33% would be sufficient to replace all other taxes, including income tax, company tax, payroll tax, etc. This is due to the large volume of money withdrawn daily, given as $200 billion per day by proponents. The total Australian tax take (federal and state taxes) around the time the proposal was made was $151 billion per year for the year 1995-96.

Whittaker investigated the volume of bank withdrawals, and estimated them to be more like $70 billion a day, necessitating a tax of 1% to reach the same tax take. This would imply that someone earning $50,000 per year would pay $500 tax per year instead of $14,000. A small business with a turn- over of $400,000 a year would pay just $4000 in total tax and there would be no FBT, CGT, payroll tax or stamp duty. Petrol prices would halve as excise would be abolished, and Australia would become a duty-free country.

Whittaker was intrigued by this, and wanted to know “If we all pay less tax, where does the extra money come from?” Perhaps from wealthy corporations and people paying little tax now?

A few months after he wrote the original column in 1998, he found himself in the offices of Treasury in Canberra and mentioned the debits tax to the then- Head, Ted Evans, and his Deputy, Ken Henry.

They pointed out that the major fault with the tax was that it disadvantaged small Australian companies, and advantaged international companies who were big enough to vertically integrate and hence avoid the tax.

For example, an Australian grazier buys cattle and pays the debits tax, then buys feed and pays the debits tax, then pays staff with more debits tax, and then sends the cattle to market where there is debits tax on every transaction until they end up in the shop as a pair of shoes. In contrast, the only tax on imported shoes would be on the final retail price.

So it appears that the debits tax has drawbacks which limit its usefulness as a broad-ranging tax.

Source Noel Whittaker blog “A debits tax”

1. https://www.noelwhittaker.com.au/ essential_grid/a-debits-tax/

Elinor Hurst is an ERA member living in SA