I flatly refuse to write about different ways of raising more tax money. … I am prepared to recommend ways of saving money so government can raise less taxes.
~ Bert Kelly, “Unholy state of taxation,” The Bulletin,
March 19, 1985, p. 98.

1. How to end that national sport of tax avoidance (April 23, 1971)
2. Death duty the death of us all (April 30, 1971)
3. Once more unto the (tax) breach (May 7, 1971)
4. Tax revolt evades the notice of Mr Howard (April 11, 1980)
5. Who among us can cast the first gall stone? (April 18, 1980)
6. Income tax encourages ‘avoision’ schemes (April 24, 1980)
7. Born again on the issue of death duties (May 2, 1980)

1.
A Modest Member of Parliament [Bert Kelly],
“How to end that national sport of tax avoidance,”
The Australian Financial Review, April 23, 1971, p. 3.

Eccles says that I have been side-stepping for far too long the unpleasant task of examining our taxation system. So here goes, but I don’t expect it will do anything except get me into hot water.

The first thing I am going to do is to admit that there ought to be some kind of capital tax, at least, while our income tax laws remain as they are. There is only one reason for this statement — there are so many ways of avoiding income tax that you really need a capital tax to gather some of the money that clever sods have successfully avoided paying.

That there is a lot of tax avoidance is both known and natural. Old Fred doesn’t now pay any income tax at all for the very good reason that he doesn’t have an income.

But in the good old days when there was money in farming, it didn’t take the old boy long to think of ways, legal and — well, almost legal, for avoiding income tax.

He had a natural advantage over the income tax man as he spent a lot of time on the tractor where he had both the time and the incentive to think out really good schemes. People often make the mistake of thinking that Fred is as simple as he seems.

We all know that there are many respectable ways of avoiding paying income tax. You can, if you are a city business man, buy farming land, clear the scrub from it, sell it at a profit and pay no tax on the profit. Or you used to be able to when people wanted to buy it.

Another good way of getting a non-taxable income is to buy shares and receive bonus issues. Or you can buy land and have the government build a road through it (with the taxpayers’ money) with the result that you don’t have to pay income tax on the increased income which other taxpayers have put into your pocket.

But there are comparatively simple systems. The really clever people, with a lot of income to make it really worthwhile to buy expert taxation brains, have got the most magnificent schemes. Avoiding income tax is said to be one of our chief national sports.

No one thinks it is wrong — we are only acutely envious of people who find another hole in the legislation.

But it is really a bit hard on the wage and salary earner who can’t avoid anything much.

These people are inclined to sneer rather cynically when you tell them how sorry you are that you have to pay so much income tax. They have a shrewd idea that they wouldn’t have to pay nearly as much if other people paid their proper share.

And there is something hopeless about thinking that you can block up all the holes in the tax legislation. I suppose it is a grim indictment of our modern civilisation that the best brains in the country are devoted to avoiding income taxation rather than producing income.

You are kidding yourself if you think, while income tax tends upwards all the time, that people suddenly are going to be different and are going to welcome parting with large lumps of their money to other people. You also know that if one bolt hole is closed off with new laws, some sod with a sharp nose will sniff out a weakness in the new legislation, and then away go the shrewd ones out through the new hole.

So to catch some of the wealth that slips, legally or illegally, through the income tax gatherer’s fingers, there ought to be some kind of capital tax. I know everyone will hate me for saying this.

There is another comparatively unimportant reason for reluctantly agreeing to this proposition. After all, the more money gathered in by a capital tax, the less income tax will have to be paid, and so the less steep the progression in the income tax scale will need to be.

But there we are, landed with a capital tax, with votes going out the window in a steady stream — and Mavis crying quietly in the background.

But there is one thing about which I am certain, that is, that the death duties tax, the chief capital tax used by the States and the Commonwealth, is about the worst form of capital tax you could use. I will tell you why next week.

***
2.
A Modest Member of Parliament [Bert Kelly],
“Death duty the death of us all,”
The Australian Financial Review, April 30, 1971, p. 3.

Last week I reluctantly agreed that there should be some kind of capital tax and that the death duty taxes were about the worst form of such a tax.

My chief objection is that the bigger you are, the more worthwhile it is to spend considerable amounts of money to make certain that you escape paying your proper share.

Here again, my experience during the prosperous years of the past has taught me something about avoiding probate.

In those good old days, my accountant and I thought up some very clever schemes, some of which the Government has not yet found out about, or at least hasn’t yet stopped.

And when they stop these, I am sure my accountant will think of something else, quite legal of course, but a bit hard to follow and pleasantly devious.

My accountant has a very fertile mind — and if he hadn’t, I’d get one that had.

But the trouble is that the chap with a smaller amount of property doesn’t worry about these things so much.

And there is, (thanks be) still a considerable hard core of people in the community who are basically honest who think it is morally wrong, even if legally right, to get up to the kind of tricks that I engage in.

Now these people are just the ones who get clobbered by death duties and they are just about the most worthy people we have left.

The justification for death duties is said to be that it prevent the accumulation of large fortunes in the hands of rich families.

But if this is as bad as it is said to be, then it is certain that death duties are not effectively preventing it — not generally, and not now.

But they are catching the chap in the middle and lower wealth bracket just because he is too simple to be cunning, or too small to make the evasion worthwhile.

The second nasty thing about death duties is their uncertainty.

It is true you are certain that you are going to die sometime, but it would be a great comfort if you knew when. The uncertainty of not knowing often leads to over-insurance which is expensive.

Thirdly, death duties hit a family just at the wrong time. When the bread-winner dies, the Government steps in and clobbers the widow and kids.

And if disaster strikes extra hard and both mother and father die soon after each other, then the Government gets it for an extra serve from the kids alone. No wonder people dislike members of Parliament!

Fourthly, winding up an estate often takes years and years.

I know of many cases where land, when a husband dies, was worth, say, $100 an acre and attracted death duties on those values. Yet by the time the estate was finalised the land value was $50 an acre.

This can be a devastating blow on a farm property and it is not confined to farms, of course. The same thing has frequently happened with falls in share prices.

And finally, it is plainly ridiculous to have a probate system which tends to make rural holdings smaller while at the same time having a rural reconstruction scheme that sets out to make rural holdings bigger.

One of the side-effects of abolishing death duties would be that life insurance payments would diminish. I do not think this is necessarily a bad thing.

We now have the rather queer situation where the Commonwealth cannot afford to build its own buildings, so it rents a great deal of space from insurance companies at a cost that is considerably greater than if it built for itself.

But one of the reasons why life insurance companies have so much money to invest in building is the taxation concession on life insurance premiums.

So the consolidated revenue is really paying for a considerable portion of the cost of the insurance buildings and then has to pay high rents for the buildings it can’t afford to build.

Summing it all up, death duties are a lousy form of capital taxation which ought to be replaced with another system.

I seem to be heading for a capital gains tax — Mavis will never forgive me!

***
3.
A Modest Member of Parliament [Bert Kelly],
“Once more unto the (tax) breach,”
The Australian Financial Review, May 7, 1971, p. 3.

It is with a feeling of intense resentment that I reluctantly pick up my pen and write about taxation again.

Only Eccles could have got me into this mess.

Two weeks ago, I admitted that, because there were so many legal and illegal ways of avoiding paying our proper share of income tax, there has to be some kind of capital tax, to gather up those who get away from the income tax collector.

Last week we discussed death taxes and agreed that these were about the worst kind of capital tax.

But if a capital tax is necessary and if death taxes are the wrong answer, what do we put in their place?

Eccles says there are two answers, a capital gains tax and a net worth tax.

I admit I am really a bit hazy about the difference between these two taxes, and most of what I say hereafter is really regurgitated by me from Eccles.

He says the big disadvantage of a capital gains tax is that it is levied on capital gains only when these gains actually take place.

For instance, if you buy shares at $1 a share and sell them 20 years later at $10 a share, you pay capital gains tax only when you sell the shares 20 years later.

This means you get a great big slug of tax all at once, which often is excessively awkward.

Eccles says a tax on net worth would avoid this pitfall. Each year the tax would be collected on your networth.

If your land or your shares have increased in value, this change would be set against the change in your debts position, and you would pay your tax that year and that would be that.

If you suffered a capital loss, you would either get a refund (which would not be easy) or you could carry the losses forward for, say, seven years, to be put against the gains of other years.

After Eccles had got this far in the lecture, I had to tell him I was not so interested in the principles as he was.

What I was really interested in was what it would cost me and, what was even more important, what it would cost my most worthy constituents?

So then Eccles started to do his arithmetic.

He started off by saying that, between them, the State and Federal Governments collected $207.5 million last financial year in death duties.

If you accept that we should replace these death duties with a net worth tax, what rate of tax would you need to impose?

Eccles has been as busy as a bee in a bottle trying to work out the figures.

He thinks there is a total pile of wealth owned by persons in Australia of somewhere between $70,000 million and $100,000 million.

A net worth tax of one quarter of 1 per cent would bring in between $175 million and $250 million.

To collect the equivalent of the $207 million collected in death duties, it then looks as if you would need a 0.25 per cent net worth tax.

That doesn’t sound much if you say it quickly, but it would, after all, mean an annual tax of $125 if you have assets worth $50,000, and $250 on assets worth $100,000.

But if you were 40, and were leaving your estate split three ways at your death, you would have to allow about $150 a year to cover probate (State and Federal) on an estate of $50,000, and $520 on an estate of $100,000.

Summing it all up, a net worth tax would be geared to bring in the same amount of money as death duties, but would have two advantages — it would not be so easily avoided by clever rich people, and you would at least know where you were from year to year, instead of being terrified that you might “do the dirty” on your family by dying on them at the wrong time.

***
4.
A Modest Farmer [Bert Kelly], “Tax revolt evades the notice of Mr Howard,”
The Australian Financial Review, April 11, 1980, p. 13.
Reprinted in Economics Made Easy (Adelaide: Brolga Books, 1982),
pp. 236-38, as “Canberra School (a),” dated March 11, 1980.

I used to go to the Political Science School at Canberra hoping, like Saul, that a great light would suddenly illuminate my political path.

But nothing like that ever happened. All I got was a lot of learned advice which I could not understand.

So I had to fall back on Eccles, who explained the path to economic rectitude so plainly that even I could understand.

And look where it got me — washed up on the political beach.

Now that I am no longer a power in the land, Eccles does not care if I go to political science schools or not.

But, strangely enough, Fred does. Or he did this year because he had heard this year’s school was about taxation.

Now Fred is usually indifferent to abstruse subjects like taxation. He prefers to dwell on more mundane matters, such as wheat varieties and the rates of applying superphosphate and that kind of thing.

But he has had two good years in succession, so the sordid matter of taxation looms large in his cunning, if simple, mind.

He said quietly behind his hand:

You must go along to this school, Bert.

People will not be suspicious if they see you there because they are used to seeing you trying to look cleverer than you are.

You must sit there quietly in the back of the hall. Do not say anything — whatever you do because the place is sure to be thickly planted with tax investigators.

You must sit there looking stupid, which would be hard, but say nothing.

But take a big note book and three sharp pencils and make a note of any hints that might be helpful.

So I did as Fred said and sat unobtrusively in the back of the hall.

Fred was right. If he has been there looking simple and earnest and sunburnt, with his roughened hands, those shrewd people would have become suspicious. But I still have enough of the political pallor from my past to pass unnoticed in Canberra so I sat there ignored by everyone.

There was much discussion about the difference between avoiding and evading taxation.

Most of those was on too high a level for me to understand.

My working rule is what Fred does is evasion and what I do is avoidance.

Another definition is avoidance as what you do when you aren’t caught and when you are, it becomes evasion.

There was discussion as to whether there was, in Australia, the same taxation revolt which has become so notable in the rest of the democratic world, particularly America, where there seems to be a growing resentment about the amount of tax required to run the welfare state.

I realised I was really back in Canberra when I heard some nice people, who wanted even more tax to be levied to run the welfare state, claim there was little evidence to show such a revolt was taking place in Australia.

This attitude reminds me of the story of the madam who, when her brothel was raided by the police while she was playing the piano downstairs in the hall, protested she did not know what was going on upstairs and who was making all those thumping noises.

Of course there is little evidence about what is going on upstairs about tax being dodged.

There is no place in the statistics for what happens in our shearing shed when the hearers suddenly knock off at 5 pm (and 4 pm if it is stinking hot) and they realise Mr Howard will get about half of what they would have earned if they had kept on shearing and he would not even have to bend his back to get it.

And there would be no record in the ivory towers of the games of golf played by doctors who have seen too many of their colleagues suffer heart attacks caused by working too hard to make money for the tax man.

There is no record of the stratagems Fred gets up to and he would have my guts for garters if I were to drop the slightest of his procedures.

So I am not surprised that the extent of the taxation revolt does not appear in the annual report of the Taxation Commissioner.

The second shock was to hear Professor Russell Matthews state that our income tax system does not bring about that equality so dear to the hearts of the socialists.

These people have always expected that our progressive income tax would not only supply the sinews to allow the welfare state to flourish, but they knew it also was designed to make everyone equal.

It must have been an awful shock for them to discover that it was not doing this at all. In fact, it was working in the opposite direction.

I will write more about taxation avoidance next week if Fred lets me.

After all, he paid for me to go to Canberra, or that is the story he is telling the tax man.

***
5.
A Modest Farmer [Bert Kelly], “Who among us can cast the first gall stone?,” The Australian Financial Review, April 18, 1980, p. 13.
Reprinted in Economics Made Easy (Adelaide: Brolga Books, 1982),
pp. 238-40, as “Canberra School (b),” dated March 18, 1980.

Last week I said that I would write more about taxation avoidance and evasion if Fred would let me.

He has agreed that I can do it, but I have to be particularly careful not to dob him in.

Eccles says that it would save a lot of confusion and time explaining things if I were to use the newly coined word “avoision.”

Then we would not have to try to differentiate between practices that were legal and therefore regarded as “avoidance” last year but have become illegal this year and so are now “evasion.”

So we will call both groups “avoision,” which can be taken to mean artificial schemes of either kind.

There was a beautiful paper given at the Canberra school by Mr S.E.K. Hulme, QC.

Because he is a QC, Mr Hulme naturally breathes a purer air than Fred and I, but all the same he spelt out some general principles that are common to all walks of life.

Mr Hulme gives a definition of avoidance as being “conduct of a taxpayer which reduces his tax and which strikes a well paid, well superannuated member of the Tax Department as being over the odds.”

He says that big companies are usually too big for smart footwork. He feels that private companies (and, indeed, the whole economy) have been damaged in the past by the taxation on undistributed profits because this has inhibited adventuresome development.

But Mr Hulme feels that the self-employed person is the man who is really getting the stick from the tax man, and if he doesn’t win the battle, he will stop working for himself and will become an employee instead.

As Mr Hulme says: “Tax avoidance is the process by which self-employed persons seek to achieve something of the taxation benefits available to the employed.”

Much of the resentment that leads self-employed people along the avoision path is due to superannuation and similar benefits which employed people get and which self-employed people don’t.

Fred knows plenty of employees of governments and big private companies and he envies them the generous treatment they get on retirement.

And he has some nasty, pointed comments about the retirement benefits available to retired MPs also.

I know that I miss the tax free advantages that we MPs gave ourselves.

The taxation avoision battle is mainly a contest between the well paid, well superannuated and permanently employed tax men and Fred and his mob — big and little battlers, the people out on their own, putting up their own money and fighting for their own existence.

They may not always fight as cleanly as they should but they are the mainspring of capitalism. And if they give up the fight and slink back to being employees, we will all be worse off.

We should let Mr Hulme speak for himself on this matter:

The foremost home of artificial avoidance is among the ranks of the self-employed.

If one’s impression is that certain professions have been particularly prominent, who among us can cast the first gall stone? (what a lovely fruity phrase) …

Why have the self-employed swarmed into artificial avoidance schemes? And why so much worse in the last 1970s than as recently as 10 years ago?

At that time most of the self-employed would have thought that such conduct, as most companies and employed people still do, was beneath their own personal standards of behaviour.

Why did we get like this? Mr Hulme, being a QC, wouldn’t see it from the low levels that Fred and I do.

One of the reasons for our behaviour is our suspicion that, if we pay all the tax we should, a lot of it will be wanted anyway.

Particularly do we resent the wastage in the welfare field.

I know that it is difficult for the Government to draw a firm line anywhere, so it is not surprising to see the mess we get in.

But this makes us all the more determined not to part with more of our money than is absolutely necessary.

The feeling of resentment is strengthened when we see the attacks made on the Social Security Department when it takes some timid tentative steps to clean up some of the rackets that the system breeds.

When that happens, all the “bleeding hearts” claw the poor officials who are desperately trying to put their fingers in the dyke.

So one of the reasons why Fred and I play the tax avoision game as tough as we do is that we are sick of seeing our hard-earned money squandered.

We would give the milk of human kindness down more willingly if so much of it did not end up on the cowshed floor.

***
6.
A Modest Farmer [Bert Kelly], “Income tax encourages ‘avoision’ schemes,”
The Australian Financial Review, April 24, 1980, p. 13.
Reprinted in Economics Made Easy (Adelaide: Brolga Books, 1982),
pp. 240-42, as “Canberra School (c),” dated March 25, 1980.

I am still worrying about that taxation seminar held in Canberra earlier this year.

You may remember that Mr S. E. K. Hulme said many of the tax “avoision” measures taken by self-employed persons were an attempt on their part to catch up with employees who received so many advantages, particularly with regard to superannuation, which were denied to self-employed people.

I have not said much about a detailed and authoritative paper by Professor Russell Matthews, but anyone who is interested in taxation should study it carefully.

He sees the “avoision” problem differently to Mr Hulme, as this question shows:

While the total extent of tax avoidance and evasion in Australia must remain speculative, it may be concluded they are significant in absolute terms; they are increasing; and they are undermining both the stability and the equity of the tax system.

Attempts have been made to clone tax loopholes, but these have served to complicate the system without achieving lasting results.

As soon as one device is blocked another emerges in its place.

Apart from its effects on equity and the threat it poses for the continued acceptability of the tax system as a whole, tax avoidance is associated with a substantial waste of resources as accountants, lawyers and businessmen have combined to establish a whole new industry devoted to manipulating and exploiting weaknesses in the system.

The essential problem is not to make the rich pay higher rates of tax, or even more tax than the poor; it is to make the rich pay any income tax at all.

There has recently been some discussion about the potential for a tax revolt in Australia.

It must be recognised that a massive tax revolt has already taken place; but it is a revolt of business taxpayers against wage and salary earners, of the rich against the poor.

Before we put these differing opinions side by side, there is no doubt that Prof Matthews is right when he talks about the amount of effort that taxpayers on one hand, and tax collectors on the other, now devote to planning, or defending, tax “avoision”.

At least once a week I receive an advertisement for yet another publication which promises to save me a lot of tax.

No doubt the tax men get all of these and I can imagine them burning the midnight oil working out ways of closing any new loopholes.

I suppose this is one way of creating employment and I know all these activities will show up in the GNP figures as increased production, but it seems rather futile.

And past experience has shown the self-employed taxpayer is likely to win most of the contests in the end, mainly because he has a direct financial incentive to do so.

Nothing clarifies the mind, they say, like the knowledge that you are going to be hanged in the morning.

But to return to the disagreement between Messrs Matthews and Hulme: the former feels the tax system bears harshly on employees while the latter says the self-employed behave as they do to get even with the rest.

But both agree our tax system is not working well and there is little reason to expect that a progressive income tax system such as ours can be made to do so.

It may be true Australia is not a highly taxed country compared with other OECD countries, but we have collected more of our government revenue in the form of income tax than most of them.

It is income tax that has made us behave as we do.

As long as income tax continues to loom so large in our taxing system, we will continue to have a tax “avoision” contest that the self-employed taxpayer will usually win, either by tricking the tax man or simply by not working so hard.

You cannot very well prosecute a shearer from knocking off an hour early on hot days or a doctor for spending two afternoons a week playing golf when he really should be in his surgery doing his duty and making more money for the tax man.

And Fred, who considers himself a pillar of rectitude in these matters, has been heard to mutter it is the tax man who encourages him to play bowls most Wednesdays.

Anyone who says that there is not a tax revolt does not know what is going on upstairs.

At the conference, when the socialists heard of the unworthy behaviour of Fred and his mob, they were full of righteous indignation.

“People should not behave like that,” they said with petulant irritation.

“From each according to his ability, to each according to his need, this should be Fred’s motto. Fred ought to be ashamed of himself,” they said.

When I last saw Fred he had a broody look and I think he was working on it.

But I noticed he still had his bowls in the boot.

***
7.
A Modest Farmer [Bert Kelly], “Born again on the issue of death duties,”
The Australian Financial Review, May 2, 1980, p. 13.
Reprinted in Economics Made Easy (Adelaide: Brolga Books, 1982),
pp. 242-44, as “Canberra School (d),” dated May 2, 1980.

For years, I have gone around complaining about the wickedness of governments for imposing death duties.

The abolition of gift and death duties is so recent I have not had time to readjust my thinking to the new situation.

For many generations our family has done its dying with measured tread, as it were.

There has been enough time between the succeeding generations for proper arrangements to be made so the property could be passed from father to son without incurring death duties of a magnitude that would necessitate selling off part of the farm.

I have always assumed this family habit of orderly demise was due to superior planning or to a close contact with the Almighty, but I suppose it was really just luck.

But it was not all luck. There also was a lot of organising, with the lawyer and the accountant doing the thinking and the family doing the paying.

There were complicated gifting programs, with a kind of alarm clock going off in the accountant’s office every 18 months so we could pass across another slice of the farm without incurring gift duty.

We had various complicated company arrangements with imposing minute books which Mavis used to sometimes refuse to sign if I were in the dog house.

And I remember once, when I was really ill, the family gathered at my bedside and warned me grimly I just had to live another 10 months or the tax man would get me (or them).

I am sure their earnest admonitions was one of the reasons I recovered as fast as I did.

When I was on Parliament, tweaking this heartstring was a sure way of becoming popular. I used to thunder while wiping away a tear:

How can the Government be so cruel and heartless?

Surely it is fairer for the Government to get its ill-gotten gains by income-taxing the living than taxing the dead.

Strangely, no one ever interjected that it would be hard to collect from the dead.

But my statements were often greeted with applause which was unusual at my meetings.

The really rich people, who were working some income tax “avoision” scheme, clapped louder than the others.

But now most governments are whittling down, if not abolishing, death duties, I am starting to have some doubts about the wisdom of it all.

It would be fine if governments were to reduce their spending by the amount of money they had ceased to collect in death duties, but bitter experience, both in Parliament and out, has taught me this is unlikely.

Governments seem to have a compulsion to buy popularity by spending out money, or by printing it.

So I have an uneasy feeling that, deprived of this source of income, they will immediately set to work to raise the same amount of money in some other way. And if I had to choose between paying increased income tax and death duties, I would prefer the latter.

At least death duties do not act as a disincentive to the extent income tax does.

And so many people avoid or evade income tax, but they cannot do that with dying.

I knew that dying would have been made much more interesting for me if I could have arranged to die with all my affairs in order so I could spit in the Government’s eye as I left this vale of tears.

Now all that planning has come to a grinding stop.

I have been trying to work myself up into a lather of anxiety about the fate of the lawyer and the accountant who will now lose a steady source of income. But I doubt if they will starve.

And if the Government sets out to recover the money it has lost in death duties by increasing income tax, my benefactors are likely to pick up on the swings what they lost on the roundabout.

So I am not going off my food worrying about these two nice people.

I am the chap I am worrying about.

What should I do with the money I used to spend with the lawyer and accountant doing perfectly legal things to reduce death and gift duties?

I could stick it away to give to my family when I die but they may not need it then as they do now when their children are younger.

Perhaps I should use the money by helping to educate my grandchildren.

I have been told it is only grandparents that can afford to meet the astronomical cost of putting a child through boarding school.

So it may be we grandfathers are going to come into our own again and will be able to spend on our own flesh and blood what we used to spend on the lawyer and accountant.

And wouldn’t it be lovely if we could take these payments off our income tax.

Then my cup of happiness would really run over.