Sunday, October 09, 2011

Thoughts on Taxation, and Logistics of Industrial Society ...

Its that time of year again, BAS accountant due at end of week to check accounts so can submit end of quarter BAS statement, hand over GST collected and PAYG withheld, to tax office. So tend to get thinking about taxation.

We would like to operate business at zero profit, that is break even. If by definition profit is surplus to requirements then zero profit should be feasible, further more tax office could tax at rate of 100%. But surplus to requirements is not a precise definition when tax office considered.

For a sole proprietor or partnership, profits equal wages and the bread and butter required to survive. So zero profit means starve. For a company however, the business is an independent entity to the owner/operators. The owner/operators of a company either get paid as employees, subject to state and federal industrial awards minimum rates of pay, and/or paid directors fees. That is living expenses effectively become a business expense, and the company can operate at zero profit. The situation changes if there are shareholders who only contribute funds and who are only interested in a financial return on investment: and otherwise have no interest in what the business does.

The tax office basically only taxes profit, but there appears to be some inequity in the assessment of profits. The inequity is that business is taxed on what are essentially surplus to requirements, whilst employees are taxed on 100% of their income. Sure employees can claim certain things as legitimate expenses incurred in the process of making a living: but surely the cost of living itself is a legitimate expense in supplying labour to the market. If a business was producing livestock, cows, pigs, chickens etc... Then the cost of water, food, shelter, and various essential services (medical care) would all be expenses. Given that the fundamental law governing employment is the original Master Servant Act, and as Rousseau points out in the "Social Contract", slavery has many forms and we just exchange one for another, each employee is effectively a sole proprietorship supplying human flesh to the labout market, and as such the costs should be claimable.  After all when look at the social security system, have all kinds of payments for family allowance and giving birth to children, so why not abolish and transform to claimable expense?

Admittedly people have different living expenses, but these expenses are not all a matter of choice. For example we have a society which opposes caravan parks and high density housing. Hence some 30% of 3 bedroom house are occupied by one person and some 8% of 4 or more bedroom houses occupied by one person. I don't recollect the statistics for shared accommodation, or even if that was actually covered. Average household occupancy however is at less than 3 persons per household. Births are declining and population aging, but housing still being constructed so moving towards average of 2 persons per household, yet houses seem to be getting bigger on smaller blocks of land. Something is not right.

It is partly a consequence of property speculators, and also silly ideas on retirement. With introduction of superannuation and cuts in government pensions, many people concluded that do not have enough future income to support their retirement. Therefore they have been investing in bricks and mortar: not practical livable house, just expensive houses. To maintain the value of such houses they oppose construction of government trust houses, and high density housing, including retirement villages. The result too few retirement units available, and therefore high costs, and the sales of the expensive house still won't provide adequately for retirement. Should be noted however that retirement is a relatively recent concept: its only been around for a few decades not centuries. Also to be noted that many people don't want to retire, for retirement just represents getting bored to death: waiting for god as a TV series puts it.

The property speculators also not been investing in high density housing, they have been producing houses for the rental market, but otherwise diminishing the benefit of renting. The basis of the idea, is get into property, by using somebodies elses money. Historically the benefit of renting is that it costs less than buying a house. It costs less, because the landlord owns the house and only needs to cover operating and maintenance costs, with possibly some profit. The new landlords don't own the houses, they have mortgages to pay off, and profits they also expect to make, add to this the operating and maintenance costs. Result renting starts costing more and buying starts looking more promising. But to buy requires people moving out of established houses, or land available for new houses. Difficult to do when the property speculators are grabbing everything they can get. Basically there was only one way it could go, and thats is as its doing, taking a dive, though the property market may be picking up again by all accounts.

Anycase, the point is cannot actually buy what you want, can only buy what is available. The market does not work on the basis of supply to the demand. Suppliers to the market supply what they have, that which heritage and prior actions have provided access to. All people have mind and body, though some are more capable than others. As I was previously saying there is a cost in supplying mind and body to market, and it is currently being taxed. Rather than the government paying young couples to have kids, as current payments are perceived, stop taxing the cost of producing and raising kids, and stop taxing the general cost of living.

The infrastructure and certain social expectations impose a minimum cost for living in a given location, so allow such minimum as a claimable expense. Since we are all stuck with the inconvenience of submitting an annual income tax return, why not use it to collect more worthwhile information? For example how much spent on:

Other Household consumables
Household Appliances

Then for each of these catagories have a minimum and maximum claimable expense.If expense is less than minimum, then government assistance available, if greater than maximum then the excess is taxed. Since individuals distribute their income differently, the government assistance is only available if the total income less than the sum of the minimum allowances. The allowances are for individuals and adjusted for the economies of shared resources. For example given that single people and families are living in the same type of houses: the allowance per person with one person in house greater than with a family of 4 persons in the house. Given that some 5% of households don't have enough bedrooms when measured against some Canadian quality of life index: the tax return can help indentify these shortfalls and direct resources to assist in allevating such problem.

Through the tax return, can now say, you had this income, you should have spent this much on food, you didn't so you are not getting any assistance: go change the way you distribute your income. In other situations this is the income you had, its less than assumed to needed, but survived anyhow: therefore it is possible to reduce the minimum allowances and the assitance provided. Noting however that assistance is provided to set the minimum standard of living in a region. If the cost of living increases then the tax free allowances for such automatically increase.

Whilst we already have a tax free threshold, it doesn't explicitly cover costs of living, nor require consideration of: further more as indicated employees are effectively taxed on 100% of their income: not the real profit component of their incomes. The machinery of industrial society requires a minimum number of people to operate: those humans not only have to be produced they also need to be regularly replaced. Like it or not we are slaves to the machinery of the city, and the nation. Many towns in industrial society are turning into ghost towns, as the humans required to operate the machinery of society are not replaced. {NB: the machinery consists of systems which make society function, it is not a direct reference to lathes and such, though they may be involved.}

It seems the machinery of industrial society has no care for humans but cannot be driven without humans. It does seem in practical terms the market is not entirely capable of providing the core functions required of the machine, and its ability to do so is diminishing yearly. The core functions need to be better managed, individuals need access to appropriate information so that they can decide to supply those core functions or not. Once core functions of the machinery satisfied, then have the free market where have no choice but to dream up anything that can be exchanged for that required to survive.

My perspective on the money system is that money flows into natural wells of accumulation, where it otherwise is taken out of circulation. Therefore do not have to work hard to get rich, just have to be fortunate enough to claim ownership of one of these wells. If $1 satisfied an individuals needs for an entire day, and such dollar could flow around to all people in one day, then would need to stamp out only a single $1 coin. Unfortunately need more than $1 to satisfy daily needs, and it doesn't flow fast enough around all people, and it otherwise accumulates and is taken out of circulation. The money system has no natural restorative cycle, and will eventually grind to a halt. Therefore I see the purpose of the  tax system to be to take money from where it naturally accumulates and pump it to those places where it doesn't otherwise reach or doesn't otherwise return to. Therefore contend that individuals have not altogether earned the money they receive, nor altogether have right to retain.

If profits are to be taxed, then profits have to be a more proper measure of surplus to requirements. Future need is an essential requirement, therefore maybe better to identify what is permitted to be retained rather than what has to be handed over to the tax office. That is 100% of surplus is handed over to the tax office for the future benefit of all: but the surplus has to be properly accounted for. The government treasury is a kind of insurance policy: like Joseph and the Egyptians putting grain aside for the coming drought. To a certain sense of practicality we no longer have a ruling class and the government serves the people through public servants.

However the machinery of industrial society is still driven in a constantly changing environment with decisions made in the face of uncertainty. Business is an experiment, a gamble: yet employees want expected minimum wages. This is crazy! As hunter/gatherers we go out into the wilderness and either return with meat for supper or little more than berries: there are no guarantees. Just because we have built industrial society does not mean we have removed uncertainty: many years of apparent consistency may have given the impression that we had, but we hadn't and cannot.

It should also be noted that much of that consistency experienced in the past was based on growth and expansion of cities. But we cannot sustain further growth, more and more resources are being drawn from ever distant places to keep the cities operational. In more historic times we would have been more likely to move closer to the resources than waste energy in transport. There is a need to change our logistics: our supply and distribution systems.

Initially we industrialised agriculture, dropping the population required to be employed in agriculture to less than 10% of the population, and we became manufacturing nations. Now we have diminishing need for local manufacturing, local demand is close to replacement levels only, with population basically got all that they need unless innovative goods become available. Established cities don't really need materials, the materials are already there either in the goods or in land fill. Only fuels are required to energise transformation of the available materials to better meet the needs of the population. Thus the population moves away from manufacturing and becomes more service sector: operating, maintaining and adapting the existing facilities of the city. The economic system, including the tax system needs to assist this state of maintenance and adaptation rather than growth.

Adaptation however is a problem: it is like those magic square games: need an empty space otherwise no movement can happen. A new more efficient factory needs space in which to construct it, since shutting down existing when need its output is not viable. However new factories do not have to be built on land, nor built at ground level. So new factories can be built as ships, thus resurrecting the ship building industry: probably an important task to do given ultimate future in space: need to build up aerospace and ship building industry. Alternatively, given that many existing workplaces have a lack of parking for both clients and employees, new production facilities can be built below or above the existing buildings: the existing building can then be cleared for parking. Also given that industry can be designed to be better integrated such that the waste from one facility can be piped as resource into another facility. The vertical and horizontal integration of production facilities can take place on one site: a site where there is already one of the facilities to be integrated.

One thing missing from the industrial side of things is real design. Architects may plan and dream, individual buildings and estates, but there is little real dreaming and planning taking place relative to the physical machinery of industrial society: no dreaming by engineers {NB: this time I do mean the chunks of metal.}. It seems to me that designing a ship is the closest we have to designing an integrated industrial city: but populations moving to ships causes problems with national government and taxation. Infrastructure is required somewhere to build the ships and possibly register the ships: but such systems can also be held on board a ship aswell. The population of a ship can simply form a company.

Corporations to a certain extent permit the creation of governments within governments. Companies however are not constrained by geographical boundaries, whilst federal, state and local governments are. Also in the age of the internet nobody really needs to have a physical address. The population can be made increasingly mobile. With a mobile population, a so called global village, and massive commitments to humanitarian and development aid, investment in national infrastructure becomes somewhat questionable. It is not national infrastructure that we need but global infrastructure.

If business thinks it can do better than government, why are the multinationals not planning and supplying to a more global market? There is clearly a global demand for education, health care, water, gas, electricity, food, clothing and shelter. The demand is there so why aren't the multinationals supplying to it? Sure there are some local regulatory constraints, but they typically do not constrain supply, only control quality of supply. So we have a national health care system: but neither private nor the national system properly serves the rural communities. Demand and need is there, so why is it not supplied? What fault or defect lies within the money system which prevents goods and services not being supplied to where the need and demand lies?

Another thing is our government tossing money away because of the GFC. Each and every year the news reports a massive credit card debt for the nation: people buying things with money they do not have. So what does the government do: it hands money out to people to keep the retail sector going. Stupid! People didn't need government handouts to encourage spending, they were already spending what they didn't have: that was the primary cause of the original problem. Now retail is complaining of decline again, some criticism of online sales outside the country, other criticism because people reluctant to spend and savings are growing. But people need to save more to get a larger deposit for loan on a house, and develop greater confidence in long term capacity to pay the loan back. Also as already indicated they basically have all that they need, and otherwise potentially running out off personal space at the same time they are being told also running out off landfill space. Both fuel and material consumption need to drop.

If retail sells goods, and we are increasingly moving towards a service oriented society, then retail sales are going to drop. Plus we need logistics systems to get goods and services circulating around the city. Once upon a time the public library was preferable to owning a book: but whilst people now own their own books they are running out off space to retain and read more. But the internet and ebooks are partially resolving this problem, along with such organisations as book crossing. It is innovation in the service sector that is required: not throwing money at retail. Some retail is part of the core machinery of industrial society, other retail is not. For the most part the supermarket chains are providing the core function. It is however the local family owned store that typically provides goods and service: but not all provide service. If the service is not there then people will favour the lower prices of the supermarket.

People tend to want maximum wages and minimum priced goods and services. Though what they are mostly aiming for is maximum benefit from their available resources. So its not so much that prices need to drop but that service value needs to increase. When labour increases its productivity it tends to want higher wages. Increases in productivity however do not necessarily reflect a reduction in costs or an increase in sales, so not necessarily an increase in profits to shareholders to which workers can claim a fair share off. The problem is that optimising a part does not optimise the whole. Further productivity changes have to be reflected in the cost structures, and often it is the very costing system itself which is the burden to productivity improvements.

Take the building industry for example, the quantity surveyor typically costs construction in terms of dollars per unit weight such as $/tonne. Structural engineers are consequently pushed to design the minimum weight structure, rather than the true minimum cost structure. The actual minimum cost structure likely to be based on most readily available materials and the simplest labour input. Another situation is that subcontracting and outsourcing can place fixed prices on things that would otherwise be variable. Whilst this can simplify things, it also hinders cost reductions: with some simple things costing more than they otherwise would. Similarly productivity gains in the building industry may result in faster supply, but not an increase in the number of projects available: so no change in the price. Or those that can increase their share of the projects available, drop their price whilst the others have to increase price due to reduced time on projects available: then it all balances out at some intermediate market price. With the potential nett effect being no permanent reduction in price. So that changes in costing and pricing methods needs to take place, before changes in production method passes benefit onto the customer.

By the same measure customers themselves have to modify and change the distribution of their own personal monetary resources. For example spending excess money on foods which are fattening and surplus to requirements, results in poor health requiring more money for health care, but the money was otherwise spent on getting the poor health. Modify diet, improve health, and have more money available for the more random and accidental health problems rather than recurrent problems. But that is another problem, random and accidental becomes more and more remote, and reserves for emergency events get spent on more desirable things. Thus buffers are cut short, and increasingly so in the modern world of "lean" where inventories are attempted to be cut to zero, and a continuous flow set up. Once again fully integrated on a ship has the greater potential for achieving. Anycase, it is the government that people look to as a national buffer, provided for by the tax system. But once again have that conflict between the maxim buffer and protection from the government and the minimum tax. Presently the primary complaint against successive governments is tax paid and services being removed or privatised.

Privatising isn't really the problem, the problem is the quality of service and the way the service is paid for. Tax is a buffer, an insurance policy and a collective payment. Services provided by the government are paid for, just not at the time they are used. When privatised, people then have to pay on an as needs basis. That poses a problem of no funding to sustain the availability of the service when not in use, and people not otherwise having the necessary funds when they do need the service. Privatise but still have to have the collective insurance buffer system of payment.

So returning to the beginning there are certain essentials that people have to pay for to support a basic national lifestyle, and the costs of such are an operational expense not a luxury: only the real surplus should be taxed, not the employees full income. Making it a requirment of the mandatory income tax return to explicitly cover the essentail costs: imposes a need on individuals to pay more attention to how they spend their money before they start demanding pay rises, and at the same time collects more national statistics annually to better manage the economy. Given yearly income tax returns the national census is somewhat wasteful, and only collects slightly more information. Much of that information would be a constant on the tax return, and whilst it deals with individuals with incomes, it otherwise does deal with households and families in terms of dependencies. So the tax system could be providing more timely summary statistics for decision making, and better "means testing" of recipients of benefits. Also based on the earlier references to minimum allowances for costs of living, everyones income becomes measured as a multiple of the minimum: so this person has 80% of the minimum, that person has 5 times the minimum. Further more they are employees with wages set by industrial awards: so unions set the wages at 5 times the minimum: didn't really earn. Whilst those not on industrial awards, typically working longer hours, and would be getting less then the minimum allowances: they may get federal or state minimum hourly rate, doesn't mean they get enough hours for whole year: or that hours reasonably spread throughout the year. So tax returns could keep track of hours as well as incomes.

However, for small business owner/operators keeping track of own hours often on the unproductive side of activity: time isn't money, time is life. Whilst some service sector businesses think they sell time, that is not true. Engineers in particular who think they sell time have a particularly flawed view. Clearly cannot be selling time. I cannot remember where it comes from: but there is the case of the old retired guy who turned up with an hammer hit the machine fixed and got working, then issued bill for $100,000. This was considered extortionate for the 5 minutes taken: the response was the fee was for knowing where to hit it, not the time taken. Other case is that for the painting of the "whistlers mother" I think, once again only a short time to paint and a high fee: this time not the time to paint it, but the years of experience developing the skill leading up to the point in time when able to produce the required painting. Engineers should not sell time. If they do, they will have a problem: because 40 hours of hand calculations can be collapsed to a few minutes of computer time. This process can typically be repeated again and again, 40 hours block after 40 hour block collapsed to a few minutes: with no real increase over the few minutes: because a computer completes calculations in nanoseconds: and the calculations are interdependent: so no increase in the input parameters. So if only selling time, new comers to the market only have a few minutes to sell not thousands of hours. Though given the quality of what some engineers sell, they may aswell just be selling time. The real value does not lie in the time, nor being able to do the calculations manually: the value lies in the understanding of physical systems, imagination and ingenuity, social interaction on the project, and what can be achieved with available knowledge on current project. As a client do I really want to interact with this person, and what benefit do I get in return? There is a need to get away from time, and get away from averaging costs over time for convenience. Prices are not absolute measures they are only ever relative to a given time and circumstance.

Circumstances may be that don't like the work available, and don't really want to do it, and got plenty of other work to do anyhow. Even so it can be difficult to get rid of the work. Tell potential client, cannot do for 12 weeks, try 12 months and still they come back. Timing doesn't make them go away, so next option is to try high price, since everyone else must have tried timing, so pull a big number out off thin air. If still won't go away then getting close to fishing out the market price. I don't know why consultants always complaining of cost cutting bottom feeders: small business does the work that big consultants don't want: they provide more of a public service. Further more if not really concerned about the work, can drive the work away and around the block, and push the fees up. Sure someone may offer lower fees, but they will get swamped, and have to push the fees up: unless they get enough work to expand and employ more people. It has been said that the purpose of business is to maximise profit not minimise costs. My contention is that profit should be considered in terms of benefit not financial surplus. But still should be pushing prices upwards whilst minimising time expended to generate income. {eg. Spend more time doing what like doing, not increasing hourly pay rate: whats the point of that! if still working same total hours in year. Objective is to change what you spend time on: time equals life.}

Business is a real world experiment: there is no certainty. Likewise appropriate taxation is also an experiment: the more dynamic, adaptive and responsive to real world changes the more acceptable the system becomes. One contention is that the government and tax office doesn't know what it really costs people to make a living, I'm suggesting explicitly putting it into the income tax return so that they will know in future. The only tax on cost of living should be by the GST, income tax should only be on real profit not total wages.