Gavin R. Putland,  BE PhD

Tuesday, January 31, 2017 (Comment)

How we encourage the black economy

An Initial Submission to the Black [sic] Economy Taskforce
(submitted 31 January 2017; posted here 3 February 2017)

I respectfully submit:

(1) As the Government invites “initial views” on the black economy, Centrelink is engaged in the biggest “speculative invoicing” scam in the history of the world. The scam targets persons who found employment in the legitimate economy for less than a full year, or whose legitimate employers were known to Centrelink and the ATO by different names. Persons who merely earned undeclared income in the black economy are not affected by the scam. So, by the time the Taskforce delivers its final report, a large fraction of the Australian population, including the next several years' cohorts of school-leavers, will have received a clear and indelible message that it's better to get started in the black economy than to fall into the hands of Centrelink.

(2) If people are to be kept out of the black economy, they must have an alternative legitimate means of making ends meet. In particular, all persons capable of work must be able to afford residential accommodation within commuting distance of jobs, plus the cost of commuting, on wages that the employers can afford to pay after paying for their own commercial/industrial accommodation. To that end:

(a) There should be no taxes that cause the cost of hiring a worker to exceed the worker's take-home pay — that is, no taxes on labour. Nor should there be taxes on (produced) capital, which enhances the productivity, hence the earning capacity, of labour. The remaining tax bases include economic rents, externalities, and consumption, and would be more than adequate if governments did not need to throw money at problems caused by taxes on labour and capital.

(b) Under the headings of externalities and economic rents, there should be punitive taxes on activities (or inactivities!) that reduce the supply of jobs or accommodation. This category includes vacant lots, derelict and boarded-up buildings, apartments that are neither occupied nor available for rent, and residential land that “developers” deliberately withhold from the market in order to keep prices high.

Present tax policies conspicuously do the opposite. For both the Commonwealth and the States, labour is the biggest own-source tax base. Income-tax concessions are overwhelmingly for speculation on existing assets (rent-seeking) rather than production of new assets. Taxes on externalities are attacked for raising particular prices and suppressing particular industries, while payroll taxes and the superannuation guarantee quietly raise prices and suppress industries across the board (and, unlike the GST, make no attempt to exclude necessities of life). Land owners who waste their land avoid transaction taxes and pay lower council rates and charges than owners who fully develop their land.

(Note the implication that affordability of housing is not only an equity issue, but also a first-order efficiency issue — a point seldom mentioned by those politicians and lobbyists who love to preach efficiency.)

(3) To ban any commodity is, by definition, to grant a monopoly on that commodity to the black economy. If we insist on doing this, we should at least do it in such a way that the ensuing price signals make the monopoly unattractive. Consider:

(a) To discourage use of undesirable products, we want retail prices to be high. To discourage production and trafficking, we want upstream prices to be low, so that concealable quantities are not valuable enough to be worth producing or trafficking. If law enforcement puts a bottleneck in the supply chain, it raises prices downstream of the bottleneck, and lowers prices upstream. If we put the bottleneck on retail sales, we get the price signals that we want.

(b) All profits from trafficking in contraband ultimately come from retail sales. That is where law-enforcement must be concentrated in order to de-fund the industry.

(c) Further upstream, law enforcement should be just strong enough to maintain the need for concealment. Summary confiscation is enough. Any stronger action upstream sends the wrong price signals. Breaking up a syndicate raises prices for the benefit of downstream dealers and competing syndicates. Taking out a wholesaler raises prices for the benefit of retailers and other wholesalers. Eliminating an importer raises prices within the country for the benefit of domestic producers, retailers, and other importers. Eliminating an exporter raises prices in the rest of the world for the benefit of all suppliers to that market. Obviously the benefits of price rises are greatest for dealers who hold stockpiles, but all dealers gain when a given value of contraband becomes smaller and easier to conceal. Deterring exports reduces domestic prices; but if this is not compensated by disrupting retail sales, the price reductions reach all the way to the streets, encouraging consumption of the contraband in one's own country.

(d) Actions that send the wrong price signals become too easy and too common if they can be occasioned by mere possession of contraband. Furthermore, it would be much easier to gather evidence on retail sales if the most numerous witnesses, namely the customers, were not at risk of getting a criminal record for buying or possessing.

(e) The reverse onus of proof for possession of contraband helps traffickers to avoid prosecution by arranging for the contraband to be in the possession of some unsuspecting person, who will take the rap if anything goes wrong.

(f) This reverse onus of proof is manifestly unconstitutional in all jurisdictions; see

Yet governments continue to pursue policies that raise wholesale prices of contraband, attracting more suppliers into the trade.

(4) And what a pretty irony it would be if the name of this Taskforce were to run afoul of 18C.

In summary: Reverse-engineering of current policy leads to the conclusion that we are trying to encourage the black economy.

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