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Tax rates and other innovation levers

Taxation specialist, Anton Joseph, a good friend of our firm, writes on tax for CCH, one of the leading publishers for lawyers and accountants in Australia. In August 2009 he penned a blog post titled Murky world of tax cuts and deficits.

Anton looks ahead. He queries the potential financial impact on government revenues from any lower tax rates in current circumstances.

Anton also looks back, and notes the follow remarkable fact about increases in government tax revenues in the U.S. and Australia:

"Tax revenue in the U.S. and Australia has been steadily growing. Taking the years 2000 to 2008, total internal revenue collected in 2008 in the U.S  is 1.3 times that in 2000  whereas in Australia it is 1.6 times."

Today I responded to Anton's post with a long comment. I've reproduced my comment below.

I recommend Anton's full post. It begins with a reference to the John R. Talbott book, The 86 Biggest Lies on Wall Street which Anton has been reading. You can listen to a straight talking radio interview by Phillip Adams with Talbott on 3 September 2009. The topic is the U.S. financial crisis, now commonly and misleadingly labelled as the  "global financial crisis". Talbott is the author of at least two prescient books, Obamanomics: How Bottom-Up Economic Prosperity Will Replace Trickle-Down Economics, and Sell Now! The End of the Housing Bubble.

In my comments to the post I focused on the need for innovation levers and agreed that changing tax rates alone is insufficient given the size of the U.S. problem.

Anton

Thank you for targeting a topic that is one of the greatest issues faced today in management of the world economy, especially the

impact on it of developments in the U.S. economy. Yes, use of tax and other laws as tools is part of the solution. However, as lawyers recognise in dark quiet rooms amongst each other, law is only a small part of the required solutions.

Surely no one can suggest that a tax rate change alone will resolve the current growing and massive U.S. debt issue?

According to the Wikipedia entry on "United States public debt", "The debt is projected to nearly double to US$20 trillion by 2015, but is expected to increase to nearly 100% of GDP by 2010 and remain at that level thereafter. These estimates assume real GDP growth (after inflation) ranging from 2.6% to 4.6% annually from 2010 through 2019...".

These Wikipedia figures are projections, hence estimates. Presumably in part they draw on current statistics which indicate a U.S. GDP of about US$14 trillion. This weighs only slightly more than a U.S. debt of about US$12 trillion. Unless that debt growth is slowed and scaled back in coming years, the U.S. economy will distort like a banana republic.

If that takes place, could domestic demand in China and India arrive sufficiently in time to maintain positive sentiments in the world economy?

So we come, as you have, to the question of what to do, and not just with tax adjustment.

As an intellectual property law and IP commercialisation specialist over 25 years, I would point to wealth creation through innovation, a field in which the U.S. has obviously been among the leaders for more than a century.

But due to U.S. misadventures, improved innovation in the U.S. will not be sufficient to cut back the debt if real change remains stagnant in terms of it policies on war, public transport, health, education, climate change and other hot issues piling up against the U.S. in particular but also other nations.

I believe it's not overstating it to say that significant cultural change is needed in many nations to tackle the challenges. Unfortunately I don't see signs of that taking place.

In the search for solutions my hunch is that collaboration, enterprise 2.0 and open innovation are ideas worthy of more research. More on this later.


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