Libertarians hate to pay tax, especially at current rates. Many subscribe to the view that “taxation is theft”, although most also acknowledge the government has a legitimate role in limited circumstances for which it requires funds.

With that off our chests, let’s get practical and talk about how the government’s debt collection activities in relation to small businesses interfere with the free market and create moral hazards. 

One of the most active ways the government intervenes in the free market at the SME level is through its debt collection activities.

SMEs accrue significant tax obligations, regardless of their profitability, because they are required to pay not only their own tax, but “other peoples” tax which they withhold on behalf of the ATO (commonly referred to as ‘withholding taxes’).

These withholding taxes include ‘Pay As You Go’ income tax they deduct from their employees’ wages and salaries, as well as the GST their customers pay on their purchases.   

A business turning over a modest $1m per annum and simply breaking even
can easily have upwards of a hundred thousand dollars in ATO obligations
for these withholding taxes.

Problems begin when businesses retain these monies to use as working capital instead of passing them on to the ATO as they are supposed to.

And this is where the moral hazard begins.  How tough should the ATO be when it comes to collecting these taxes from small businesses? 

The pro-small business observer might say the ATO should support small business by being lenient. 

And the ATO is extremely lenient. In fact, it has been extraordinarily lenient through Covid. In its last annual report, the ATO reported some $44.8b owing in overdue and uncontested (“collectable”) withholding taxes from small business. It also reported 13,000 small business tax arrangements entered into in FY 2022.

In its 2022 Annual Report the ATO stated:

As the economy recovers, one of our key priorities is to address the collectable debt that has accrued over the past 3 years. This has increased from $26.5 billion at 30 June 2019 to $44.8 billion at 30 June 2022 – up $18.3 billion or 69%. The increased debt is a result of disrupted economic activity due to lockdowns and cash flow impacts on small businesses and households. During the early stages of COVID-19 we deliberately shifted our focus away from firmer debt collection action to assist businesses and the community experiencing challenges because of the pandemic.

To put this $44.8b in context, according to the Reserve Bank of Australia, as of April 2021 the total outstanding credit to small businesses in Australia was around $291b, including loans from all types of lenders, not just the banks. Suffice to say the ATO is not a small player when it comes to extending credit to SMEs in Australia.

The moral hazards are as follows:

  • The ATO gives a competitive advantage to a business which is either unable or unwilling to remit its taxes, allowing it to undercut a business that diligently pays its taxes and prices its goods and services accordingly.
  • Many businesses that fail to pay their taxes ultimately fail. When that occurs, they take with them money they owe their suppliers, employees and sub-contractors, who might otherwise not have been exposed to the failed business but for the ATO keeping it in business.
  • $44.8b in uncollected taxes is $44.8b our profligate governments will seek to gouge out of the rest of us one way or another elsewhere.

The Austrian economic principle of ‘creative destruction’ refers to the natural process of innovation and market competition, whereby new and more efficient ways of producing goods and services replace older, less efficient ones, and well-run firms outcompete poorly run firms. It is a Darwinian process where resources are re-allocated from losers to winners.  Creative destruction is essential for a prosperous free market as it encourages businesses to constantly innovate and improve, leading to greater efficiency, lower prices, and higher-quality goods and services for consumers.

The moral hazard created by the ATO in the form of leniency towards debt collection and granting unfair advantages to businesses that do not pay their taxes, compromise the process of creative destruction by propping up inefficient and unproductive businesses, inhibiting market competition, and ultimately hindering economic growth.

To promote a truly free market and ensure long-term economic prosperity,
it is necessary to hold businesses accountable for their tax obligations
and to allow the natural process of ‘creative destruction’ to take its course.

While the catch cry “taxation is theft” may be contentious, the practical implications of the government’s debt collection activities for small businesses cannot be ignored.  For those who favour a genuinely free market and long-term economic prosperity, we must hold businesses accountable for their tax obligations and question the role of the ATO in hindering the natural process of market competition.

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