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INTRODUCTION

This is the final instalment of a 3 part essay on taxation policy and discusses import taxes in detail.

Part I provided some background on how taxes work in eRep today for the inexperienced reader.

Part II discusses considerations for taxation policy, and recommends what is IMO some good principles.



IMPORT TAXES - AN IN-DEPTH LOOK

As the specific tax policy under discussion in senate is related to import taxes I thought it worth spending a little time looking at this specific form of taxation in detail. So far nobody is suggesting NO import tax, so the debate is whether they should be higher (>35😵 or lower (20% or less which is still quite high).



Part I - The arguments for higher import tax

1) Competitive disadvantage - due to our lack of resource-rich regions eAustralia suffers a competitive disadvantage when it comes to productivity. Countries holding all resources enjoy a 100% production bonus for all raw materials and manufactures while eAustralia with only a 40% and 20% bonus for weapons and food respectively can’t compete. For example, a worker in eAus will produce 120 food per day while a worker in a country with all resources will produce 200 per day, a massive productivity advantage. The argument goes that high import taxes are needed to allow eAustralian business owners to compete or they will stop producing and unemployment and lower wages will result.

2) Patriotism/parochialism - it is unpatriotic to buy goods from foreigners and send profits off to other countries, proponents argue we should ‘buy eAustralian’ for the good of the country.

3) Earn revenue from foreigners to give eAussies a break - the more we earn from import tax receipts the less we need to tax eAussie citizens via VAT and Income tax.



Part II - The arguments for lower import tax

1) Competition leads to lower prices and efficiencies - it is argued that the higher competitition in the market when local producers compete with importers leads to lower prices and therefore welfare benefits to eAussie citizens.

2) Stop import tax avoidance - as discussed in my earlier article high taxes of any form increase the incentive to engage in black market transactions and in extreme circumstances can lead to reduction in tax revenue.



Part III - A theoretical examination of the effects of increasing import tax

To assess the validity of these arguments let’s run through the effects of an increase in import tax keeping all other factors equal:

- Initially importers will experience a drop in profitability as import tax is deducted from their sales revenue. They will quickly seek to restore profitability by increasing prices or withdrawing from the market.

- Initially government revenue increases as the market offers from importers are sold.

- Local producers will take advantage of the lower levels of price competition to increase profitability, either by selling more or raising prices in line with the importers. Citizen welfare will be negatively affected by the higher prices.

- Seeking higher production, employers in the affected industry will bid for new employees putting upward pressure on wages. The higher wages will enable workers to afford the higher-priced products, though assuming the business owner sets profit levels at a percentage of revenue rather than a nominal level some purchasing power will be redistributed from employees to business owners.

- If the higher import tax is only applied to one industry (e.g. Weapons), producers in the other industry (e.g. Food) will be priced out of the jobs market. Some producers will cease production, others will raise prices (as the lower supply will lead to unmet demand) until wages are equalised.

- Higher production of manufactures will lead to higher demand for raw materials, resulting in higher prices, and eventually higher wages in the resource companies.

- As higher prices relative to international markets kick in, some citizens find they can save money by conducting black market transactions. The degree to which transactions move to the black market depends on the rate of import tax (the higher the tax the higher the incentive) and the risk propensity of consumers and traders.

Finally we are left with higher prices and higher wages. Depending on the degree to which higher prices contribute to profit or wages, business profitability will remain the same or marginally increase and citizen welfare will remain the same or marginally decrease. More citizens will try their luck on the black market to avoid import tax, and depending on the import tax rate and risk appetite of consumers / traders government revenue may be higher or lower.

It appears that import taxes have only a short-term effect on profitability, in the longer term the net effect is probably insignificant or marginally in favour of redistributing income from consumers to business owners. The redistribution of profits from importers to local business owners is dependent on the degree to which black market transactions substitute market-based transactions.

An increase in import tax will also exert upward pressure on the exchange rate. Importers are interested in converting their AUD revenue to Gold (or other currencies) and as imports reduce the volume of AUD on exchange markets will also reduce. In RL this would lead to higher exchange rates which in turn reduces the cost of imported goods to counteract the effect of the import tax (in the longer term). Unfortunately in eRep the exchange market is fundamentally broken due to admin’s gold sinks. With the AUD/Gold exchange rate currently at 0.002 it is only possible to devalue by 50% or revalue by 33% so it is unlikely that the exchange rate will increase directly as a result of import tax increases.

In RL the profitability effect is likely to be longer lasting as there is ‘stickiness’ in wages. In eRep full employment is the norm and wages ride the roller coaster of the business cycle so stickiness of wages is not an issue.

Conversely a decrease in import tax from some pre-existing level will result in lower prices, lower wages, and less tax avoidance. There will be downward pressure on exchange rates though this is unlikely to tip the balance in favour of a 50% reduction from 0.002 to 0.001. Depending on the previous level of import taxes government revenue may decrease or increase as the incentive to avoid tax using black market transactions is reduced.

In summary the level of import tax in the longer term has only a marginal effect on business profitability and citizen welfare, while higher import taxes tend to increase the level of black market transactions. The extent to which local production is substituted for imports is off-set by increased black market transactions. There is potential for high import taxes to redistribute wealth from workers and consumers to company owners. The increase in black market transactions tends to favour experienced players and disadvantage new players who haven’t built up a network of potential business partners in other countries, while bulk buyers purchasing direct from foreign markets (avoiding both local import tax and VAT) may result in overall reduction in government revenue depending on the price differential between markets.



SUMMARY

In short, the analysis does nothing to change what I believe are good principles for taxation as outlined in Part II; a moderate import tax combined with similarly moderate VAT and income tax appears to be the best policy mix.

What is moderate? I’d say from looking at the examples of other countries that 10-15% across the board for all forms of taxation in all industries is a good starting point, from there the specific rates can be fine-tuned to match government expenditure. It is a level that makes black market transactions less worthwhile, while maintaining reasonable government revenue and minimises harmful redistributive effects.



That’s the end of this 3 part series on taxation policy.

Part I provided some background on how taxes work in eRep today for the inexperienced reader.

Part II discusses considerations for taxation policy, and recommends what is IMO some good principles.

EPILOGUE

Those who know me might be thinking OMGWTF why is Chris Carnage talking like an accountant? Has he moved to the dark side of free-market conservatism? Fear not friends, this analysis assumes the continued existence of an essentially free-market economy and will bear no relevance when the revolution comes.

If you like 3 part TL😉R articles about taxation policy perhaps you should consider joining the Australian Communist Party.