20/05/2015 - 05:01

The business of growing government revenue

20/05/2015 - 05:01

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It has been almost seven years since the GFC, and the subsequent drop in tax revenue has challenged two federal governments here in Australia.

The business of growing government revenue

It has been almost seven years since the GFC, and the subsequent drop in tax revenue has challenged two federal governments here in Australia.

In fact, the nation is now in a structural deficit, meaning unaided economic growth alone will not produce enough growth in tax revenue to overcome annual budget deficits. While this compels any responsible government to rein-in spending, that's only one side of the equation. Of greater importance is the other side – growing tax revenue. But in doing so, we must look beyond the lazy options of increasing taxes or imposing new ones.

The smarter approach is to focus on growing the economic pie from which the government takes its slice, rather than directly increasing the slice itself by increasing taxes. The point is to make the government's slice bigger the healthy way – as an outcome from making the pie bigger.

That's easier said than done. In fact, it's quite a challenge, but we shouldn't be deterred. While controlling expenditure is certainly important, it shouldn't dominate over growing revenue. That would be like trying to grow a business mainly by cutting costs. While a sustainably successful business must be diligent with its costs, that's not what makes it a success. The key is growing its revenue, relative to its costs.

That brought to mind the four rules for sustainably growing a business, and whether those rules applied to growing government tax revenue (cost cutting does not feature in any of them).

1) The first rule of growing a business is getting more customers of the kind that you want. That last bit is crucial, as more of the wrong kind of customers can actually send you backwards. So who are the right 'customers' for government? Quite simply, that means taxpayers, whether individuals, businesses and so on.

Governments want people who are drivers of economic activity, such as entrepreneurs and business owners. These people are motivated to create something bigger

than they are, and in the process create employment and wealth – and thus more tax revenue.

We also need more 'intrapreneurs', people who are innovative and driven to create new products, services and systems within the organisation that employs them. Richard Branson often pays tribute to identifying and cultivating intrapreneurs within the various Virgin businesses as a key part of his empire's success. We need more investors and savers, as they indirectly provide funding for businesses to invest in the things they need to for growth.

A government that provides an environment that encourages all these kinds of people will find itself with more 'customers' of the kind it wants.

2) The second rule of growing a business is increasing the number of times your customers come to you to purchase your goods or services. In terms of government, this means taxpayers doing more of whatever they do that generates economic activity. For example, an entrepreneur succeeds with one business, and then sees an opportunity to start another one. We'd like them to embrace that opportunity, with the prospect of creating more employment and wealth, and therefore tax revenue.

A salesperson hits their bonus target this month. Similarly, we'd like him or her to hit it again next month. If government makes it easier for people to do more of these things, or at least removes obstacles, those people are increasing the number of income sources for themselves or their employees, resulting in more tax revenue.

3) The third rule of growing a business is increasing the value of each transaction with a customer. While the goal of the first and second rules is additional activities, this rule is about amplifying existing activities. The textbook example is the fast food cashier asking 'Would you like fries with that?'

For government, this means helping taxpayers raise their activities to the next level – expanding their business, innovating, or developing their employment skills. Again, achieving this produces more income, employment, wealth, and therefore tax revenue.

4) The fourth rule of growing a business is to systematise its processes. This is so that it functions coherently and consistently, as this crucially underpins the ability to grow.

This rule is the one most emulated by government, with a vast array of people, systems and processes for carrying out government tasks. However, the benefit of this is only realised when those responsible possess the necessary skills to adeptly use those systems at their disposal.

When a government is spending beyond its means, the responsible course of action is to reduce spending; but the bigger question is how to make the economic pie bigger, resulting in more tax revenue the healthy way. How we might achieve this is certainly open for debate. For now, the point is to obtain a clearer perspective on what we need to achieve, and then we can focus on how to get there.

Tax policy is a key factor here. Treasurer Joe Hockey is trying to kick-start discussion on tax reform with his recent Re:think tax discussion paper, which contains 200 pages of thought bubbles to ponder. That's fine, but the role tax policy plays in growing the economic pie is only part of a much bigger discussion involving industrial relations, industry policy, productivity, trade relations, foreign investment and so on.

In fact, tax policy is sometimes used as a prop to merely create the appearance of boosting business activity. Do you remember the short-term 'investment allowance' from a few years back (pinched from a similar policy in 1994), or the brought-forward deduction for the first $6,500 of the cost of new equipment (until abolished last year)? There is little evidence to suggest businesses invested in new equipment – cars don't count – because the government legislated for a bit of extra depreciation deduction. And yet, with a heavy sense of déjà vu, last week's federal budget announced an accelerated depreciation deduction – not any extra deduction, mind you, just a timing difference – for small business on equipment costing less than $20,000. Here we go again.

As a general proposition, the best reason for a business to invest in its future is the judgment that it will earn a sufficient commercial return. If you can get that right, then you're onto something.

You can't directly grow a business; growth is an outcome from doing things under the four rules. Similarly, if government is facilitating an environment in which businesses and people have confidence to invest in themselves for the right reasons, a bigger economic pie and the consequent growth in tax revenue are outcomes.

There is no understating the challenges – whether policy or political – in achieving this. Merely tinkering with taxes has limited effect, but maybe the four rules for growing a business really do have something to offer here.

But you must have good people on the inside to make things happen. Perhaps the government should take a cue from Richard Branson and do more to cultivate its own intrapreneurs.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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