Tallinn, Estonia: 2016 Free Market Roadshow

This is part of a speech presented while visiting Vilnius, Tallin, Warsaw, Gdansk and Kiev for the 2016 Free Market Roadshow.

Australia’s claim to fame

Australia’s claim to fame in Europe is not just that we came second (to Ukraine) in the recent Eurovision Song Contest. No, Australia’s other claim to fame, is the small but significant part it played in the introduction of the Flat Rate Tax to Estonia in 1994. I’ve written about this in a book that I published in 2009.  I won’t detail the story here, however, except to note that it explains how Sir Arvi Parbo, whom I have known since I was seventeen, was involved (for more on this, download Heroic Misadventures for free).

Sir Arvi, an Estonian by birth, is probably the most respected company director that Australia has ever produced. So that’s one up for Estonia! I had the opportunity of speaking with Estonia’s former Prime Minister yesterday, reminiscing about those events that led to that reform and we chuckled about it. I must say that Mart Laar is a role model to the rest of the world. He is a rare politician who understands the value and the benefits that flow from good policy.

He introduced two waves of reform, each with a different focus, each time successful. The first wave was to remove corruption from Estonia.  The second was to reduce the size of government, to ‘live within their means’ without ‘stimulus’ or debt. His clarity of thought impressed me (something not often seen in politicians) as he explained Estonia’s determination to solve budgetary problems without borrowing or increasing taxation.  His reforms and his choice of very good people to travel with him has left a lasting legacy.  He is, rightfully, acknowledged as one of the new Estonian founding fathers.

Business rules

The first rule of business is to select and only surround yourself with very good people. There have been some significant reforms in your part of the world that can teach us much, with outcomes that remind me of a Ronald Reagan quotation:

“There have been revolutions before and since ours, but those revolutions simply exchanged one set of rulers for another.  “Ours was a revolution that changed the very concept of government.”

Reforms often change the concept of government by limiting government to the very few tasks that we can’t do best for ourselves as individuals.  Then the secret is making those policy changes stick and I’m gathering information on who has been successful there.

Australia, too, benefited from some economic reforms in the decade-or-so from 1986 to 1998.  However, that push for reform has stalled and there is now insufficient political courage to continue the process—for example, by simplifying our incredibly complex tax structure. The idea of a simple Flat Rate Tax is not even discussed. The vested interests (hordes of advisers) just love the complexity of Australia’s Tax Act because they can use it to their own benefit.  (I have too, on several occasions.)

Tax troubles

I’d like to talk about the complexity of the overall tax regime in Australia. Economist Ludwig von Mises once said that capitalism breathes through tax loopholes and author Trey Thoelcke expands on Mises’ insight as follows:

“Loopholes get a bad rap because they are perceived as ‘unfair’. But loopholes are the natural outcome of a political system controlled by the compromise of hundreds of politicians in a single room that have to agree and pass something. It is never a clean, loophole-free bill. 

“Perhaps what is more unfair is the fact that a group of people who contribute nothing to a business can take away that business’s income at will just by agreeing to it through some loophole-ridden compromise.”

Complex taxation arrangements were well described around 500 BC (2000 years before Adam Smith called for a ‘simple system of natural liberty’) by one of the first libertarians Lao Tzu when he wrote:

“The more restrictions and limitations there are, the more impoverished men will be. The more rules that are imposed, the more bandits and crooks will be produced.”

Let me show you how complex Australian taxation is. It is so complex that I don’t know any Australian who can tell you exactly how much tax they pay. Several years ago I bought a new car and it took me a full day to work out how much tax I paid on the car. When I discovered how much tax I had just paid, I wondered if I should ever buy another car.

It’s easier to explain to children the burden of taxation in Australia.  I explain it to them by asking two questions. Firstly, if a stranger politely asked if he could taste your ice-cream what would you do? The children inevitably say, “I suppose I’d let them.” Secondly, if a stranger comes along and takes half your ice-cream what would you do? They think about it for a while before replying, “Oh, I’d hide it so they could never, never do that again.” I then congratulate them for understanding how taxation works.  They get it immediately.

Following the successful introduction of Flat Rate Tax to Estonia, in 1994, by 2000 there were 24 countries with Flat Rate Tax and only eight of them were non-European countries—which illustrates what a significant revolution it was.  Several have since moved off and that worries me.  What could the reasons be?  I’m wondering whether it traces back to the Public Choice Theory where the vested interests feel that there is money to be made, by making it complicated again, so to receive the ‘concentrated benefits’ with the costs shared over the general population.

I’d welcome the introduction of a Flat Rate Tax in Australia because I’ve seen how well it works in Hong Kong. They have had a Flat Rate Tax since 1940. The title of one session today is Death and Taxes. I can think of one reason why that title may have been chosen.  I’m cynical of governments when they get too big.  Governments then only excel at two things.

One is stealing money from their own people through taxation. The other thing is killing both their own people and other people (history is my evidence). They are the two things that governments excel in, stealing and killing, so it is a reasonable title for today’s session.

Now, speaking about other threats, one of the biggest financial threats to the world is, ironically, the USA. It’s a bold statement to make because in many ways they are our friends and at one time they were the model for us all to follow, in the words of writer Ayn Rand:

“During the nineteenth century, mankind came close to economic freedom, for the first and only time in history.  Observe the results.  Observe also that the degree of a country’s freedom from government control, was the degree of its progress.  America was he freest and achieved the most.”

Now because the US has severely damaged their own economy they are trying to impose the costs of repair on the rest of the world. They have managed to get away with this because of their reserve currency status but it has led to many unintended consequences. They started off by filling jumbo jets with printed US dollars and exporting the all around the world.  We could never get away with that in Australia.  You could never get away with that in Europe because the threat of those dollars coming back and being redeemed could sink your economy.

Those US dollars never came back to the US because those bank notes just remained embedded in all those countries as a choice of currency all around the world.  They got away with it because of the reserve status of the US dollar.

The US then inflicted onto us the Global Financial Crisis along with all those derivatives.  They bailed out their banks with taxpayers’ money and created a dangerous precedent for the rest of the world.  It’s been an ongoing problem for many of us and then we now see the case of US bullying by imposing their FATCA and other regulations around the world.  I think Europe knows more about FATCA than Australia does.  It’s the Foreign Account Tax Compliancy Act.

How can they get away with this? By using bully-boy tactics like threatening if we don’t comply with all this they will cut off supplies of technology, research, medical knowledge etc.  They make it very difficult for a country and its people to exist which is really bully-boy stuff. How many of you understand the US total control over the Global Positioning System (GPS) and the pandemonium that would follow if GPS ‘shut-down’.

The FATCA Regulations are all part of the US plan to repatriate much of the world’s ‘portable money’ back to the US. I have a personal recent experience with FATCA because our company made an investment in Europe. A very simple investment.  However, I wondered why we were completing all these forms. Our Australian company was dealing with a European company.  Very simple.   I inquired about what all the forms were for, as it occupied two of our senior people over a two-week period just filling in the forms.

We were advised that the European country could not deal with us in Australia without complying with all the US regulations. What is the cost to the world of letting the US slow us all down like this? It is turning it around to the benefit of the USA because the money is starting to flow back into the USA areas in the USA like South Dakota have become virtual tax havens, compared to the rest of the world, so a huge amount of money is going to flow back to the USA.

Peter Cotorceanu of Anaford, a Zurich law firm, predicts that hundreds of billions of dollars will move to the US with most of the money moving this year. He notes that individuals in Switzerland, Hong Kong and Singapore have until the end of the year to pull their money out. That’s bad news for my country or company seeking investment capital.

This FATCA business is really not the end of the world for a big company because they delegate the role of completing all the necessary forms and fool themselves by hiding the costs in this way. However, as a small company, it just ties up our key individuals at a high cost to the business, preventing us from completing the entrepreneurial and productive tasks that should remain our top priority.

Business and in fact, the world, right now is so competitive that if you let anything get in the way of entrepreneurship and productivity , you will fail as a country or company. Therefore, non-essentials must be stripped out of both the corporate world and government. This puts intense pressure on people, like you, to come up with fresh ideas to facilitate changes. It is the role of think tanks to develop better ideas to replace the ideas that have got many countries into the difficulties we see so clearly today.

Always remember that it is the role of think tanks to develop these ideas on first principles and to be very precise about it, but it is not the role of think tanks to modify the ideas to make them politically acceptable and politically attractive. That is the job of the politicians.

Think tank work at its core, is to bring ideas and policy options into the light of day and convey them to decision makers in the hope that these ideas are adopted, implemented or even stolen.  In many ways, Think Tanks do the very opposite of intellectual property lawyers.

So, we need to bring on some change.  So, what are we to do about it? One of my mentors told me if we want change in our society then there are four main ways to bring about this change:

1. Education (a slow process because while the world goes mad in herds, it only regains its senses slowly and one by one)
2. Peaceful civil disobedience (by taking a stand when you know you are right – and this often takes courage)
3. Physical violence or war (we don’t want that)
4. Political change (which often follows the above)

My preference and focus is on the first two options – education and civil disobedience. I’ll just mention a couple of examples of peaceful civil disobedience. One, is Sir John Cowperthwaite, who in 1961, was sent by England to run the colony of Hong Kong.  He was the Finance Secretary there and made the decision not to send any statistics back to England. So England had no idea what was going on in Hong Kong and instructed him that as he was responsible for Hong Kong he must send them all the statistics.

Sir John again refused because he knew the minute they got hold of all those statistics they would start interfering with Hong Kong’s economy.  Just remember that in the 1960s, the United Kingdom was a role model for prosperity. As a result of Cowperthwaite’s intransigence, the economy of Hong Kong continued to prosper. Hong Kong’s secret was to have minimum bureaucracy.

Peaceful civil disobedience takes many forms and sometimes takes an enormous amount of courage which we saw with Ukraine’s young people three years ago when at great personal cost, of 100 lives, they were successful in removing the despotic President Yanukovych.  We have seen the younger generation take the lead in so many countries (such as the various Arab Springs Revolutions and now in Hong Kong and China).

On a personal level, I’m much less courageous than the young Ukrainians.  I run a business and our company has been going 120 years which is a long time in Australia being six years older than the flag or the Australian Constitution. I stated recently that our company would not have survived if we had filled in all the government forms expected of us or paid all the taxes that we were supposed to have paid.  Simple as that.

To survive, in business, you must exhibit a degree of civil disobedience and question things. I was running a mining company, some years ago.  I saw our people filling in government forms which requested all sorts of useless information (we collected our own data, all focusing on productivity but none of these government questions were of use to us). I calculated the cost of filling that government form in and it was $15,000.

I informed the staff that we were not there to fill in government forms.  We were there to find and produce gold which would result in paying their salaries and a dividend for the shareholders. The staff expressed their concern that if they did not complete the forms then we would be fined. I asked them to read the small print in the bottom line and the fine was only $100 so I instructed them to put the forms in the bin which resulted in saving of $15,000 every time there was a form to complete. You must question all these unreasonable demands on your time.  Don’t just go along with everything that you are handed.

I have an engineering background and I like measuring the success of different individuals, of different companies and, in the case of my current trip, of various countries where we can pick up ideas and transport one idea from country to country. To help you in measuring there are many indexes published. Property Rights Indexes, Economic Freedom Indexes, all these indexes help us recognize that a good civilization is one where people will flee to and a bad civilization is one where people will flee from.

So learn, the art of measuring, as it will help you explain to other people that free people, dealing freely with each other, with minimum involvement of third parties such as governments or monopoly unions, can solve most of the world’s problems. If we all continue liberalizing and making it easier for us to deal with each other and be understanding, then you will have more people coming to your country to trade and exchange ideas and I’ll have more people coming to my country to trade and exchange ideas. Our worst enemy is the bad policies that will confront us.

We wonder how bad people get to the top and bad policies remain but there is a school of thought in the economics world called the Public Choice Theory which explains the concentrated benefits going to the people who work harder to ensure that legislation gets passed or the bad laws remain. They spread the costs over a greater number of people, like us, so we never really march in the streets.  We just put up with it.  Consequently there is a huge responsibility and the whole future of ensuring a civil society rests on the shoulders of people like us.

We must fight bad ideas with better ideas. One of my favourite economists, FA Hayek, left us with this challenge:

“We must make the building of a free society more an intellectual adventure, a deed of courage.  If we can regain that belief in the power of ideas which was the mark of liberalism, at its best, the battle is not lost.”

Good luck and be relentless in your pursuit of better ideas.