Update No. 253 – 05/02/16

Earning Seasons are the best time of year to be a fund manager. If you have done your job well, there will be a couple of nice surprises in your portfolio that the market hadn’t banked on and you’ll probably generate some outperformance, at least that’s the theory.

As a consequence of the increased workload, blogging may be a little more limited over the next few weeks, but I thought I’d write a quick note on the potential GST increase, as it’s been in the news this week.

The GST is interesting to me, because it is one of very few taxes I support. I think it is perhaps the most moral option for taxation. Now to be clear, I tend toward the low-tax/small-government side of economic theory, so supporting a rise in taxes will probably surprise most who know my general stance about government involvement in regulation and taxation.

But, in order to have the functioning society we do, there needs to be some taxation, so if we first accept this idea, we then need to make the taxation system as moral as possible.

The reasons I describe GST as a more ‘moral’ taxation option are twofold. Firstly, and the primary reason I think it qualifies as moral is because it captures taxation from areas of the economy that were previously hidden. If I’m going to shoulder my burden, you’d damned well better shoulder yours… For example, if I was a drug dealer, a prostitute, a dodgy taxi-driver, a tradesman doing ‘off the book cash-jobs’ or any of the other myriad components of the ‘black economy’ before the GST was introduced, I didn’t pay my fair share of tax. After the GST was introduced, participants in the black economy still didn’t paying their ‘fair-share’ of tax, but at least they were paying something. Increasing the GST from 10 to 15% effectively adds around 50% to the tax paid by someone who avoids paying all income tax in the black economy.

The second element to the moral component of the tax is that although it gets described as a regressive tax, it is very clearly also a progressive tax. The high-income earner consumes more goods and services than their lower-earning counterpart. To be sure, lower-earners typically spend a higher proportion of their income on consumption, but the rich pay more. As long as the changes to income tax are handled properly, the poor seem to do best out of the introduction of consumption taxes as I describe below.

When I researched this post, I was interested to find from the Australian Bureau of Statistics that the bottom quintile of household incomes have grown faster over the last 20 years than the top quintile. This is wonderful news, means the poorest 20% are improving their incomes faster than the wealthiest 20%. This is the sign of a ‘fair’ society.

What I found more interesting though is that on an adjusted basis, the difference in the change between the bottom quintile & the top quintile was smaller in years leading up to the introduction of the GST (Bottom Quintile = 2.47% annual income growth & Top Quintile = 2.31%) than it was in the years afterwards (Bottom Quintile = 3.04% annual income growth & Top Quintile = 2.69%). Incomes grew faster after the introduction of the GST, but the poorest 20% captured 50% more increased in annual income growth than the richest 20%.

The final reason I prefer consumption taxation to income taxation is that it will increase the net savings of persons who take the morally righteous path of grossly underspending their income. That is to say that income tax reductions are typically greater than consumption tax increases for aggressive savers when consumption taxes are introduced. Policies that encourage righteous behaviour are good policies – Tony Hansen 05/02/2016


Apr 1st 2011

Jul 1st 2015

Current Price

Since July 1st 2015

Since Inception

EGP Fund No. 1












EGP Fund No. 1 Pty Ltd. Up by 3.30%, leading the benchmark by 8.35% since July 1st 2015. Since inception, EGP Fund No. 1 Pty Ltd is Up by 91.81%, leading the benchmark by 62.30% all-time (April 1st 2011).

*1 after a 31 May 2013 dividend of 2.333 cents per share (cps) plus 1.000 cps Franking Credit, a 31 May 2014 Dividend of 7.000 cps plus 3.000 cps Franking Credit and a 31 May 2015 Dividend of 8.6667 cps plus 3.7143 cps Franking Credit

*2 calculated based on dividends reinvested

4 thoughts on “Update No. 253 – 05/02/16

  1. S1mon says:


    Hi Tony

    Random question/comment

    I was pleased to see/hear cooked chooks from coles and woolies and now $8..(im told they are/have always been 7$ at costco)….thats down from $10 or $11. Will that impact RFP at all. not sure who is taking the hair cut.





    • Tony says:

      The farms RFP operate get

      The farms RFP operate get paid a fixed fee for housing the chickens. With a bonus/penalty system for mortality and finished weight.

      Much like the grocers use milk as a ‘loss-leader’ I suspect they aren’t making much from the BBQ chickens either – Tony

  2. john says:

    GST and income

    Is correlation causation?  Did the incomes really rise with GST introduction? I’d like to think my example involving bob illustrates how it is probable that low income earners didn’t increase their disposable income as you imply. Let’s say bob earns $100- a year after tax. He earns so little that he has to spend every penny he earns. Because bob spends every dollar he earns, bob pays 10% GST on every dollar he earns. While bob’s $100- was worth $100 prior to the introduction of GST, bob now has $90 from his $100 to spend. Bob can only eat for 9/10ths of the year. It sucks to be bob. Australian society doesn’t want poor bob (literally) to be any worse than he was pre GST so they go about making changes to make bob’s life like it was pre tax introduction. Either the $100 of chicken bob was eating needs to fall in price or bob’s income needs to go to $110-. Let’s assume the price of chicken is 90% fixed costs and 10% profit so if they drop company tax from 30% to 20% bob will save $1 of the $10 he needs. There is still a $9- gap. the gap has to be filled by a pay increase and exceptions that only affect bob.  

    Meantime, bob’s rich mate habib is earning $900k a year and working so hard he only gets time to spend 90k a year. The effective increase for Habib is only 1% more tax (assuming he doesn’t purchase any GST exempt items). Habib has the choice you described (unlike bob) because he can elect to avoid paying GST (as a percentage of income). If you are paying 1% more tax then your wage should only increase 1%. This low percentage of GST is effectively a smaller tax increase for rich people. I know GST should still be paid eventually and thus should get priced in but not all market participants act like they should. Isn’t it reasonable to say someone like Gina Rinehart or yourself won’t ever pay 10% GST on their income because you don’t intend to ever spend the money. I know I don’t intend to pay my share of GST ever. Should my pay reflect a cost I don’t incur?

    Another question is does the data really show my income is rising by less than the poor? I looked through the data and it shows an increasing Gini coefficient since the GST introduction which makes me believe your allowing human bias to influence your data collection. Surely the coefficient would fall if GST improved equality. It is worth noting your view is contrary to most texts which cite sales taxes as a regressive tax which increase inequality.

    I think people form too many of their beliefs on personal experience (particularly political and macro economic) and then select facts to match their beliefs, they believe that everyone has the same choices as them (and to an extent they do), but really people don’t get the same choices. Lots of people want to be as rich as buffet yet only one can be. Lots of people want to have over 50k disposable income yet less than half of Australian households can. GST may be avoidable for you but 50% don’t Really get a choice in how much GST they pay and thus less than 50% of people get the choice you believe they have.

    • Tony says:

      Right you are John

      My personal experiences have shaped me enormously, as anyone who’s dragged themselves out of poverty will attest.


      I do object somewhat to the idea that I ‘selected facts’, I went looking at the data and reported what I found. 


      This objectivy when reviewing data is critical to success in investing. Almost all of your efforts are spent trying to check/dismiss your priors. If you spend your time trying to confirm them, you will get sub normal returns – Tony

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