It’s tax time again.
This year tax time is a bit special. We have a government set on a path of tax reform to simplify the system and make it more efficient. Yet this very day sees the introduction of two new taxes that smack of complexity, inefficiency, avoidability and of being ideologically driven. (The new superannuation and health levies.)
We have a tax commissioner bemoaning how many taxpayers have to go to tax agents while at the same time administering a hugely complex Act through self-assessment with painful consequences if they get it wrong. Small wonder people want help.
More middle-income or upper-middle people seem to be feeling the pinch and more of them are entering the more complex financial world which used to be the preserve of quite high income earners.
Bracket creep is throwing more people into the top marginal income tax rate, under which half additional income is taken in tax.
Gone are the days of indexed superannuation after lifetime careers, so people have to organise their own retirement incomes and invest on their own during their working life.
With incessant out-sourcing and down-sizing more individuals are working as consultants and contractors rather than employees.
These trends are making the tax arrangements of more people more complex.
They come on top of an earlier trend in Australian tax history in the 1970s and 1980s. This was the tussle between tax avoiders on one hand and legislators and tax administrators on the other. The courts were supposed to be in the middle, but frequently favoured the tax avoiders. The avoiders would create artificial arrangements with trusts, companies, partnerships and overseas tax havens; the courts would let them get away with it; and then the legislators would patch up the loophole with complex black-letter law.
With that background in mind several questions emerge.
Can we trust business and very wealthy income earners not to resort to tax avoidance schemes if the legislation is simplified? Simplicity can bring the ambiguity from which loopholes are created.
Can we trust the courts to interpret the simplified law in a way that does not encourage avoidance schemes?
Can we trust the tax office with wide discretion that must come with simplified law? Simplicity can bring ambiguity which gives more leeway to administrative decision makers.
Can we trust the government in its tax reform process not to stray from the path of efficiency and simplicity on to the path of ideology?
Taking the last question first, the superannuation and health exercise do not instill confidence.
Proponents (many members of the Coalition) of the GST have argued that it should be of a uniform rate and broad-based with no exceptions to make it administratively convenient. There is merit in this. Customs and wholesale taxes are good examples of the problem of striking different rates for different things. Is a Superman outfit tax-free clothing or a toy to be hit with a tax? You have to set up a bureaucracy to deal with the difference.
But what happened with superannuation? Before today superannuation was taxed at 15 per cent across the board when it went in to a fund. That is easy to administer. The fund just pays 15 per cent of its takings. From today, things change. People whose income is higher than $70,000 pay more than 15 per cent on a sliding scale to 30 per cent at $80,000. The funds have to set up a bureaucracy to deal with this.
And the new health tax? Singles with income over $50,000 and families with income over $100,000 will pay an extra 1 per cent Medicare tax unless they take out private health insurance.
This is a bizarre inefficiency. Medicare spends about 3 per cent of turnover in administering claims; the private funds spend 14 per cent.
Then there is the health incentive. Low-income people with private cover get a rebate. The idea is to attract more low-income people to private cover. But, on the Government’s own admission, it comes at the huge cost (nearly $500 million) of paying the rebate to people already in private insurance. The Government is rewarding the inefficient purely on the ideological ground that private is good; public is bad.
Both the superannuation tax and the health tax are easy to avoid by many mid-range income earners in small business.
Many small business people pay themselves for the whole year towards the end of the financial year. Many will pay themselves $69,999 on June 30 and put nearly all of it in superannuation at the low 15 per cent rate. Then on July 1 they will pay themselves in advance for the following financial year of whatever is their normal income. That year, of course, they will decide not to put any money into superannuation. Incidentally they can avoid the health tax for the year they are on $69,999, though most will have private cover anyway.
These ill-conceived complex, avoidable taxes to not augur well for tax reform.
As for the us of tax agents, Mr Carmody to the Sunday Herald-Sun, “”I am concerned that two-thirds or more of taxpayers feel the need to go to a tax agent to complete their tax returns.”
Of course, they need a tax agent. Tax capital gains tax as a small example. In the past five years hundreds of thousands of mums and dads shareholders have bought shares as governments and mutual organisations have privatised. They rightly feel if our public assets are being flogged off, the public may as well buy. Most join dividend reinvestment plans where dividends are paid in shares twice a year.
When it comes time to sell the capital gains have to be adjusted for inflation from the time shares were acquired. It is a nightmare to adjust every single share acquisition for inflation. You need a computer program to do it.
Other areas of tax are getting equally complex.
In short, mums and dads are finding it harder and harder to do their own tax returns.
We need some lateral thinking. One large complex system of tax is not longer appropriate. We need one simple, plain-English system for the great majority of PAYE and small business taxpayers and another complex, detailed, black-letter-law system for the very wealthy or medium and large business. Taxpayers can elect for whichever they want.
The latter can insist on the letter of the law and take advantage of whatever loopholes they find and fight for them in the courts. The former get the benefit of simplicity but there is a very wide discretion on tax authorities to disallow the inevitable loopholes that will emerge when simple language is used.
Most people apparently approve a GST if it is combined with lower income tax, but it will be appalling if the GST turns out to be as complex and unfair as the present income-tax regime. We would have the worst of both worlds.
But watch it happen. There will be special pleadings to exempt or reduce the tax on clothes, food and other essentials without any concern for the cost in adminsitering the exemptions. Part of those special pleadings will come because people will have little faith that politicians will fairly cut income tax and increase social welfare to compensate for the GST.
And based on the performance of the Government to date they would be right.