The Income Tax Assessment Act now comprises 1,376,875 words.
The Act, for example, has a Section 82KZBB(1)(a)(iii)(B). The section deals with record keeping for travel expenses and the like – things ordinary taxpayers have to deal with. The whole section is 1346 words long and utterly unreadable.
About the only thing holding it together is the diligence of the Australian Tax Office which puts out English translations of the Act in the form of the Tax Guide and other information sheets. It also provides the wonderful E-tax computer program which was used by more than a million taxpayers last year. Without it, the accounting profession would make even fatter gains from the unwieldy law.
The law is so bad that even the Tax Office says forget the law, you can rely on our translations.
Still, why should the system be so complicated that so many Australians need a special computer program or an expensive accountant to do our tax returns?
Last weekend parties offering tax reform in New Zealand and Germany got increased support. In Europe economists point to the higher growth rates in places with simple tax systems – mainly in Eastern Europe.
In Australia this week the new National Party federal president David Russell called for a flat tax system. Usually flat-tax proposals state that there should be no deductions. That makes them simple and appealing.
Flat tax has it difficulties. It is unfair to people whose method of earning an income requires a lot of inputs which would otherwise be deductions.
The real point is that the present system is so awful that people are turning to flat tax – a catch-cry, you might remember, of the Joh [Bjelke-Petersen] for Canberra campaign of 1987. But given the choice between a system that takes 1,376,875 words of opaque legislation to describe and a simple flat rate of, say, 20 per cent on all income with no deductions, the latter looks good.
Of course, we already have one form of flat tax – the GST. It works well. It is far easier to do a GST return – the Business Activity Statement – than to do an income-tax return. Moreover, since the initial swathe of legislation in 1999, there has not been much need for amendment – unlike the Income Tax Assessment Act which every year seems to need more band-aids that Norman Gunston’s face.
It is hard to wiggle your way out of the GST. But if you have got thousands of pages of special deductions from income tax, the field is ripe.
It is a bit naïve to claim that the progressive tax system is fairer than a flat system. Theoretically, the higher your income, the higher rate you pay. But if you can artificially reduce your income through quite legal deductions, the “progressive” nature of the system breaks down. In any event, the flat system has a fairness element – the more you earn the more you pay, even if at the same rate. In the case of the GST, the more you spend the more you pay.
Another problem with the progressive system is bracket creep. Inflation inevitably pushes people into higher brackets – unlegislated tax increases. Politicians then generously hand it back in the form of periodic “tax cuts”. With a flat system, there is no bracket creep.
Bracket creep and higher tax levels have enabled governments (of both sorts) to increase welfare. We now have the absurd position that some people on more than $100,000 a year can receive a welfare payment. The Government takes swags of money and then hands it back (less the costs of administration). It is a grossly inefficient vote-buying exercise.
Another – more hidden – inefficiency is the deductions system. The Government promotes all sorts of activities through the tax system. It hands out deductions (often at a bonus rate) for investment in things like Australian films (which still haven’t done much good); agricultural pursuits; investment in equipment and so on. In recent years it has amounted to about $30 billion a year – up to 20 per cent of the Budget. This business welfare is disguised government spending which does not get enough scrutiny. It is open-ended. That is, it is determined how many people happen to spend money on the deductible activity rather than on the basis of sensible priorities for government spending. If Governments want to spend in these areas, they should do so in a controlled way.
But reform is difficult. It is often seen as a guise for the rich to pay less. Politicians worry that if even they cut the top marginal rate by 1 per cent, the masses will cry that it is a $10,000 tax cut for people on $1 million a year. But it is not as simple as that. A lot of high-income or high-wealth people do not have high TAXABLE incomes. Further, tax relief at that end of town usually goes straight back into the business and thus produces more income and more tax.
Reform may also be difficult without “grandfathering” taxpayers’ huge future depreciation deductions and carried-forward losses being held in the present system.
And the politicians are unlikely to give up a system that enables them to buy votes with middle-class and business welfare.
CORRECTION: In last week’s column on the Clea Rose case I wrote: “Clea’s parents were on scene within minutes of the impact. They say they saw no police at the scene.” I should have written: “Clea’s parents were on scene within minutes of the impact. They say they did not see the police who were in the pursuing vehicle at the scene.” Other police and paramedics attended promptly and arrived before Clea’s parents, who are grateful for the care they gave their daughter.