About 12 million Australians, from this week, will begin doing tax returns.
It is a massive amount of paperwork even with the Australian Tax Office’s splendid e-tax system. And most of it is utterly unnecessary.
Probably about eight million of those Australians should not need to do a tax return with some slight changes to the system.
Of course, probably four million will still have to. The question is how to determine which ones.
But if you flushed eight million people from the tax-return system the savings would be huge. About 75 per cent of taxpayers use a tax agent because the system is so complex. Others spend a lot of time doing returns and the Tax Office spends a lot of time administering them.
But the amounts at stake for the eight million average wage slaves are quite trivial and could easily be accommodated in other ways.
The average deduction is about $2400. But given the very high deductions at the top end of the system the average wage slave deduction would be less than $500. We know that the average investment-property owner deducts about $17,000, for example. Incidentally, more on them and some good news for the Treasury anon.
Most of the wage slaves are on fairly low tax rates these days, so their $500 or so in deductions results in only $150 or so in the pocket. The tax-return system is a lot of mucking about for $150 average per head.
Why not just give them the money and a tad more – say $200 — and relieve them and the bureaucracy the burden. Of course, the tax agents who make buckets out of the system would scream, but there are always losers whenever inefficiency is cleaned up.
The way to determine who would do a return and who would not is fairly straightforward. Like so much tax administration these days, you get taxpayers to do it themselves.
You could just apply the structure of the GST administration to the income-tax system.
With the GST, people in business register for GST and they claim back the GST on the inputs to their business – computers, paper, transport, raw materials etc.
The rest just pay the GST every time they buy a good or service — and it is gone. It does not matter how poor or deserving you are, you pay the GST and it disappears into the Treasury coffers. The poor and deserving get help through the welfare system not by asking for the GST they paid on their processed food to be returned.
You could do the same with income. Employers would apply the existing tax rates on the fortnightly or monthly pay and it would be gone. Like the GST, income tax would apply on the single instance of the payment of salary or wages.
There would be no need for a tax return.
Those with more complicated affairs – businesses, investments and the like instead of or in addition to salary could register for income tax, just as people register for the GST and they could do an income tax return just like a Business Activity Statement with the GST.
The perennial Australian whinge about nobody being worse off in any reform can be met by saying, if you don’t like the new system continue with the old. But if you registered and did an income-tax return you would lose the $200 automatic tax reduction that the wage slaves would automatically get.
My guess is that people registering for income-tax would be basically the same people who register for GST – people with fair complicated business affairs, plus those who invest in residential property who often do not register for GST because rent is exempt from GST.
Quite a few measures along this path have already been made. People no longer get large tax returns because they only worked part of the year resulting in their overall annual income being in a lower bracket than the tax taken out by the employer. Tax law no longer allows the stretching of income over a period a person was on welfare.
People no longer have to detail medical deductions. Everyone gets an automatic medical deduction that covers the vast bulk of the population.
Quite a few countries have managed to do away with the tax-return system for the bulk of wage and salary earners. Very few countries have an income-tax system as complicated as that of Australia which results in so many people having to seek professional help.
As to the property investors, and I must declare that I am one, they might be in for an unpleasant surprise and the Treasury a pleasant one as the 2008-09 returns come in.
The Tax Office says about 1.6 million Australians are investment property owners. In the past decade their deductions have more than doubled to $24 billion. A lot of that is offset against wage and salary income or income from other investments.
A lot of these people have interest-only loans and throughout the year pay their rent into those accounts and pay any shortfall required, or if no shortfall they allow the amount of the loan to fall.
It is only at the end of the financial year they have any real idea what profit or loss they made over the year.
Well, over the past financial year, interest rates fell by four percentage points. My guess is that a lot of these people will find themselves a lot more positive or a lot less negative than last year.
They will find they will owe more tax than they bargained for. Alas, I am one of them. But fair cop.
Until about five years ago, investment property overall resulted in net tax being paid. But by 2006-2007 the Treasury was down about $3 billion through negative gearing and by perhaps $5 billion in 2007-2008.
Given that such a large portion – about 60 per cent — of deductions are for interest, back-of-the envelope figures suggest that the Treasury might pick up as much as $1.5 billion in 2008-2009.
Not all parts of revenue collapse in an economic downturn.