Dispatches From the Moderate Left

Monday, April 03, 2006

A Simple Idea

Opposition parties tend to get a lot of flack for not having their own ideas. Often it's an unfair complaint because any ideas that opposition parties come up with are ignored by the media because it's not usually newsworthy to report on a plan which won't have any effect on public policy for the foreseeable future. Opposition parties and parliamentarians usually do come up with all sorts of ideas but they get routinely ignored. While researching an essay on tax simplification, I ran across one collection of Labor Reform ideas at Craig Emerson MP's web site. It had an interesting article by an ANU economist Andrew Leigh which advocated the abolishment of mandatory self reporting of income tax for taxpayers with simple affairs.

This isn't a new idea. New Zealand and the UK both moved away from compulsory self assessment in the 90s with great success. While very close to 100% of Australian taxpayers (67% of the adult population) submit a full assessment form, the figure is only 37% and 31% in the UK and NZ respectively. Self assessment was introduced in Australia in the mid 1980s and there's been academic calls for reducing its scope since the early 90s when a study by Pope revealed the reasonably high costs of complying with self assessment. The findings of this and other studies is that the average taxpayer spends about 8.5 hours a year filing out their tax return.

The total costs of complying with the Australian income tax system are reasonably high by international standards. While no studies have been done since the mid 90s, the paper by Leigh updates those studies by using more recent time valuation figures and works out that it costs individuals about $3bn a year to comply with their tax obligations. About 70% of those costs are time costs, but Leigh points out that the time savings alone of reducing the number of people who had to submit a tax return would be approximately equivalent to giving everyone an extra public holiday per year, which is a good thing.

Anyway, this is an idea which people should be able to get behind and I hope Labor run with it. If we could match NZ and the UK, potentially 60-70% of people who currently submit a tax return would no longer need to. Avoidance wouldn't be increased very much, if at all, because the people who wouldn't be submitting a tax return are salary and wage earners whose affairs can be tracked fairly easily. If you think about it, thanks to the PAYG system the tax office already has most of the information it needs to calculate tax liability - a lot of the stuff in your tax return is telling the tax office what they already know. The current system of getting a tax refund at the end of the year would continue in the same way, it's just you wouldn't have to ask for it.

The only complicated stuff for the average taxpayer might be deductions, which brings us to the interesting part of this proposal. The most comprehensive academic paper on this proposal was written by Chris Evans in 2004. Leigh is aware of the paper because he cites it. But he doesn't mention the crucial ingredient which Evans argued was needed to achieve really big reductions in the number of people who file a tax return - a wholesale reduction in the number of allowable income tax deductions. So, for example, NZ has an extremely limited number of allowable deductions which was the catalyst for the reporting reform.

I've made it clear before that I'm in favour of abolishing or seriously curtailing the income tax deductions system before, but it's an idea which neither of the major parties in Australia has been willing to seriously countenance. Too many people would be affected directly by it and the benefits to the community (from commensurate, broad, tax cuts and general efficiency gains) are fairly diffuse which is a recipe for political inaction. But you can't simplify people's tax affairs substantially without doing something about deductions, which is the only complicated part of most wage earner's tax affairs. The two ideas are intrinsically linked.

So is Labor's Craig Emerson advocating a wholesale reform of the income tax system? I don't think so. He's trying to have his cake - an electorally popular move to cut the number of people who have to file a tax return - and eat it too, by not mentioning that to get any real gains a more electorally dubious tax deduction overhall. But simplification of the personal tax system just looks like one more benefit of scrapping income tax deductions to me.

2 Comments:

  • As an isolated idea, any proposal which saved a large number of Australians from 8.5 hours of bureacracy a year is worthwhile.

    I would suggest that the idea would suffers from unpopularity with accountants servicing the retail end of the tax business (it could destroy the economics of the $99 tax return at H&R Block), but that otherwise it is exactly the kind of tax policy the Coalition might adopt at some point.

    By Anonymous Joel, at 1:12 PM  

  • Heh, my point was pretty much that it can't be an isolated idea and Howard/Costello are making it very clear atm that they don't have the stomach for the sort of tax reform which would be necessary to make this move effective.

    By Blogger Jeremy, at 3:55 PM  

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