This year has been a bountiful one for the tax reformers. No sooner had the treasurer announced a suite of tax cuts in the 2005 budget than others were clamouring to see their own plans put in place. From Malcolm Turnbull to Craig Emerson, from the Australian Chamber of Commerce and Industry to the Australian Labor Party, it seems that anyone who’s anybody these days has a plan to reform our tax system. Yet all this highfalutin' talk has missed the simplest idea of all: exempting most taxpayers from the requirement to file a tax return.
Most tax reform plans are focused on cutting rates, on the basis that taxes deter work. This is what economists call a “deadweight cost” of taxation. The problem is reducing tax rates means that there’s less revenue to pay for schools, roads and hospitals. The most recent survey to have asked Australians about the trade-off between cutting taxes or spending more on social services found that the public was evenly split: 35 per cent wanting lower taxes, 37 per cent favouring more spending, and 28 per cent undecided.
But what is often missed in the Australian public debate is that work incentives are not the only deadweight cost of taxation. As everyone who has just spent their weekend filing a last-minute tax return knows, another major cost of taxation is the administrative burden. Getting your receipts in order and ploughing through the Tax Pack takes time that could be spent on more productive activities.
How much time do we take to do our taxes? In 1994-95, Binh Tran-Nam and his co-authors surveyed a representative group of Australian taxpayers, and asked them how much time they took to file their returns. On average, they found that Australian personal taxpayers spent 8.5 hours each year on their tax affairs. Multiplying this by their hourly wage rate, they found that tax compliance costs each taxpayer around $210. In today’s wages, the cost of tax compliance is probably more like $300 per person (though electronic filing may have helped a little).
To see how we could reduce the cost of tax compliance, we only have to look across the Tasman. In 1999, New Zealand dramatically simplified its tax system, freeing most adults from the requirement of filing a tax return. In the most recent tax year, half of New Zealand’s taxpayers - those with only wages, interest income or dividends - had no obligation to file a return. Another one-fifth received a statement from the tax office stating what the authorities thought they owed, which they had to correct or confirm (this could be done with a telephone call). Only three in ten New Zealand taxpayers were required to file a return.
One reason the New Zealand tax system allows nearly three-quarters of personal taxpayers not to file a return is that theirs is a simpler tax system than ours. Many of the tax deductions available in Australia do not exist in New Zealand. Indeed, some have argued that Australia should follow New Zealand in abolishing deductions and lowering tax rates.
But we can make life easier for Australian taxpayers without doing anything so radical. A much simpler reform would be as follows. In August of each year the tax office - knowing how much you earned from various sources - should send you a tax statement, setting out your income and tax liability. If you want to claim some deductions, you’re free to file a return. But if not (and provided your only income is from wages, dividends and interest), you should have the option of not filing a tax return. Just tell the tax office that you agree with their assessment, claim the refund or pay the excess tax, and you’re done.
Admittedly, simplification can’t take everyone out of the personal tax system. Self-employed workers and landlords would still have to file a tax return. But like New Zealand, we could spare around three-quarters of Australian adults from doing their taxes. No more receipt-keeping. No more Tax Pack. No more fretting as October 31 looms. The beauty of such a reform is that it can be implemented with any set of tax rates - lower or higher than those we have today.
In an era when the Australian Tax Office deducts most tax at source, why should we spend hours every year telling the tax office what it already knows? Instead, we ought to exempt most taxpayers from the requirement to file a tax return if the ATO already knows about all the income that they have earned. By saving taxpayers eight hours of work, such a reform would give most Australians the equivalent of an extra public holiday each year. Now that’s what I call many happy returns.
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