Taxpaying Made Easy

I have a short piece in the latest issue of Agenda, the ANU economic policy journal, entitled “Taxpaying Made Easy“. Simply put, I argue that we can save a lot of Australians the bother of filling out an annual tax return. In August, the ATO would simply send you a statement saying what they think you owe. If you agree with it, if you have no complex income, and if you don’t want to claim any deductions, you do nothing. Of course, if you want to claim your deductions, you’re welcome to do so, but my guess is that plenty of Australians would prefer a day watching sport to claiming their few deductions. We couldn’t save everyone from the October 31 scramble (landlords, FTB recipients, and child support payees are a few for whom it would be tricky), but we could take plenty of people out of the system.

The thing to note about this proposal is that it could also be accompanied by scrapping a whole host of deductions (as the New Zealanders did a few years ago), but you don’t have to do it that way. Moreover, simplifying tax-filing should appeal to politicians of all political stripes. Whether you think tax rates should be lower or higher, you should support lowering the compliance burden.

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23 Responses to Taxpaying Made Easy

  1. Sinclair Davidson says:

    Whether you think tax rates should be lower or higher, you should support lowering the compliance burden.

    I don’t quite agree with this point. The compliance burden would be lowers if taxes were simpler and rates lower. Making it easy to pay tax raises fiscal illusion and increases the tax take over time. I like the Hong Kong model. People pay their tax in cash at the Revenue Building. So many people arrive with bundles of cash in fuffel bags and hand it over. Also come tax time some people don’t have the cash and have to borrow to pay their taxes. That sharpens the mind and concentrates thought on the tax burden.

  2. Mark Hill says:

    Reducing deductions will mean rates can be lowered and less distortionary behaviour will occur if this happens. There is no reason not to lower rates.

  3. conrad says:

    I like the HK system too. Except I like only having to pay 16% even more than the 5 minutes it takes to fill in the forms (name, amount paid, number of children — and my favorite — and very Chinese — number of elderly relatives you take care of). If they could get rid of the smog, I’d be back tommorow.

  4. Sinclair Davidson says:

    Mark, there is never any good reason not to lower rates – I just don’t trust the government to actually perform.

  5. Damien Eldridge says:

    Sinclair, it sounds as if you think that judges, policemen and defence force personnel don’t deserve to be paid for their time. How would you pay these people without tax revenue?

  6. Andrew Leigh says:

    Sinclair, your approach to taxpaying reminds me of the Marxists who oppose trade unions – on the basis that unions only prop up capitalism, and delay the coming of the revolution. I can see your political economy argument, but don’t those efficiency costs worry the economist in you?

  7. Sinclair Davidson says:

    Damien, only judges, policemen and women, and defence force personnel should be paid out of tax revenue. Looking at the Commonwealth budget figures, they spend more on ‘Other’ than Defense and Public law and safety.

  8. Sinclair Davidson says:

    but don’t those efficiency costs worry the economist in you?

    Relative to the efficiency benefits of lower taxation (and lower public spending)? No.

  9. conrad says:

    “it sounds as if you think that judges, policemen and defence force personnel don’t deserve to be paid for their time”

    This is completely misleading statement. Perhaps another way to look at how much spending is wasted in Australia is to see how little tax you need to pay for essentially the same services as Australia (i.e., what the OTHER category means). Hong Kong manages to have almost every service you can find (except defence) in Australia for 16% tax (some of them are much better — like the 50% of people that live in public housing — and their educational system is better and better funded too). Singapore also has low tax rates, and it has defence expenditure also.

    I could point out additional examples, but the idea that you can’t have low tax rates and still pay for essential services (and indeed, even non-essential services) is simply false.

  10. Damien Eldridge says:

    How is it completely misleading Conrad? In the comment that I was responding to, Sinclair said “— there is never any good reason not to lower rates.”. I provided a number of good reasons for not lowering tax rates in some circumstances (in particular, if tax revenue is only sufficient to cover essential services). Furthermore, there are plenty of other public services that are valuable and need funding. My comment was in no way misleading.

  11. Mark Hill says:

    “I provided a number of good reasons for not lowering tax rates in some circumstances (in particular, if tax revenue is only sufficient to cover essential services). ”

    Which it more than covers.

    “Furthermore, there are plenty of other public services that are valuable and need funding.”

    Do they pass a CBA?

  12. Damien Eldridge says:

    Mark, in answer to your first question, so what and how does that contradict the point I was clearly making? In answer to your second question, yes. Indeed, it is so obvious that they some services would pass a CBA that there is no need to waste resources on carrying one out for them.

    Clearly there are plenty of ways to cut government spending that make sense. Furthermore, it is foolish to run a surplus all the time. The aim of balancing the budget over the bisiness cycle makes more sense. But the optimal size of government is certainly not zero. In deed, it is certainly larger than just the provision of police, judges and defence forces would entail.

  13. Damien Eldridge says:

    Indeed, Andrew Norton lists a number of useful ways to cut government expenditure without reducing social welfare in comment number 6 on the following post by him at his own blog:

    http://andrewnorton.info/blog/2007/05/01/tax-and-dont-spend/ .

  14. Sinclair Davidson says:

    Getting lazy in my old age. Here are some references to justify my comments above.

  15. Pingback: John Barrdear » Blog Archive » Why I like Andrew Leigh

  16. Pingback: Tim Worstall

  17. Christine says:

    Well, got to be happy to have anyone write a blog entry about your comments entitled “Why I Like Andrew Leigh”. Though then apparently youre quite rightly jumped all over in comments, so not sure what the net effect is there.

    Anyone want to debate that the compliance burden tends to make the tax system less progressive (and in a non-transparent way)?

  18. Sinclair Davidson says:

    Anyone want to debate that the compliance burden tends to make the tax system less progressive (and in a non-transparent way)?

    Could you expand on this? Are you saying the compliance burden itself is regressive, or are you saying that complaince turns the tax burden regressive?

    On a similar note complexity reduces progressivity when lower income individuals miscalculate their taxes and over-pay.

  19. Andrew Leigh says:

    At risk of sounding repetitive, I’m fascinated that both Sinclair Davidson and Tim Worstall are making arguments that seem reminiscent of the Marxists. Their arguments seems to be that the workers are wracked by ‘false consciousness’. The poor benighted voters don’t realise how awful the current taxation system is. Therefore, we have to make things really painful for them – wasting their time on a dysfuncational system even when we could make it more efficient – so that they vote for lower taxes. Only when we hurt the workers a lot will the (tax) revolution come.

    An alternative view (which I had thought that most free marketeers would subscribe to) is that voters are quasi-rational, that they understand the present tax burden, and that the current level of taxes and services is about what the median voter desires.

  20. Sinclair Davidson says:

    People are rational./ The authorities set out the deceive them – through fiscal illusion. Buchanan has written on this (in the links I have provided).

  21. Christine says:

    Sorry, Sinclair: I meant to say at the start that the compliance burden itself can be regressive. I was thinking roughly that lower income individuals would likely have a smaller ratio of dollars saved to time spent figuring out their possible deductions/credits, along with something like the less educated individuals are more likely to miscalculate and overpay story.

    But I may have gotten tangled up in another story: that there are fewer opportunities for deductions and whatnot for lower income people generally, so that the tax system looks less progressive than the simple marginal rates story would suggest. In that case, though, the distribution of deductions would mean a greater compliance burden on higher income people (more possible deductions = more paperwork/compliance costs).

    Not sure which way it would work out in the end. But admittedly it’s a bit off topic from Andrew’s starting point.

    Also: this practice of allowing people to hire tax accountants to do their taxes means that high income people don’t personally face enough pain in doing their taxes (illusorily, they see such a hire as giving them a net income gain). Shouldn’t this be outlawed, in order that higher income people in particular demand a simpler (and lower tax rate?) tax system?

    All this theorising is fun. In practice my tax calculations were due a couple of days ago, and they’re still not done.

  22. wilful says:

    Shorter Christine: Packer (in)famously paid 9% tax.

    I tend to get about a grand or two back due to deductions each year. I’d happily forgo those deductions for a slightly reduced rate and no tax return.

    This sort of reform gets proposed, in fact I think Mark Latham proposed it, but it never goes anywhere. I bet Treasury or the ATO don’t like it.

  23. Christine says:

    I suspect Treasury would in fact like it – or there’d be a certain constituency in Treasury who would like it. Probably the ATO too. The people who clearly shouldn’t like it are tax lawyers and accountants.

    But: there are some real problems figuring out how personal tax rates fit in with small business tax rates. I’m in no way an expert on these matters: I once sat in on a meeting of (Canadian) experts, though, and found the whole thing incredibly complicated and confusing.

    There are also political issues – a big advantage of credits and deductions is that they allow people to believe the govt is especially interested in them, and that they’ve managed to cut a special deal. People seem to like this. There were some really great discussions of this type of thing (re tax churning) on … I think it was Club Troppo? … a while back.

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