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If tax reform proves too hard, maybe tax simplification is the way to go.
Tax Simplification
In this episode we will ask Chris Evans of UNSW whether there is a way to simplify our tax system. Here is what we learned from this interview, but please listen in as Chris Evans explains all this much better than we ever could.
Listen while you drive, walk or work. Just search for Tax Talks on your phone’s podcast app.
If you ask anybody in any part of the world about the complexity of their tax system, they will say, “No, ours is the most complex.” Everybody thinks their own tax system is the most complex. So maybe our tax system in Australia is just as complex or simple as any other system.
However, there are a number of indicators that suggest that the Australian tax system is indeed quite complex.
Indicators of Complexity
There are a number of factors that indicate a fairly high level of complexity in the Australian tax system.
# 1 Readability of Legislation
Look at the legislation itself. How easy is it to read? And you can test this. And when you do, Australia doesn’t fair well.
# 2 Tax Agent Engagement
Australia is the country with the second highest number of tax payers engaging a tax agent after Italy. In no other country – beside Italy – do as many taxpayers and businesses seek help for the management of their tax affairs as they do in Australia.
# 3 Tax Compliance Costs
Tax compliance cost for Australian taxpayers – be it business or personal – are higher than anywhere else in the world. Research has consistently shown this.
Compliance cost are the cost we incur as taxpayers in complying with our tax obligations. Things like the fees we pay to tax advisers, incidental cost we incur in dealing with our tax affairs. These cost will disappear if that particular aspect of the tax system disappears. Compliance costs do not include the cost of the ATO.
Compliance costs are regressive in the sense that they hit the small business taxpayer heavier or harder than they hit larger business. And the person with low income is hit harder than a person with higher income.
# 4 Administrative Costs
The other side of the coin is the administrative costs. That is the cost of the ATO administering the tax system. If you add compliance costs the taxpayers incur to the administration costs that the revenue authority incurs, you get the operating costs of the tax system.
And the operating cost of the tax system in Australia do seem to be higher than many other countries.
Causes of Complexity
Once you have established complexity, it is time to look at the cause of this complexity. What makes our tax system so complex?
# 1 Change and frequency of change
If you get used to a certain tax system and then it changes, then this obviously increases the cause of complexity in complying with that tax system.
# 2 Life isn’t simple
Nobody can pretend that life is simple. And in order to have a tax system that can cope with everything life throws at us it needs a certain level of complexity. It is not going to be straightforward and simple and easy.
# 3 Non-Tax Use of Tax System
We tend to use our tax system for things it was not designed for. Our tax system is really good at raising tax and that is what a tax system should be about.
But once you start using the tax system for other objectives, it inevitably becomes more complex.
# 4 Effort To Be Fair
We make our tax system as fair as it possibly can be and make it complex in the process.
Equity, ie fairness, comes at a cost. Every time you try to make it fairer, you will make it more complex. You start having different rules for different sets of people.
Once you step away from one size fits all, you introduce a customised set of rules. And customised rules mean different thresholds, different cut off points, different rates, different rebates and so on. And all this . makes it more and more complex.
Is There Anything We Can Do About It?
The short answer to this is that YES we can do an awful lot of things to reduce complexity. You can do things on a legislative, policy or administrative level.
# 1 Legislative Level
On a legislative level we could simplify things by not chasing every dollar. Take capital gains as an example. In Australia we don’t have a threshold for capital gains. That means you need to calculate every capital gain, even it is just $3.50.
In the UK on the other hand – as an example – the first 12,000 pounds of capital gains are tax-free. So you don’t need to worry about $3.50.
# 2 Judiciary Level
If the legislator can’t simplify, the courts could hone things down a bit.
# 3 Administrative Level
And then there are a lot of low hanging fruit on the administrative side where we could do things a lot more sensibly and a lot more better. The ATO could issue directives to provider greater leniency in cases that are really not about much money after all.
Let’s take the need to file a tax return as an example.
In Australia 72% of taxpayers use tax agents to file their tax returns which is a lot. We expect every single taxpayer to file a tax return every single year with very few exceptions. Is that really necessary? If you look around the OECD, more than half of the countries in the OECD don’t require annual filing.
They get away with what they call “reduced filing”. You only have to file if you have complicated tax affairs.
With prepopulation of tax returns and with sensible withholding systems and with flatter tax rates it is perfectly possible to design a tax system where we don’t have to file when we got simple tax affairs.
All this is just one example how we could simplify things.
Conclusion
If we can’t reform our tax system, we should try to at least simplify it.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only. And it might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 03 May 2020
Tax Talks spoke to Chris Evans - Professor at School of Taxation ＆ Business Law - UNSW - for more details.
