Thursday, August 24, 2017

Our obsession with tax deductions is peculiarly Australian ... and pointless

Spare a thought this tax time for the pledge that was going to end the anguish. In 2010, still clutching his freshly printed copy of the Henry Tax Review, treasurer Wayne Swan promised to "remove the hassle of shoeboxes full of receipts".

From 2012 onwards everyone would get a standard deduction of $500 in lieu of claiming work-related and tax-preparation expenses. It would climb to $1000 from 2013.

Anyone who thought they could get more (and could be bothered) could keep receipts. The rest of us could tick, flick and get on with our lives.

Ken Henry had found that none of the countries with which Australia normally compared itself allowed unlimited work-related deductions. New Zealand allowed none whatsoever, having axed them in the 1980s in return for a tax cut. The US allowed only up to 2 per cent of gross income, Britain only where they were essential for doing a particular job, and Canada only those deductions that were specifically legislated.

Here, as the Tax Office conceded to a parliamentary inquiry in March, "almost any item purchased may be deductible in the right circumstances".

An extraordinary 8.6 million of Australia's 12 million taxpayers put in claims for the cost of doing their job. If you exclude very low and very high earners, it's even worse. About 90 per cent of wage earners on between $37,000 and $150,000 claim for something. An astounding 3.4 million claim for motor vehicle expenses, even though travel to and from work is not supposed to be tax deductible.

In the words of Richard Highfield, a former senior Tax Office official and an adviser to the OECD: "While many employees can justifiably point to the legitimate use of their motor vehicles for work purposes, it is extremely difficult to comprehend how this population could extend to anywhere near 30 per cent of employee taxpayers."

And the claims are climbing. A decade ago motor vehicle claims amounted to $6 billion. Now it's $9 billion.

Highfield told the inquiry claims of all sorts had become so widespread "as to be beyond the administrative control of the ATO".

Those of us using agents claim half as much again as those of us who don't, and high earners claim much more than the rest of us, even though the cost of cars and uniforms ought to bear little relationship to income.

For some, using deductions to cut taxable income has become a sport.

Australian National University economics professor Robert Breunig has spent much of the past four years embedded in the Tax Office, along with an economist within the Department of Prime Minister and Cabinet, Shane Johnson. They've been examining the phenomenon of "bunching", where an unusual number of taxpayers report incomes just below each tax threshold.

Their first finding, to be published next week, is that bunching near every threshold is a peculiarly Australian thing. Taxpayers in other places bunch only below the top threshold.

Near the $18,200 threshold, where the tax-free zone ends, they find 374 per cent more of us than there would be if the distribution of earnings was smooth, as it otherwise is.

Near the $37,000 threshold, where the marginal rate climbs from 19¢ in the dollar to 32.5¢, they find 209 per cent more of us than there should be. Near the $80,000 threshold they find 663 per cent more, and near $180,000 a remarkable 1896 per cent more – almost 20 times more than there should be. (Not all of those who try to bunch get below the target threshold. Some end up just above it, presumably because they were aiming to get below and missed.)

And the bunches move. In 2007-08 when the top rate kicked-in at $150,000 Breunig and Johnson found a large spike near $150,000. The next year when the top threshold climbed to $180,000 the spike climbed as well.

But some of the taxpayers who had grown used to bunching near $150,000 stayed put. They kept bunching there for another year, only wising up and stopping in 2009-10.

It's silly. Anyone who genuinely cuts their income to get below a threshold gets less income, both before and after tax. And most of us don't do it. Outlining his findings at a seminar in Canberra, Breunig said the spikes were driven by young self-employed people and distributions from partnerships and trusts.

Answering a question on notice from the Senate this year the Tax Office said the taxpayers spiking just below the thresholds of $37,000, $80,000 and $180,000 had a higher incidence of distributions from trusts. Those spiking just below the $18,200 tax free threshold had a higher incidence of partnership or sole trader income.

Clamping down on work-related deductions, as Swan was going to do before a budget crisis made his alternative of a standard deduction too expensive, wouldn't completely stop bunching. You'd have to also clamp down on trusts, as Labor is promising.

But it would make paying tax more simple and honest. Before he entered Parliament a decade ago economist Andrew Leigh costed the time spent filling in each tax form at $300 per person; around $3 billion per year. Most of us have better things to do.

In The Age and Sydney Morning Herald