tag:theconversation.com,2011:/us/topics/personal-income-tax-36184/articlesPersonal income tax – The Conversation2023-04-13T19:26:32Ztag:theconversation.com,2011:article/2037072023-04-13T19:26:32Z2023-04-13T19:26:32ZWhy is Tax Day on April 18 this year? And how did early spring become tax season, anyhow?<figure><img src="https://images.theconversation.com/files/520926/original/file-20230413-28-prjdsv.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4000%2C2646&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A red-letter day? Hardly!</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/tax-payment-day-marked-on-a-calendar-april-18-2023-royalty-free-image/1461423007?phrase=tax%20deadline%202023&adppopup=true">iStock / Getty Images Plus</a></span></figcaption></figure><p>Mid-April has arrived. And along with the spring sunshine, that means the often dreaded civic duty of finishing off one’s taxes.</p>
<p>It’s an arduous time for many, characterized by navigating increasingly confusing rules to arrive at the best refund possible. For some, it means <a href="https://theconversation.com/i-tried-to-pay-my-taxes-in-cash-heres-what-happened-and-why-the-irs-should-make-it-easier-to-do-so-203282">writing a check</a> to the federal government. Not fun.</p>
<p>On a brighter note, the tax deadline has been pushed back to April 18 this year, giving those leaving it to the last minute a few extra days. Usually, the day falls on April 15.</p>
<p>But why is Tax Day in April anyway? Well, it hasn’t always been.</p>
<p>The federal individual income tax was permanently enacted by the <a href="https://www.reaganlibrary.gov/constitutional-amendments-amendment-16-income-taxes#:%7E:text=The%20Congress%20shall%20have%20power,to%20any%20census%20or%20enumeration.">16th Amendment in 1913</a>. Before that, the only federal individual income tax that existed was in place for <a href="https://guides.loc.gov/this-month-in-business-history/april/tax-day">about a decade beginning in 1861 to ease the financial burden of the Civil War</a> on the government.</p>
<h2>Extending the deadline</h2>
<p>The tradition of filing tax returns in early spring has historically been a practical one. Since individual tax returns encompass a calendar year, Congress sought to allow time for individuals to fully account for all of their income, deductions and credits.</p>
<p>The original due date for individual income tax returns was March 1, just over a year following the adoption of the 16th Amendment on Feb. 3, 1913.</p>
<p>Back then, not many taxpayers needed to file a tax return, since the filing requirement applied only to <a href="https://www.crf-usa.org/bill-of-rights-in-action/bria-11-3-b-the-income-tax-amendment-most-thought-it-was-a-great-idea-in-1913.html">single filers with income over US$3,000</a> and married filers with income over $4,000 – about $90,000 and $120,000 in today’s dollars, respectively.</p>
<p>In 1914, this threshold represented approximately the top 4% of earners, so filing a tax return was a burden reserved for the wealthy.</p>
<p>Quickly realizing that many taxpayers needed more time to complete their returns, Congress pushed the tax deadline back to March 15, effective in 1919.</p>
<p>And on that date Tax Day stood for over 30 years. </p>
<p>But with more taxpayers needing to file returns <a href="https://www.irs.gov/pub/irs-soi/02inpetr.pdf">as the filing threshold declined</a> and the tax laws grew in complexity, Americans needed even more time to correctly complete their returns.</p>
<p>So in 1954, Congress overhauled the tax system and adopted a major revision to the <a href="https://www.census.gov/history/www/reference/privacy_confidentiality/title_26_us_code_1.html">Internal Revenue Code</a>.</p>
<p>This change also came with another extension of the tax deadline for individuals, pushing the due date back again to the familiar April 15.</p>
<p>The intent of giving taxpayers an extra month to prepare their returns was to allow more people the ability to file on time – and often get refunds more quickly. Not only did this change assist taxpayers, but it also allowed the Internal Revenue Service <a href="https://taxprof.typepad.com/taxprof_blog/2017/04/weekly-tax-highlight-and-roundup-1.html">more time to spread out its workload</a>.</p>
<p>The April 15 deadline proved to be a more reasonable deadline, and it has stuck with U.S. taxpayers for almost 70 years.</p>
<p>Since 1955, the IRS has established earlier due dates for many information returns that provide numbers feeding into Form 1040, such as Forms 1099 and W-2, both of which are due Jan. 31, to ensure that most taxpayers are able to file by Tax Day.</p>
<p>In 2016, the IRS pushed the due date of <a href="https://www.journalofaccountancy.com/news/2015/jul/tax-return-due-dates-changed-201512746.html">other returns forward a month to March 15</a>, again in an effort to allow more individuals to timely file.</p>
<h2>So why later this year?</h2>
<p>The mid-April date seems to work for the majority of taxpayers – in most years, anyhow. According to the IRS, <a href="https://www.irs.gov/statistics/filing-season-statistics">about 90% of taxpayers</a> were able to file their returns by the deadline in 2021, with the other 10% requesting <a href="https://www.irs.gov/forms-pubs/extension-of-time-to-file-your-tax-return#:%7E:text=Individual%20tax%20filers%2C%20regardless%20of,until%20the%20next%20business%20day.">a six-month extension to file</a>.</p>
<p>But for the tax year 2022, <a href="https://www.forbes.com/advisor/taxes/how-to-file-a-tax-extension-with-the-irs/#:%7E:text=Millions%20of%20Americans%20file%20federal,season%2C%20according%20to%20the%20IRS.">about 19 million taxpayers extended their returns</a>, a significant increase from prior years due to the increased complexity of the tax code brought on by temporary provisions relating to the COVID-19 pandemic.</p>
<p>So why is Tax Day this year April 18 instead of April 15?</p>
<p>Any time a deadline falls on a Saturday or Sunday, the IRS pushes the due date to the following Monday, which would be April 17, 2023. However, any federal holiday also pushes the date back by a day. Since <a href="https://emancipation.dc.gov/#:%7E:text=It%20is%20this%20legislation%2C%20and,April%2016%2C%20DC%20Emancipation%20Day.">Emancipation Day, which usually falls on April 16</a>, is observed in Washington, D.C., on April 17 this year, Tax Day was pushed back an additional day to Tuesday, April 18, 2023.</p>
<p>While having a tax deadline of April 18 happens only about every six years, the IRS occasionally pushes back the filing deadline for emergency situations like natural disasters, although these are often local. For example, the IRS extended the original due date of individual tax returns in disaster areas in <a href="https://tax.thomsonreuters.com/news/california-alabama-georgia-may-15-disaster-relief-deadline-extended-to-october-16/">Alabama, California and Georgia until Oct. 16, 2023</a>. Similarly, the IRS pushed the national deadline <a href="https://www.irs.gov/newsroom/payment-deadline-extended-to-july-15-2020">back to July 15, 2020</a>, in the early stages of the COVID-19 pandemic.</p>
<p>So use your extra days of tax preparation time wisely in 2023 and be sure to file your individual income tax return, or request an extension to file by April 18.</p>
<p>Although this time of year can often be <a href="https://www.cnn.com/2019/04/12/health/tax-day-money-stress/index.html">stressful and confusing because of complicated tax laws</a>, it will be over soon enough.</p><img src="https://counter.theconversation.com/content/203707/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thomas Godwin does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The federal government wanted to give taxpayers a couple months to prepare the year’s taxes. But as filing became more complex, the date was pushed back.Thomas Godwin, Assistant Professor of Accounting, Purdue UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1903502022-09-15T20:05:01Z2022-09-15T20:05:01ZThat $243 billion ‘saving’ from axing the Stage 3 tax cut is more mirage than reality<figure><img src="https://images.theconversation.com/files/484808/original/file-20220915-25774-n8xfin.png?ixlib=rb-1.1.0&rect=0%2C610%2C3532%2C1736&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>What if we could save A$243 billion by abolishing the Stage 3 tax cuts?</p>
<p>An article in Guardian Australia says we could spend it on all kinds of things, from <a href="https://www.theguardian.com/australia-news/datablog/ng-interactive/2022/aug/26/scrapping-stage-three-3-tax-cuts-would-save-243bn-how-would-you-spend-it-calculator-interactive">pay rises for aged care workers to electrifying homes</a>.</p>
<p>But the money probably wouldn’t be there – not most of it.</p>
<p>The <a href="https://www.aph.gov.au/-/media/05_About_Parliament/54_Parliamentary_Depts/548_Parliamentary_Budget_Office/Costings/Publicly_released_costings/2022/Stage_3_tax_cuts_distributional_analysis_updated_PDF.pdf?la=en&hash=7A6C7350261623ECC11268D806C00A821B1DDC7F">Parliamentary Budget Office</a> came up with the figure of $243 billion in response to a request from Greens Leader Adam Bandt to total the revenue the cuts would cost in their first nine years, which begin in July 2024.</p>
<p>The PBO used a standard, and, on face of it, an unexceptional assumption – that the cost would be the revenue that was lost in each year compared to what would have been raised if tax scales hadn’t been adjusted – for the entire decade.</p>
<h2>Cost, but compared to what?</h2>
<p>To recap, Stage 3 cuts the rate that applies to incomes over $45,000 from 32.5 cents in the dollar to 30 cents then extends that 30 cent rate all the way up to $200,000, <a href="https://theconversation.com/stand-by-for-the-oddly-designed-stage-3-tax-cut-that-will-send-middle-earners-backwards-and-give-high-earners-thousands-182751">abolishing an entire rung of the tax ladder</a>.</p>
<p>The problem with the PBO’s assumption is that the alternative is unlikely to be borne out in reality.</p>
<p>Whenever incomes climb (The PBO assumes about 45% growth in incomes over the next 10 years) the tax scales are typically adjusted to stop more income going into higher tax brackets – so-called <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_departments/Parliamentary_Budget_Office/Publications/Budget_explainers/Bracket_creep">bracket creep</a>. </p>
<p>The graph below shows what would happen to the average tax rate in the absence of an adjustment over the next decade. </p>
<p>It would climb from 17.9% to 20.1% of household income. </p>
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<p>With the Stage 3 cuts, average rates would at first fall to 17%, and then increase, climbing beyond current rates in 2028 as bracket creep reasserted itself. </p>
<p>This suggests the “cuts” aren’t much of cuts at all, certainly not long-lasting ones.</p>
<p>It is difficult to both claim that the cuts will cost the budget A$243 billion by 2032 and that they will allow the average tax take to climb.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/stand-by-for-the-oddly-designed-stage-3-tax-cut-that-will-send-middle-earners-backwards-and-give-high-earners-thousands-182751">Stand by for the oddly designed Stage 3 tax cut that will send middle earners backwards and give high earners thousands</a>
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<p>It means axing the cuts would produce less of a honeypot than might be thought.</p>
<p>While the PBO prepared its costing in accordance with standard practice, a more realistic costing of the Stage 3 cuts would have compared them to the sort of tax adjustments we could have expected without them.</p>
<h2>Winners and losers</h2>
<p>The Stage 3 tax cuts will be regressive, meaning they will cut the rates faced by high earners more than the rates faced by low earners.</p>
<p>My calculations suggest that in the first year they will cut the tax paid by the highest-earning fifth of households by 2.1 percentage points, leaving the tax paid by other households little changed. </p>
<p>And they will certainly cost the budget money – leaving less money for services of the kind that mostly benefit lower income households – although nowhere near as much as the $243 billion quoted.</p>
<p>But the cost will be temporary. The effect on inequality will be longer-lasting.</p><img src="https://counter.theconversation.com/content/190350/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ben Phillips does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The tax cuts only look big when compared to no cuts, an alternative that isn’t realistic.Ben Phillips, Associate Professor, Centre for Social Research and Methods, Director, Centre for Economic Policy Research (CEPR), Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1852232022-07-10T20:27:18Z2022-07-10T20:27:18ZDo Australians pay too much income tax? 6 charts on how we rank against the rest of the world<figure><img src="https://images.theconversation.com/files/473155/original/file-20220708-25-p8k8y8.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3968%2C1954&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Australians pay too much income tax – or so some argue. </p>
<p>The Australian Financial Review’s economics editor, John Kehoe, for example, <a href="https://www.afr.com/policy/tax-and-super/personal-tax-take-second-highest-in-oecd-20211206-p59f3y">has noted</a>:</p>
<blockquote>
<p>Australians are paying more personal income tax as a share of government revenue than any other advanced economy, except for the high-taxing Scandinavian welfare state of Denmark.</p>
</blockquote>
<p>And the day after the federal election, the AFR <a href="https://www.afr.com/policy/economy/australia-must-switch-to-the-right-tax-mix-20220516-p5altk">editorialised</a>:</p>
<blockquote>
<p>Too heavy reliance on taxing productive workers and business earnings blunts incentives to work, save and invest. </p>
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<p>Perhaps even more stinging is that the AFR considers New Zealand to have a better income-tax system. New Zealanders pay <a href="https://www.newzealandnow.govt.nz/live-in-new-zealand/money-tax/taxes">10.5%</a> on their first NZ$14,000 (then 17.5% up to NZ$48,000), while Australians enjoy a tax-free threshold <a href="https://www.ato.gov.au/rates/individual-income-tax-rates/">up to A$18,200</a>. The AFR <a href="https://www.afr.com/policy/economy/australia-must-switch-to-the-right-tax-mix-20220516-p5altk">says</a> this:</p>
<blockquote>
<p>creates tax-penalty work disincentives that partly explain New Zealand’s approximately 5% higher rate of workforce participation than Australia.</p>
</blockquote>
<p>Are these issues really a problem? If there is a case for tax reform, what sort of reform?</p>
<h2>High individual income tax</h2>
<p>In 2019, the most recent year for which the OECD has <a href="https://www.oecd.org/tax/revenue-statistics-australia.pdf">complete statistics</a>, Australia ranked second among OECD members on personal income tax as a share of total taxes.</p>
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<p>In fact, it has ranked second or third in 36 of the past 40 years, and fourth in the other four years, swapping places with New Zealand and the United States.</p>
<h2>But that’s just part of the picture</h2>
<p>Overall, Australia’s level of taxation, measured as a proportion of GDP, is relatively low – 27.7% to the OECD average of 33.4%. </p>
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<p>That makes Australia the 29th lowest-taxing nation of the OECD’s 38 members. </p>
<h2>Other nations have social security taxes</h2>
<p>The main reason Australia ranks so highly on individual income tax levels is because Australians don’t pay separate social security taxes.</p>
<p>Australia, New Zealand and Denmark fund social security from general government revenue. The other 35 OECD nations levy specific taxes on employers and employees to fund social security systems (unemployment support, age and disability pensions etc)</p>
<p>These account for an average 25.9% of total tax revenue, or close to 9% of GDP, across the OECD. </p>
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<p>Employee social security contributions are <a href="https://www.jstor.org/stable/pdf/1910545.pdf">very similar to income taxes</a>. They are generally collected the same way, and counted as direct taxes on households or individuals in income surveys.</p>
<p>Though employers also pay social security taxes, <a href="https://voxeu.org/article/who-really-pays-social-security-contributions-and-labour-taxes">evidence suggests</a> about two-thirds of these are effectively paid by employees through lower wages.</p>
<p>In fact, if we add together personal income taxes and social security contributions, then Australia, rather than having the second-highest share of income taxes in the OECD, has the eighth-lowest.</p>
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<h2>What about superannuation?</h2>
<p>Some say Australia’s compulsory superannuation scheme, in which employers pay 10.5% of an employee’s wage as super, should be counted in these tax measures, because it is similar to social security contributions in other countries.</p>
<p>12 other OECD countries have mandatory employer-paid private pension schemes. </p>
<p>Employers pay this money directly into private accounts, not to the government, so it doesn’t meet the <a href="https://treasury.gov.au/sites/default/files/2019-03/c2015-rethink-dp-TWP_combined-online.pdf">definition of a tax</a>. </p>
<p>But for argument’s sake we can factor in super payments using “<a href="https://data.oecd.org/tax/tax-wedge.htm">tax wedge</a>” data. </p>
<h2>Combining mandatory payments</h2>
<p>A tax wedge is the ratio between the amount of taxes paid by an average worker (assumed to be single without dependents) and the corresponding total labour cost for the employer.</p>
<p>The important point here is that wedge data include both what employers pay as mandatory private payments and as mandatory payments into government social security.</p>
<p>On this measure, Australia’s direct tax burden is the 11th lowest in the OECD.</p>
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<p>So claims we have very high shares of personal income taxes are only part of the picture. Superannuation does not change the story significantly.</p>
<h2>So what about New Zealand?</h2>
<p>New Zealand does collect more revenue through consumption taxes – <a href="https://data.oecd.org/tax/tax-on-goods-and-services.htm#indicator-chart">12.5% of GDP</a> in 2019, compared to 7.3% for Australia.</p>
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<p>But it still collects more in income taxes – <a href="https://data.oecd.org/tax/tax-on-personal-income.htm#indicator-chart">12.4% of GDP compared to 11.6%</a>. Its total level of taxation is <a href="https://data.oecd.org/tax/tax-revenue.htm#indicator-chart">33.4% of GDP</a>, compared to 27.7% for Australia.</p>
<h2>The case for tax reform</h2>
<p>Even so, there are things to learn from New Zealand. </p>
<p>Australia’s system could be structured better. As Louis XIV’s finance minister, <a href="https://www.economist.com/special-report/2014/02/20/plucking-the-geese">Jean-Baptiste Colbert</a> (1619-1683), said, the art of taxation is about “plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.</p>
<p>Income taxes are highly visible. This may make us more ready to believe we are highly taxed. There is a case for considering tax reforms that deliver adequate revenue more fairly.</p>
<p>New Zealand is in the process of this change, with its proposed <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2021/November/NZ-Social-Unemployment-Insurance">Social Unemployment Insurance scheme</a> being funded by a 1.39% levy on employers and workers.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/beyond-gdp-chalmers-historic-moment-to-build-wellbeing-184318">Beyond GDP: Chalmers' historic moment to build wellbeing</a>
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</em>
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<p>Last month the Australian Treasury’s secretary, Steven Kennedy, said <a href="https://treasury.gov.au/speech/address-australian-business-economists-0">in a speech</a> it was possible for the government to spend more on things “that improve lives”, such as higher-quality aged care and disability services, “while reducing pressures arising from poorly designed policies”:</p>
<blockquote>
<p>We will need a tax system fit for purpose to pay for these services, that appropriately balances fairness and efficiency. This is achievable.“</p>
</blockquote>
<p>Given the inevitable challenges of an ageing population, climate change and international uncertainty, anything that moves the national conversation on from misleading comparisons with other nations can only help.</p><img src="https://counter.theconversation.com/content/185223/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Whiteford receives funding from the Australian Research Council. He is a Fellow of the Centre for Policy Development.</span></em></p>Compared with other OECD nations, Australians pay much less tax than some headline statistics suggest.Peter Whiteford, Professor, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1428232020-07-19T19:53:30Z2020-07-19T19:53:30ZProgressive in theory, regressive in practice: that’s how we tax income from savings<figure><img src="https://images.theconversation.com/files/348080/original/file-20200717-31-1f6e2yr.jpg?ixlib=rb-1.1.0&rect=0%2C275%2C3970%2C2131&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>We’re told Australia has a progressive tax system – the more you earn, the higher the rate.</p>
<p>And that’s certainly the case for earnings from wages. An Australian on A$35,000 sacrifices 21 cents out of each extra dollar they earn whereas an Australian on $90,000 sacrifices 39 cents.</p>
<p>That’s how it’s meant to be for income from savings, but in practice it isn’t.</p>
<p>Fresh calculations released this morning by the <a href="https://taxpolicy.crawford.anu.edu.au/sites/default/files/uploads/taxstudies_crawford_anu_edu_au/2020-07/20271_anu_-_ttpi_policy_report-ff2.pdf">Tax and Transfer Policy Institute</a> at the Australian National University show that low income Australians in the bottom tax bracket pay a higher marginal rate of tax on income from savings than high earners in the top tax bracket.</p>
<p>It is because of exemptions and special rates, and the alacrity with which high earners take advantage of them.</p>
<h2>Super gives the most to the highest earners</h2>
<p>The taxation of superannuation drives the results. </p>
<p>Super contributions are generally taxed at a flat rate of 15%. For low earners on an income tax rate of zero, 15% would constitute a considerable extra impost did the government not refund the difference with a <a href="https://drive.google.com/file/d/1W9FN4deDYY9q0ooFDPNqq1CvYAUz90Ao/view">tax offset</a> that cuts the effective rate to zero. </p>
<p>High earners on the 47% marginal rate do much better. The tax rate of 15% offers substantial tax relief. For them, it is an effective rate of minus 32%.</p>
<p>Other tax concessions are directed at older Australians, who are often on higher incomes than younger Australians.</p>
<h2>Highest bracket, lowest rate</h2>
<p>Our calculation of the marginal effective annual tax rates actually paid on income from savings is published in a report entitled <a href="https://taxpolicy.crawford.anu.edu.au/sites/default/files/uploads/taxstudies_crawford_anu_edu_au/2020-07/20271_anu_-_ttpi_policy_report-ff2.pdf">the taxation of savings in Australia: theory, current practice and future policy directions</a>. </p>
<p>It shows that the marginal tax rate high earners pay on additional savings held over a twenty year period is 5.3% of income, on average, whereas for low earners in the bottom (zero) tax bracket it’s 12.2%.</p>
<p>Low earners in the second lowest tax bracket are paying 13.8%.</p>
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<p><strong>Marginal effective tax rates actually paid on income from savings, by bracket</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/348198/original/file-20200718-15-e3c10t.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/348198/original/file-20200718-15-e3c10t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/348198/original/file-20200718-15-e3c10t.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=307&fit=crop&dpr=1 600w, https://images.theconversation.com/files/348198/original/file-20200718-15-e3c10t.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=307&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/348198/original/file-20200718-15-e3c10t.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=307&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/348198/original/file-20200718-15-e3c10t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=386&fit=crop&dpr=1 754w, https://images.theconversation.com/files/348198/original/file-20200718-15-e3c10t.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=386&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/348198/original/file-20200718-15-e3c10t.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=386&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Authors’ calculations using data from the Australian Survey of Income and Housing, 2019.</span>
<span class="attribution"><a class="source" href="https://taxpolicy.crawford.anu.edu.au/">TTPI Policy Report 01-2020</a></span>
</figcaption>
</figure>
<hr>
<h2>The way forward: a dual income tax system</h2>
<p>Our report proposes taxing all types of saving at the same flat low rate.</p>
<p>This dual income tax system (a progressive rate for wages and salaries, a flat rate for income from savings) has been used in Norway, Finland, Sweden
and Denmark since the early 1990s. Elements of it are used in Austria, Belgium, Italy, Greece and the Netherlands. </p>
<p>If the rate were 10%</p>
<p>• all interest payments would be taxed at 10%</p>
<p>• all dividends, both domestic and foreign, would be taxed at a rate of 10%</p>
<p>• all capital gains (including owner-occupied housing) would be taxed at 10%</p>
<p>• superannuation contributions would be made from after-tax income and then earnings in the accounts taxed at 10%</p>
<p>• rent and capital gains on investment properties would be taxed at 10%</p>
<p>• the imputed rent from owner-occupied housing (the benefit home owners get from not having to pay rent that is taxed) would be calcuated and taxed at a rate of 10%. An alternative would be to raise the same amount through a broad-based land tax.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/housing-and-tax-why-is-reform-so-hard-3300">Housing and tax: why is reform so hard?</a>
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</em>
</p>
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<p>Our calculations suggest that if the tax were applied broadly at a rate of 6.2%, it would raise as much as is raised now from taxes on income from savings. If income from owner-occupied housing were excluded, the rate would need to be 10.2%.</p>
<p>But there is no particular reason for the rate to be set to generate as much from savings income as it does now. It could be set to raise more, or to raise less.</p>
<p>The design and implementation of a dual income tax should be considered alongside broader changes to the tax and transfer system. In particular, it should be combined with removing opportunities to re-classify income for tax minimisation purposes. We outline some of the considerations <a href="https://taxpolicy.crawford.anu.edu.au/sites/default/files/uploads/taxstudies_crawford_anu_edu_au/2020-07/20271_anu_-_ttpi_policy_report-ff2.pdf">in our report</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/tax-free-super-is-intergenerational-theft-60369">Tax-free super is intergenerational theft</a>
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</em>
</p>
<hr>
<p>In the meantime, as steps towards a flatter fairer system of taxing income from savings, the government could consider better targeting superannuation subsidies, replacing real estate stamp duty with land tax and including the family home in the means tests for pensions and other age-related benefits.</p>
<p>Our current approach to taxing income from savings is a mess at best and a serious driver of intergenerational inequality at worst. Some savings tax arrangements are progressive, taxing higher incomes more heavily, and some are regressive. </p>
<p>We want to encourage and reward savings. But we also need to remove the crazy incentives that impel ordinary Australians to take part in distorting and costly tax planning schemes.</p>
<p>Our report outlines a way forward, and steps to get there.</p><img src="https://counter.theconversation.com/content/142823/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Breunig works for the Tax and Transfer Policy Institute which is an independent policy institute established in 2013 with an endowment from the federal government. It is supported by the Crawford School of Public Policy of the Australian National University.</span></em></p><p class="fine-print"><em><span>Kristen Sobeck works for the Tax and Transfer Policy Institute which is an independent policy institute established in 2013 with an endowment from the federal government. It is supported by the Crawford School of Public Policy of the Australian National University.</span></em></p><p class="fine-print"><em><span>Peter Varela does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It would be a mistake to think that just because higher earners face higher tax rates, that’s what they pay. When it comes to income from savings it’s the other way around.Robert Breunig, Professor of Economics and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityKristen Sobeck, Senior Research Officer, Crawford School of Public Policy, Australian National UniversityPeter Varela, Research Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1426372020-07-14T03:49:50Z2020-07-14T03:49:50ZCutting taxes for the wealthy is the worst possible response to this economic crisis<p>Australia’s response to the health and economic impacts of the COVID-19 pandemic is rightly considered one of the world’s best. At their best, our federal and state politicians have put aside the sterile games dominating politics for decades. </p>
<p>It seemed possible these efforts might last, as politicians sought to find common ground and make real progress on issues such as climate change, industrial relations and inequality as part of the coronavirus recovery.</p>
<p>But as soon as the virus seemed to be receding, politics returned to the old “normal”. Policies are again being put forward on the basis of ideological reflexes rather than an analysis of the required response to our new situation. </p>
<p>There is no more striking example than the federal government’s reported plan to <a href="https://www.abc.net.au/news/2020-07-08/government-tax-cuts-coronavirus-response-melbourne-billion/12432964">bring forward income tax cuts</a> legislated for 2024-25. The idea apparently has <a href="https://www.smh.com.au/politics/federal/backbench-backs-early-tax-cuts-even-as-budget-deteriorates-20200709-p55aj6.html">backbench support</a>.</p>
<p>Those cuts will benefit high-income earners the most. They include replacing the 32.5% marginal tax rate on incomes between A$45,000 and A$120,000, and the 37% rate on incomes between AA$180,000, with a single 30% rate up to <a href="https://www.ato.gov.au/General/New-legislation/In-detail/Direct-taxes/Income-tax-for-individuals/Lower-taxes-for-hard-working-Australians--Building-on-the-Personal-Income-Tax-Plan/">A$200,000</a>. </p>
<p>This is being proposed while the government begins to wind back income-support measures, such as free child care, with much more serious “cliffs” fast approaching.</p>
<h2>This economic crisis is different</h2>
<p>One of the most striking features of Australia’s initial response to COVID-19 was the speed at which the Morrison government abandoned a decade of rhetoric denouncing the Rudd Labor government’s response to the Global Financial Crisis. </p>
<p>In mid-March the government was floating the idea of a tightly limited response with a budget of A$5 billion. By the end of the month this had been abandoned in favour of the JobSeeker and JobKeeper schemes, estimated to cost A$14 billion and A$70 billion respectively. Other schemes brought the total to <a href="https://thenewdaily.com.au/news/national/2020/06/23/coronavirus-grants/">A$133 billion</a>.</p>
<p>Despite the close resemblance to the Rudd stimulus packages, there was one crucial difference. </p>
<p>The GFC caused a collapse in the availability of credit, potentially choking off consumer demand and private investment. This was the classic case needing demand stimulus.</p>
<p>By contrast, the COVID-19 pandemic caused a shock to the production side of the economy, which flowed through to incomes. Millions of workers in industries such as tourism, hospitality and the arts were no longer able to work because of the virus. </p>
<p>The crucial problem was to support the incomes of those thrown out of work, and keep the businesses employing them afloat until some kind of normality returned. There were problems with the details of eligibility and implementation of the JobSeeker and JobKeeper programs, but the response was essentially right.</p>
<h2>Have cash, will buy luxury car</h2>
<p>The primary rationale for early tax cuts is that they will stimulate demand. But the economy’s real problem is not inadequate demand – particularly not on the part of high-income earners. </p>
<p>On the contrary, the problem for high-income earners is having a steady income even as many of the things they usually spend on (high-end restaurant meals, interstate and overseas holidays) have become unobtainable. </p>
<p>Among the results has been a splurge on luxury cars. Compared to June 2019, sales of Mazdas, Hyundais, Mitsubishis, Kias, Nissans and Hondas last month were all down. But <a href="https://www.caradvice.com.au/862977/vfacts-june-2020-new-car-sales-the-complete-report/">Mercedes-Benz, BMW, Audi and Lexus</a> were all up.</p>
<p>As Jason Murphy notes, this rush to buy fancy cars isn’t definitive proof the wealthy are looking to ways to spend all the money they’re saving. “But it is suggestive. Eventually the money has to go somewhere.”</p>
<h2>The worst possible course of action</h2>
<p>The continuing problem with the pandemic is the loss of income faced by millions of workers. By definition, anyone in a position to benefit from a high-end tax cut doesn’t have this problem. Equity would suggest that, far from receiving more income, they should be sharing more of the burden, if not now then in the recovery period.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/cutting-unemployment-will-require-an-extra-70-to-90-billion-in-stimulus-heres-why-141376">Cutting unemployment will require an extra $70 to $90 billion in stimulus. Here’s why</a>
</strong>
</em>
</p>
<hr>
<p>When the federal government legislated its tax-cut schedule in advance, critics including Reserve Bank governor Philip Lowe and Access Economics partner Chris Richardson <a href="https://www.theaustralian.com.au/nation/politics/hold-the-milkshakes-we-want-to-see-a-surplus-first/news-story/32e54ce7065ccfb2b70b61f8d29488d0%20https://johnquiggin.com/2018/05/18/l-a-w/">pointed out the danger</a> of promising future tax cuts based on projected growth. The same policy had failed ignominiously in the 1990s when the Keating government legislated tax cuts to be introduced after the 1993 election. After declaring the cuts “L-A-W”, Paul Keating was forced to withdraw half of the tax cuts <a href="https://www.news.com.au/finance/economy/swan-defends-keatings-broken-l-a-w-promise/news-story/d9802a82bf060e93ba8a509ba0d6085a">when the budget deteriorated</a>. </p>
<p>These criticisms have now been vindicated. </p>
<p>The decade of strong economic growth, starting this year, that was supposed to make big tax cuts affordable has disappeared. We will be lucky if per capita GDP is back to its 2019 levels by 2024-25, when the tax cuts are slated to kick in regardless of circumstances. </p>
<p>Once that happens, we will need all the tax revenue we can get to bring the budget back into balance and deal with the continuing expenditure needs the pandemic has created.</p>
<p>The government now seems to be headed for the worst possible course of action – cutting support for those hit hardest by the pandemic while pouring money into the bank accounts of the well-off. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/forget-jobseeker-in-our-post-covid-economy-australia-needs-a-liveable-income-guarantee-instead-141535">Forget JobSeeker. In our post-COVID economy, Australia needs a 'liveable income guarantee' instead</a>
</strong>
</em>
</p>
<hr>
<p>The inevitable result of such a policy will be a surge of personal and business bankruptcies, mortgage defaults and evictions. That will bring about the kind of demand-deficiency recession the tax cuts are supposed to prevent, superimposed on the continuing constraints created by the pandemic.</p>
<p>So far we have all been in this together. For high-income earners that means forgoing tax cuts promised in happier times and contributing more to the relief of those who need it most.</p><img src="https://counter.theconversation.com/content/142637/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Quiggin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The COVID-19 pandemic has hit the production side of the economy, So how will tax cuts for those on high incomes help?John Quiggin, Professor, School of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1413642020-06-29T20:07:58Z2020-06-29T20:07:58ZBe careful what you claim for when working from home. There are capital gains tax risks<figure><img src="https://images.theconversation.com/files/344438/original/file-20200629-96678-1l0ucry.jpg?ixlib=rb-1.1.0&rect=384%2C0%2C2740%2C1327&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Nearly all of the income tax focus in the context of “working from home” during COVID-19 has been on claiming “<a href="https://www.smh.com.au/money/planning-and-budgeting/how-working-from-home-could-save-you-7000-a-year-20200528-p54xcj.html">running expenses</a>” – things like electricity, heating and internet/broadband fees.</p>
<p>These are pretty straightforward.</p>
<p>The Australian Tax Office has created a temporary <a href="https://www.ato.gov.au/General/COVID-19/Support-for-individuals-and-employees/Employees-working-from-home/#ShortcutMethod">shortcut</a> for claiming running expenses to make it easier: it’s 80 cents for each hour you work from home between March and July.</p>
<p>At the same time, it has made the brief comment that employees generally cannot claim “<a href="https://www.ato.gov.au/general/property/your-home/working-from-home/">occupancy expenses</a>” as deductions. Occupancy expenses are things like interest on housing loans, rent, council rates, building insurance and similar things.</p>
<p>These would be deductible if you were running a business from home, but generally should not be if you are merely working from home for an employer that normally provides you with a place to work.</p>
<h2>Claim running expenses, not occupancy expenses</h2>
<p>Occupancy expenses are usually far bigger than running expenses and their deductibility assumes considerable importance to government revenue, and to people who claim them.</p>
<p>And there’s something else about them. </p>
<p>The capital gains tax exemption for the gain on sale of the family home (the main residence) is linked to them; in particular to the <a href="http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.190.html">deductibility of interest expenses</a>. </p>
<p>If a taxpayer is entitled to deductions for interest on the home loan, she can lose a portion of her capital gains tax exemption.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/344446/original/file-20200629-155308-1986pw4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/344446/original/file-20200629-155308-1986pw4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/344446/original/file-20200629-155308-1986pw4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=444&fit=crop&dpr=1 600w, https://images.theconversation.com/files/344446/original/file-20200629-155308-1986pw4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=444&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/344446/original/file-20200629-155308-1986pw4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=444&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/344446/original/file-20200629-155308-1986pw4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=558&fit=crop&dpr=1 754w, https://images.theconversation.com/files/344446/original/file-20200629-155308-1986pw4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=558&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/344446/original/file-20200629-155308-1986pw4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=558&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption"></span>
<span class="attribution"><a class="source" href="http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.190.html">Section 118.190 Commonwealth Income Tax Assessment Act</a></span>
</figcaption>
</figure>
<p>In effect, the tax benefit from deductibility is offset or clawed back through denial of the full capital gains tax exemption later on. </p>
<p>Of course, if there is no immediate prospect of the sale of the home, then to many people the loss of the full capital gains tax exemption won’t be of much concern.</p>
<h2>Try not to put capital gains into play</h2>
<p>An interesting, <a href="https://www.taxinstitute.com.au/tiausttaxforum/the-age-of-the-home-worker-part-2-calculation-of-home-occupancy-expense-deductions-deduction-apportionment-and-partial-loss-of-cgt-main-residence-exemption">perhaps strange</a>, aspect of this part of the rules is a homeowner can lose part of their capital gains tax exemption even when they don’t have interest to deduct (such as when they have paid off their home loan).</p>
<p>The relevant rule poses the question: would you have got interest deductions if you still had a loan on the home? If the answer is yes, the homeowner loses part of the capital gains tax exemption, even though the home owner did not in fact obtain tax deductions for interest.</p>
<p>There is a perception among some taxpayers, and perhaps some tax practitioners, that taxpayers have choices in this area, that it will help to say: “I will not claim my deductions, and therefore I get to keep my capital gains tax exemption.”</p>
<p>In short, there is no choice given to taxpayers in the relevant substantive tax rules. If the tax office knows you have used your home to earn an income, it has every right to deny you some capital gains tax benefits if and when you sell later on.</p>
<h2>Not claiming deductions might not help</h2>
<p>Of course, how taxpayers (possibly with help of tax agent) fill in their tax returns is their choice; they can decide to depart from the law, assuming they know how it applies in their situation. In turn, whether ATO audit coverage is sufficient to pick up incorrect tax returns depends on a range of factors. </p>
<p>What could be a disastrous outcome for a taxpayer would be to forgo a deduction (when entitled to it), but later on sale, have the ATO apply the capital gains tax rule correctly and withdraw part of the capital gains tax exemption. </p>
<p>If the taxpayer was out of time to amend (or make) their deduction claim, they would suffer both ways.
The other issue with occupancy expense deductions is that if there is “financial union” in the finances of spouses, the spouse entitled to occupancy expenses may only be entitled to 50% of the relevant expenses because the other 50% is incurred by the other spouse. </p>
<p>Regrettably, legal cases and the tax office itself have not dealt with this issue in a meaningful way.</p>
<h2>There’s a high bar for occupancy expenses</h2>
<p>The central question therefore becomes whether a worker’s situation of working at home could be sufficient to attract deductions for occupancy expenses.</p>
<p>The courts and the Administrative Appeals Tribunal (AAT) have set the bar very high. Let’s put aside for the moment the situation of the mere <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3311253">contemplative worker</a> who needs little equipment to work, other than perhaps a laptop computer.</p>
<p>There are two requirements; both must be satisfied. </p>
<p>First, the room claimed for occupancy expenses must be used extensively and systematically for taxpayer’s work. Some cases have put this requirement in terms of near exclusive use for work such that the taxpayer and family have forgone domestic use of that room and/or that the room is not readily adaptable back to domestic use. Minimal domestic use (such as storing some clothes in room, thoroughfare to rest of home) will not preclude satisfying the usage requirement.</p>
<p>This usage requirement will be enough to deny deductions to many COVID-19 at-home workers because many are working in bedrooms, lounge rooms, dining rooms and so on.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/mortgage-deferral-rent-relief-and-bankruptcy-what-you-need-to-know-if-you-have-coronavirus-money-problems-141274">Mortgage deferral, rent relief and bankruptcy: what you need to know if you have coronavirus money problems</a>
</strong>
</em>
</p>
<hr>
<p>Those who choose to “run the risk” of satisfying deductibility for occupancy expenses and thereby losing part of the capital gains tax exemption might consider retaining a significant degree of domestic use of the relevant room. </p>
<p>(Renters, not being owners, have no capital gains tax cost down the track so obtaining deductions for occupancy expenses would be a win with no accompanying loss.)</p>
<p>Assuming the usage requirement is met, the second criterion is the requirement that the home office is not just a mere convenient place to work. This has come to mean that the home office is needed as a place of necessity because the worker does not have anywhere else to carry out their work and/or the employer does not provide a work location.</p>
<p>A worker who has been lawfully directed, due to COVID-19, that they cannot work at the normal employer-provided premises must be taken to satisfy this second criterion; that working at home is a necessity and not for the mere convenience of the taxpayer.</p>
<h2>It’s hard to claim a place for contemplation</h2>
<p>What about the mere contemplative worker, the one who needs very little equipment or items to carry out their work, perhaps just a laptop computer and a range of hard-copy documents.</p>
<p>There is little to no guidance in the cases on this. However, it’s likely if a worker is a mere contemplative worker, that person cannot deduct occupancy expenses even if there is extensive use of a room. </p>
<p>The reasoning is likely to be that the worker could work in many places (such as a lounge room, public library, café) without compromising their quality of work. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/about-that-spare-room-employers-requisitioned-our-homes-and-our-time-139854">About that spare room: employers requisitioned our homes and our time</a>
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<p>The room in the home they are working in does not have that degree of necessity about it and/or working in that room might have a high degree of mere convenience. It is also likely that aspects of the “usage criterion” will be drawn on to help deny the deduction (such as that the room has not lost its domestic character).</p>
<p>In the end, a court or the Administrative Appeals Tribunal will have to rule on at least one COVID-19 case. It is hoped that the case(s) are roughly representative of workers more generally so serve as guidance. </p>
<p>As well, some authoritative ruling on the mere contemplative worker would be very welcome, even for a post-COVID-19 world.</p>
<hr>
<p><em>The commentary in this article is largely based on two articles by Dale Boccabella and Kathrin Bain, namely, <a href="https://www.taxinstitute.com.au/tiausttaxforum/the-age-of-the-home-worker-part-1-deductibility-of-home-occupancy-expenses">The age of the home worker - part 1: deductibility of home occupancy expenses</a> (2018) and <a href="https://www.taxinstitute.com.au/tiausttaxforum/the-age-of-the-home-worker-part-2-calculation-of-home-occupancy-expense-deductions-deduction-apportionment-and-partial-loss-of-cgt-main-residence-exemption">The age of the home worker - part 2: calculation of home occupancy expense deductions, deduction apportionment and partial loss of CGT main residence exemption</a> (2019), both in Australian Tax Forum.</em></p><img src="https://counter.theconversation.com/content/141364/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dale Boccabella does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Claiming for working for home is fraught. It’s safest to claim the running expenses the tax office allows. ‘Occupancy expenses’ are harder to justify and could cost you your capital gains tax discount.Dale Boccabella, Associate Professor of Taxation Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1202182019-07-11T20:17:03Z2019-07-11T20:17:03ZVital signs: we need those tax cuts now, all of them. The surplus can wait<figure><img src="https://images.theconversation.com/files/283606/original/file-20190711-44453-14vvfu3.jpg?ixlib=rb-1.1.0&rect=0%2C592%2C3504%2C1652&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">If you're going to stimulate the economy, it's wise not to wait.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>In an enormous week for economic news at the start of the month, parliament passed the government’s three-stage personal income tax plan, and the Reserve Bank cut official interest rates to an unprecedented low of 1%.</p>
<p>It happened against the backdrop of a flagging economy in dire need of stimulus.</p>
<p>As the bank cut rates to a record low, its governor Philip Lowe again warned about the waning power of rates (monetary policy) to lift the economy.</p>
<p>At the <a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-07-02.html">Darwin community dinner</a> after the board meeting he said: </p>
<blockquote>
<p>Monetary policy does have a significant role to play and our decisions are helping support the Australian economy. But, we should not rely on monetary policy alone. We will achieve better outcomes for society as a whole if the various arms of public policy are all pointing in the same direction.</p>
</blockquote>
<p>Lowe and many others – including yours truly – have repeatedly pointed out that spending on physical and social infrastructure can do what lower rates can’t do well – boost the economy while lifting its productivity. So, too would other productivity-enhancing reforms, particularly in the labour market.</p>
<p>And, of course, the government’s tax cuts will also stimulate the economy when they come into effect. </p>
<h2>With tax cuts, timing’s the thing…</h2>
<p>The obvious problem is that much of stimulus from those tax cuts will happen years from now, rather than today.</p>
<p>What the government should have done was insist on enacting all three stages of their tax plan immediately. Not staggered over several years, not in 2024-25. Now.</p>
<p>That would have, of course, pushed the budget into deficit in the short run, and that would would have run counter to the government’s narrative about being responsible economic managers.</p>
<p>But how responsible is it to prioritise one’s own political brand over the economic health of the nation?</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/ultra-low-unemployment-is-in-our-grasp-how-philip-lowe-became-the-governor-who-lifted-our-ambition-119754">Ultra-low unemployment is in our grasp. How Philip Lowe became the governor who lifted our ambition</a>
</strong>
</em>
</p>
<hr>
<p>Let’s not forget where the timing of the government’s tax plan came from. 2024-25 is outside the budget’s so-called “forward estimate” period and thus the impact on the deficit or surplus projections is not apparent.</p>
<p>It was the same rationale that underpinned the glacial, decade-long pace at which the government’s “enterprise tax plan” was to move to a 25% company tax rate. And it is the same set of dodgy accounting tricks that Wayne Swan was a master of for everything from health to education spending commitments.</p>
<h2>…and the timing could be immediate</h2>
<p>Productive infrastructure spending is hard to enact quickly. Spending on social infrastructure like education and training has a long lead time. </p>
<p>And structural reform of the industrial relations system might is probably the hardest and longest of all to put in place.</p>
<p>They are real constraints. </p>
<p>The Reserve Bank faces another, the so-called “zero lower bound” of conventional monetary policy and the complexities and uncertainties of unconventional policies such as quantitative easing.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/below-zero-is-reverse-how-the-reserve-bank-would-make-quantitative-easing-work-118843">Below zero is ‘reverse’. How the Reserve Bank would make quantitative easing work</a>
</strong>
</em>
</p>
<hr>
<p>But a government which won a mandate for its tax policies, and who frankly has the Labor opposition in a tailspin, could have insisted on all three stages of the tax cuts immediately. </p>
<p>The only thing standing between the economy and the aggressive fiscal stimulus it needs is the government’s obsession with balancing the budget regardless of the circumstances.</p>
<h2>We’re not in the best of times</h2>
<p>Don’t get me wrong, I think debt and deficits most certainly do matter. The government deserves credit for chipping away at the structural budget deficit, and we shouldn’t be running deficits in good economic times.</p>
<p>But we’re not in good economic times. We’re standing on the precipice of the first recession in nearly three decades. We’re looking at highly uncertain global conditions, domestic economic growth that has slowed to a trickle, sluggish wages growth, persistently high underemployment, and even the possibility of Japanese-style deflation.</p>
<p>The irony is that if, with the failure to enact sufficiently bold stimulus, we do tip into a recession, the red ink will flow all through the budget. Unemployment benefits and welfare payments will rise, personal and corporate income receipts will fall, GST revenue will drop. And young people who enter the labour market during a recession will <a href="https://www.sciencedirect.com/science/article/pii/S0927537109001018?via%3Dihub">suffer for years to come</a>.</p>
<p>The downsides of not enacting sufficient fiscal stimulus far outweigh whatever benefits there are of a glide to path to budget balance while avoiding a recession.</p>
<h2>It’s certainly not the time for hand-wringing</h2>
<p>Coming back to Lowe’s admonition that we need the “various arms of public policy…<a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-07-02.html">pointing in the same direction</a>”, here’s where we currently stand: The bank has acted, but far too late. For years it told us that 5% unemployment was as good as it could get long-term, to be patient and to wait for higher wage growth and inflation. </p>
<p>It’s been a mere five weeks since Lowe stopped impersonating Charles Dickens’ character Wilkins Micawber, who was fond of saying “something will turn up”.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/buckle-up-2019-20-survey-finds-the-economy-weak-and-heading-down-and-thats-ahead-of-surprises-119455">Buckle up. 2019-20 survey finds the economy weak and heading down, and that's ahead of surprises</a>
</strong>
</em>
</p>
<hr>
<p>Now the treasurer Josh Frydenberg is giving us his version of the same routine. On one hand he says personal income tax cuts are crucial to boosting employment and spending. On the other hand, he says we’d better wait.</p>
<p>The Australian economy can’t afford to wait for aggressive stimulus. The government has shown more concern for its political brand than for our economic health. </p>
<p>It isn’t what a responsible steward would do.</p><img src="https://counter.theconversation.com/content/120218/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A bold government would have delivered stages one, two and three of the tax cuts at once. Boldness is what we need.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1147282019-04-03T19:17:04Z2019-04-03T19:17:04ZNATSEM: federal budget will widen gap between rich and poor<figure><img src="https://images.theconversation.com/files/267272/original/file-20190403-177184-3n3zsz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The National Centre for Social and Economic Modelling has calculated the impact of the 2019 federal budget’s tax and welfare transfer changes.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>The Morrison government’s pre-election budget has not been the bonanza some predicted. It is a fairly modest affair. </p>
<p>But calculations by the the National Centre for Social and Economic Modelling, based at the University of Canberra, show the budget will <a href="http://www.ausbudget.org/assets/NATSEM-BUDGET-ANALYSIS-2018.pdf">widen the gap between rich and poor</a>. This is because changes to the tax and welfare system most benefit those paying tax. Those who don’t earn enough income to pay tax benefit least. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/infographic-budget-2019-at-a-glance-114289">Infographic: Budget 2019 at a glance</a>
</strong>
</em>
</p>
<hr>
<p>The centre has calculated the impact of the the federal budget’s tax and welfare transfer changes by families, age groups and Commonwealth Electoral Division. </p>
<p>The most significant tax changes are the two stages of tax cuts in 2022-23 and 2024-25. In 2022-23 the point at which the marginal tax rate increases from 19% to 32.5% will lift from A$41,000 to A$45,000. In 2024-25 the marginal tax rate on incomes between A$45,000 and A$200,000 will be reduced to 30%. The top tax rate of 45% (which now kicks in at A$180,000) will apply to any income above A$200,000. </p>
<p>The threshold on which no income tax is paid remains the same, at A$18,200.</p>
<p>Other tax changes involve increases to the Low Income Tax Offset (LITO) and the Low and Middle Income Tax Offset (LMITO). The LMITO (available for those earning more than A$48,000) will increase from A$530 to A$1,090 from this financial year, while the LITO will increase from A$645 to A$700 in 2022-23.</p>
<h2>More income, more benefit</h2>
<p>The benefit of the 2024/25 tax cuts on high-income families will be dramatic, as seen in Figure 1, which shows the effect of the changes over three years (2019-20, 2022-23 and 2024-25) by income.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/267739/original/file-20190405-123413-1bgim94.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/267739/original/file-20190405-123413-1bgim94.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/267739/original/file-20190405-123413-1bgim94.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=169&fit=crop&dpr=1 600w, https://images.theconversation.com/files/267739/original/file-20190405-123413-1bgim94.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=169&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/267739/original/file-20190405-123413-1bgim94.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=169&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/267739/original/file-20190405-123413-1bgim94.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=212&fit=crop&dpr=1 754w, https://images.theconversation.com/files/267739/original/file-20190405-123413-1bgim94.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=212&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/267739/original/file-20190405-123413-1bgim94.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=212&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://www.ausbudget.org/assets/NATSEM-BUDGET-ANALYSIS-2018.pdf">National Centre for Social and Economic Modelling</a></span>
</figcaption>
</figure>
<hr>
<p>The important point to note is that changes to marginal tax rates and the income tax offsets affect anyone paying tax. There is absolutely no benefit to anyone not paying tax. Which is why there is very little gain for those on incomes below $40,000 (the top of the second income quintile in Figure 1). The gain for those in the first income quintile (who mostly earn no private income) is even lower.</p>
<h2>Demographic benefits</h2>
<p>Figure 2 shows that the cohort that would gain the most in 2019-20 are those aged 26–35, by an average by A$245 a year for men and A$213 a year for women. This is mainly due to the change in the Low and Middle Income Tax Offset. </p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/267269/original/file-20190403-177167-zr8wo2.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/267269/original/file-20190403-177167-zr8wo2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/267269/original/file-20190403-177167-zr8wo2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=383&fit=crop&dpr=1 600w, https://images.theconversation.com/files/267269/original/file-20190403-177167-zr8wo2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=383&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/267269/original/file-20190403-177167-zr8wo2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=383&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/267269/original/file-20190403-177167-zr8wo2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=481&fit=crop&dpr=1 754w, https://images.theconversation.com/files/267269/original/file-20190403-177167-zr8wo2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=481&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/267269/original/file-20190403-177167-zr8wo2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=481&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Figure 2: Impact of 2019-20 budget tax and welfare system changes by age group and year of impact.</span>
</figcaption>
</figure>
<hr>
<p>By 2024-25, the cohort gaining most are men aged 46–55, by A$795 a year, and women aged 46-55, by A$759 a year. This is mainly because the tax changes in 2024-25 provide greatest advantage to high-income earners, as shown above.</p>
<h2>Family benefits</h2>
<p>Figure 3 breaks down the impact by family type and income quintile. Couples with children gain the most for all years. By 2024-25, couples with children in the highest-income quintile gain an extra A$4,573 a year, while those in the lowest quintile get just A$114. </p>
<hr>
<hr>
<p>The main reason for this is that couples with children commonly have both parents working and paying tax, therefore tax changes benefit these families more. </p>
<p>In the first year (2019-20), the Low Income Tax Offset and Low and Middle Income Tax Offset mean middle-income earners gain the most (although it is still Quintile 4 gaining the most in this first year). By 2022-23 the tax cuts benefit higher-income households more.</p>
<h2>Geographic gains</h2>
<p>When it comes to the impact by Commonwealth Electoral Division (Figure 4), we can see that by 2024-25 urban areas gain the most, and regional areas the least.</p>
<hr>
<hr>
<p>This is because households in urban areas tend to have higher incomes, and the tax cuts in 2024-25 mean electoral divisions with higher income households will benefit the most.</p>
<h2>Effect on poverty rate</h2>
<p>The budget’s effect on the poverty rate – the proportion of households living on less than 50% of median income – is to reduce it by 0.2 percentage points by 2024-25. This is a fairly small reduction. But due to the tax cuts in 2024-25 raising the net incomes for high-income households, this means income inequality will be higher. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/future-budgets-are-going-to-have-to-spend-more-on-welfare-which-is-fine-its-spending-on-us-111498">Future budgets are going to have to spend more on welfare, which is fine. It's spending on us</a>
</strong>
</em>
</p>
<hr>
<p>The 0.2 percentage point decrease compares to an 0.8% percentage point reduction that NATSEM’s modelling estimates would result from raising the Newstart allowance by A$75 a week from what it is now.</p>
<p>The message from this analysis is that the changes to the tax and welfare system in this budget benefits those with higher incomes and who are paying tax, with little to no gains in future years to some of those low income earners who aren’t paying tax.</p><img src="https://counter.theconversation.com/content/114728/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Tanton receives funding from the Australian Research Council, the Government and other NGOs. </span></em></p><p class="fine-print"><em><span>Hai Anh La receives funding from the government for her consultancy work.</span></em></p><p class="fine-print"><em><span>Jinjing Li receives funding from government agencies and NGOs. </span></em></p>The Morrison government’s tax changes will benefit high income earners the most and low income earners the least, says the National Centre for Social and Economic Modelling.Robert Tanton, Professor, Institute for Governance & Policy Analysis, University of CanberraHai Anh La, Senior Research Fellow, University of CanberraJinjing Li, Associate Professor, NATSEM, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1136132019-03-17T17:08:44Z2019-03-17T17:08:44ZDread doing your taxes? Some tips on hiring someone to take over<figure><img src="https://images.theconversation.com/files/263984/original/file-20190314-28487-1m4kjof.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ah, yes. Once again, it's tax season. If you decide to outsource filling out your returns to someone else, be sure to ask the right questions to get the best service.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/">Shutterstock</a></span></figcaption></figure><p>I don’t have to tell you that money is a big part of our lives. But in case you doubted it, <a href="https://www.apa.org/news/press/releases/2015/02/money-stress">a study by the American Psychological Association</a> says that money issues outweigh other sources of tension, including work, family and personal health concerns.</p>
<p>One of the most stressful times for many of us is the annual personal income tax season, which occurs in March and April in Canada.</p>
<p>Now is the time to decide whether you should hire someone to fill out your forms or do them yourself. The degree of complexity — or simplicity — of your own tax situation can guide you in this choice. </p>
<p>However, the taxpayer is always primarily responsible for their income tax returns, regardless of whether they assign the job to others. It’s up to the taxpayer to gather the year’s tax documents together —and those of previous years as well, if needed.</p>
<h2>Doing it yourself</h2>
<p>Some people actually like doing their own tax returns. Their situation may be very simple. They’ve only got a single income, a single employer and no recent divorce or real estate transactions. </p>
<p>In this case, outsourcing the task to a third party may seem unnecessary.</p>
<p>Others are keenly interested in new changes to the tax system and keep up-to-date. These would be the self-employed.</p>
<p>It is possible for them to obtain the proper forms from the <a href="https://www.canada.ca/en/revenue-agency.html">Canada Revenue Agency </a> and various provincial departments or by using tax software.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/263463/original/file-20190312-86707-6q2ht1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/263463/original/file-20190312-86707-6q2ht1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/263463/original/file-20190312-86707-6q2ht1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/263463/original/file-20190312-86707-6q2ht1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/263463/original/file-20190312-86707-6q2ht1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/263463/original/file-20190312-86707-6q2ht1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/263463/original/file-20190312-86707-6q2ht1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Thinking about doing your own taxes? Why not, if your situation isn’t complicated. There are excellent software programs that you can use.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<p>Among the most popular tax software programs are: <a href="https://turbotax.intuit.ca/tax-software/index.jsp">TurboTax</a>, <a href="https://www.ufile.ca/ufile?_ga=2.192495330.939423701.1552583638-761270769.1552583638">UFile</a>, <a href="https://www.hrblock.ca/">H&R Block</a> and <a href="https://www.studiotax.com/en/">StudioTax</a>. Although some software offers planning elements, caution should be exercised since taxpayers may forget to check boxes appropriate to their personal situation.</p>
<h2>Hiring a professional</h2>
<p>Using a professional often means the taxpayer can take advantage of all the deductions and credits to which they are entitled. Besides completing the year’s tax return, an accountant might also offer financial planning. Other tax (<a href="https://www.canada.ca/en/services/taxes/gsthst.html">GST/HST</a>) or financial advice may be provided by a specialist. However, there is no accreditation by government revenue agencies in Canada of tax preparers.</p>
<p>People commonly hire an accountant or tax expert. Some use a family member or friend, but should ask the same questions of them as they would an accountant. There will also be costs. Even a family member or friend should receive some compensation, if only a small token of your thanks, like a bottle of wine.</p>
<p>Accountants work in firms. These firms come in different sizes and may be national or local. In addition to these firms, there are also chains that offer tax preparation services.</p>
<p>But not all accountants are equal. Those designated as accountants are professionals with a background in accounting, including a bachelor’s degree and/or a graduate diploma and expertise with taxes. </p>
<p>Some specialize in taxation and have <a href="https://carleton.ca/profbrouard/wp-content/uploads/noteTAXstudiesintaxation.pdf">advanced training</a>. And accountants are subject to a code of ethics. In Canada, Chartered Professional Accountants <a href="https://www.cpacanada.ca/">(CPAs)</a> are those whose designations <a href="https://www.cpacanada.ca/en/the-cpa-profession/uniting-the-canadian-accounting-profession">have been formally recognized.</a></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/263464/original/file-20190312-86699-1au8vly.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/263464/original/file-20190312-86699-1au8vly.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/263464/original/file-20190312-86699-1au8vly.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/263464/original/file-20190312-86699-1au8vly.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/263464/original/file-20190312-86699-1au8vly.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/263464/original/file-20190312-86699-1au8vly.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/263464/original/file-20190312-86699-1au8vly.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Not all accountants are equal. Those designated as accountants are professionals with formal training, including in taxation, and are subject to a code of ethics.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<p>Depending on the complexity of the client’s taxes and the number of hours it takes professional to complete your return, the rates charged could range greatly, from $30 to $1,000 and more. You have to consider the quality of the work, the money saved by getting the advice of a professional and the time spent on it, not just the costs.</p>
<p>Community groups and educational institutions also offer to prepare tax returns free of charge for people who have modest incomes or who belong to certain groups, like students or immigrants. This can be done at <a href="https://www.canada.ca/en/revenue-agency/services/tax/individuals/community-volunteer-income-tax-program/need-a-hand-complete-your-tax-return.html">tax clinics</a> in all regions of the country.</p>
<h2>Ten questions to ask your accountant</h2>
<p>There are a number of questions to be considered when deciding whether to outsource the preparation of annual tax returns.</p>
<p>Among these are a change in personal circumstances, such as divorce, marriage, the birth of a child or a death in the family. It could also involve a more complex situation, such as starting a business or acquiring an income property. That may require more specialized expertise since there are various options and specific rules that apply. Changes to existing tax rules may also be a good time to contemplate hiring a professional.</p>
<p>Here are some questions you should ask yourself – and your potential accountant during a first interview – before you decide:</p>
<p><strong>–</strong> How many years of experience do they have?</p>
<p><strong>–</strong> Do they have any training in taxation?</p>
<p><strong>–</strong> Do they have expertise in a specific area of taxation?</p>
<p><strong>–</strong> What are their rates and how do they charge — by the hour or a fixed fee?</p>
<p><strong>–</strong> What is their availability?</p>
<p><strong>–</strong> Are they available at any time of the year or only during tax season?</p>
<p><strong>–</strong> Are they subject to a privacy policy?</p>
<p><strong>–</strong> Do they offer continuous updates through newsletters or emails?</p>
<p><strong>–</strong> Do they offer the possibility of filing the tax returns electronically?</p>
<p><strong>–</strong> Do they belong to a tax association such as the <a href="https://www.ctf.ca/ctfweb/en">Canadian Tax Foundation</a>?</p>
<p>Asking around in your network of contacts can also help you to find a respected professional.</p>
<p>You need to be confident and establish a firm, trusting relationship before entrusting someone with an aspect of your finances, so it’s wise to spend some time on it. Be organized and start as soon as possible. Don’t wait for the April 30 tax deadline.</p><img src="https://counter.theconversation.com/content/113613/count.gif" alt="La Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Francois Brouard ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'a déclaré aucune autre affiliation que son organisme de recherche.</span></em></p>You need to be confident and establish a firm, trusting relationship before entrusting someone to do your taxes. Start as soon as possible. Don’t wait for the April 30 tax deadline.Francois Brouard, Full Professor Accounting and Taxation / Professeur titulaire comptabilité et fiscalité, Sprott School of Business, Carleton UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/959442018-05-08T20:13:53Z2018-05-08T20:13:53ZGovernment timing tricks hide the real budget story<figure><img src="https://images.theconversation.com/files/217921/original/file-20180507-46359-1xxvux1.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Timing tricks help politicians avoid dealing with the substance of their policies. That isn’t going to change any time soon.</span> <span class="attribution"><span class="source">Cindy Zhi</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>This year’s budget may not have had a whole lot of surprises, but it was chock full of crafty timing tricks. The government’s new personal income tax plan is implemented over seven years, the much-vaunted return to surplus begins in 2019-20, and support for the “smart economy” involves $2.4 billion over, wait for it, 12 years.</p>
<p>In fact, it seems that timing tricks are now a thing in Australian politics. Revenues are brought forward and spending pushed back for cosmetic effect.</p>
<p>The Coalition’s company tax cuts are scheduled to be implemented over a full decade, Labor’s plan to cut back on negative gearing has modest short-term impact on the budget but ramps up over time, and on and on.</p>
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<a href="https://theconversation.com/morrisons-budget-tax-plan-is-another-missed-opportunity-95943">Morrison’s budget tax plan is another missed opportunity</a>
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<p>This gradual, glide-path approach to fiscal policy is sometimes good, sometimes not so much.</p>
<p>Labor’s negative gearing plan is an example of where the long timeframe is both sensible and appropriate. By grandfathering in existing negatively geared properties the Labor plan ensures that folks who relied on existing tax arrangements when making investment plans are not punished. Similarly, current Coalition policy regarding raising the retirement age for the pension is not retrospective.</p>
<p>Protecting reliance interests in this way is important for both fairness and certainty. The principle applies equally to potential changes in superannuation taxation, indexation of the aged pension, and other budget measures past, present and future.</p>
<p>Having said that, both sides of politics could do a better job of protecting Australians who have relied on existing policy settings when making big decisions. The government’s changes to superannuation taxation last year clearly violated the principle, and Labor’s plan to curtail the use of franking credits also runs afoul of it.</p>
<p>But many of these timing tricks are just that—tricks. Take the company tax cut. It is clearly structured to make sure the big revenue hits happen in years eight to 10.</p>
<p>The hope seems to be that voters don’t focus on things that far into the future, but companies possibly do. Add to that the fact that the federal budget is heavily focused on a four-year horizon — the so-called “forward estimates period”.</p>
<p>Four years is a completely arbitrary time frame with no real economic basis. The idea is that it is far enough into the future to be meaningful, but close enough to the present to be predictable. In reality it is neither meaningful nor predictable. </p>
<p>Treasury forecasts are almost always overly optimistic. In the last 20 years of budgets, from both sides of politics, they are almost always wrong. </p>
<p>From Wayne Swan’s <a href="https://www.youtube.com/watch?v=i8hZ0wxSUV0">“the four years of surpluses I announce tonight”</a> to Joe Hockey’s hockey-stick GDP growth numbers and Scott Morrison’s fantastic forecasts, the federal budget makes Disney movies look pessimistic.</p>
<p>Yet this forward-estimate timing window, a media that goes along with it, and a public that is starved for time, mean that politicians can get away with pulling good news forward and pushing bad news back; gaming the system.</p>
<p>Indeed, since future parliaments are not bound by today’s legislation, I wonder whether there is any use at all for a government to announce what they plan to do 10 years hence. If history is any judge, then the political party in question probably won’t be in office. Prime ministers and treasurers have a tough enough time surviving to the next election, let alone making it through a decade.</p>
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<a href="https://theconversation.com/infographic-budget-2018-at-a-glance-95649">Infographic: Budget 2018 at a glance</a>
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<p>But there is a purpose to this long-term planning with legislative force. It creates a default that a future government needs to reverse. And we know from the Nobel-prize-winning <a href="https://www.aeaweb.org/articles?id=10.1257/jep.5.1.193">work of Danny Kahneman and Dick Thaler</a> that defaults can have a powerful psychological and behavioural effect — it can change the choices people make, and how they feel about those choices. </p>
<p>Speaking of defaults and timing, perhaps the most natural thing that could be done with regard to the federal budget would be to index tax brackets to wages growth. This would instantly do away with “bracket creep”, where wages growth and fixed tax thresholds lead middle Australia to pay an ever-increasing average tax rate. Governments of all stripes hate this because it forces them to actually raise taxes rather than get a free kick every year which folks tend not to notice very much. In fact, 80% of deficit reduction in recent years has come from such bracket creep.</p>
<p>Timing is likely to be a constant theme in the run-up to the next federal election. We can expect Labor to emphasise their $200 billion “war chest” that they plan to spend over the next decade. Equally, the government looks set to keep pushing the line that the big banks are paying more tax now and won’t get a tax cut until close to 2030.</p>
<p>Timing tricks help politicians avoid dealing with the substance of their policies. That isn’t going to change any time soon.</p><img src="https://counter.theconversation.com/content/95944/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It seems that timing tricks are now a thing in Australian politics. Revenues are brought forward and spending pushed back for cosmetic effect.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/959432018-05-08T09:41:10Z2018-05-08T09:41:10ZMorrison’s budget tax plan is another missed opportunity<p>Even though <a href="https://www.budget.gov.au/">this year’s budget</a> is pretty good politics and reasonable economics, on almost every front, it is a missed opportunity to be bold. </p>
<p>Last year’s budget was a bank-bashing bombshell, with 4-5% of profits for five of Australia’s biggest banks yanked away, not for financial stability reasons, but because, as Treasurer Scott Morrison hinted at the budget press conference, people don’t like the banks very much.</p>
<p>With that populist mission accomplished, this year’s budget is more mundane. </p>
<p>The much-vaunted return to surplus is now planned for 2019-20 at just 0.1% of GDP. In 2017-18 we are told to expect a deficit of 1% of GDP ($18.2 billion). That’s before the forecast 3% real GDP growth from 2018-19 onward kicks in. An heroic assumption. </p>
<p>Compare that to an actual of 2.1% in 2016-17. That topline forecast is not insane, but it is certainly bullish. One is tempted to ask the Treasurer whether he would bet a year’s salary that real GDP will be above 3% compared to below that. I suspect he wouldn’t.</p>
<h2>A new personal income tax plan</h2>
<p>Having previously introduced, but not wholly managed to get through the Senate, a 10-year plan to reduce the company tax rate from 30% to 25%, this year the government has a seven-year “Personal Income Tax Plan”.</p>
<p>Under the “PIT plan” (pun absolutely intended) the number of tax brackets will be reduced from five to four. By 2024-25 the tax-free threshold will remain at $18,200 and a 19% tax rate will apply up to income of $41,000, at which point the 32.5% rate will kick in. The top marginal rate of 45% will apply to incomes above $200,000. </p>
<p>One good thing the plan does address (at least in part) is “bracket creep,” where wage growth coupled with fixed tax thresholds, leads taxpayers to pay more. Under the new plan, 94% of Australians will pay no more than a 32.5% marginal tax rate. That compares to 63% of Australians who pay that rate or less, under existing policy settings.</p>
<p>In terms of tax relief, it’s relatively modest. A person earning $50,000 will be $530 better off in 2018-19. Because of changes to the Low and Middle Income Tax Offset, this falls to $215 for someone earning $120,000 (and less still beyond that).</p>
<p>Now $530 post-tax dollars, for someone on $50,000 a year, isn’t nothing. But it doesn’t really make up for wage growth so sluggish (2.2% on average last year) that it barely keeps up with inflation.</p>
<p>This is all part of the government’s newly announced, but thoroughly leaked, mantra that taxes should be no more than 23.9% of GDP. The rationale is, as the budget papers put it “so we do not unfairly burden Australians, nor allow taxes to chase ill-disciplined spending”. </p>
<p>In some sense that’s a fair point, but the 23.9% is completely unscientific. It appears to be the average of what tax as a share of GDP was during the Howard government, which has left most economic commentators wondering “so what?”</p>
<h2>The black economy and superannuation</h2>
<p>There’s a “crackdown” on the black economy with a $10,000 limit on cash transactions. Who knows how that will be enforced. Perhaps our good friends the banks will start complying with anti-money laundering provisions. </p>
<p>In any case, I prefer a $0 limit on cash transactions by transitioning over three years to a cashless Australia. That would likely raise $5-6 billion a year every year, maybe more.</p>
<p>The sneakiest thing of all is taxing tobacco 12 weeks earlier upon entry into Australia, rather than at present when it leaves the warehouse. That will boost tax receipts once, and once only, in 2019-20 by $3.27 billion. Without that timing trick the return to surplus would be pushed back a year to 2020-21.</p>
<p>Having attacked retirement savings last year, the government is now “reuniting Australians with lost super”. Hard to be against that, but hard to get too excited either. Exit fees on superannuation accounts will also be banned, which is a very good idea and should help consolidation of accounts.</p>
<p>One step better would be making it a net zero cost to transfer all banking arrangements (mortgage, accounts, credit cards, etc) from one bank to another, through a mandate on banks and a subsidy for customers. That would help with competition in the banking sector, which has come under recent scrutiny.</p>
<p>Another small but sensible initiative is increasing the Pension Work Bonus from $250 to $300 per fortnight, which permits pensioners to earn up to that amount without affecting their pension eligibility.</p>
<p>On a more disappointing note there is a reasonably large amount of fanfare but very little substance about “backing regional Australia”. There is $200 million for a third round of the Building Better Regions Fund to support infrastructure on top of the $272 million from the Regional Growth Fund. </p>
<p>That’s fine but falls well short of a systematic plan for regional infrastructure and does not address regional unemployment, particularly youth unemployment, in a meaningful way. Tackling that would require the kind of place-based policies like targeted wage subsidies and reduced payroll taxes <a href="https://theconversation.com/the-government-should-pick-towns-not-industries-to-fund-78464">that I have advocated before</a>.</p>
<p>There are a host of so-called “integrity measures” to do with taxation. There’s the oft-talked about tightening of thin capitalisation rules, whereby companies load worldwide debt onto an Australian entity to increase interest charges in Australia, instead of in low taxing jurisdictions like Ireland. This is in addition to other attempts to get multinationals to pay more tax. These are more likely to get multinationals to pay lawyers more, but it’s now customary padding in every budget. </p>
<p>The forecasts are pretty rosy in this year’s budget, but they always are. Overall, it’s a hard budget to hate, and a hard budget to like. But it is a classic political pre-election budget.</p><img src="https://counter.theconversation.com/content/95943/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Even though this year’s budget is pretty good politics and reasonable economics, on almost every front, it is a missed opportunity to be bold.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/946422018-04-10T21:55:10Z2018-04-10T21:55:10ZDoing taxes used to be an even bigger pain<figure><img src="https://images.theconversation.com/files/213973/original/file-20180410-114080-1pgxdbr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Filling out tax forms used to be an exercise in legalese torture for Canadian taxpayers. Canada has come a long way, but can still to more to simplify filing taxes. </span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Chris Young</span></span></figcaption></figure><p>If your income is mainly a paycheque, filing a Canadian income tax return these days is pretty easy. And that’s no accident. </p>
<p>Smart innovations in tax administration in the 1950s built a slick collection system that worked. Except, of course, for small business. And, for the moment, let’s not speak of the many avenues of escape that capital income has enjoyed.</p>
<p>But taxing employees? We figured out how to do that pretty painlessly almost 70 years ago. Surely we can do the same for more tax filers today.</p>
<p>When federal taxation of wages and small salaries was launched during the Second World War, there was incomprehension, chaos and widespread resentment. Tax protest was part of <a href="https://books.google.ca/books?id=qu07DwAAQBAJ&pg=PA210&source=gbs_toc_r&cad=3#v=snippet&q=strikes&f=false">several strikes</a> by organized labour in 1941 and 1942. Non-union workers refused overtime for tax reasons, a real problem for wartime industries. </p>
<p>The new income tax law left lower-income workers no wiggle room in their household budgets. </p>
<p>My book, <a href="https://www.amazon.ca/Give-Take-Citizen-Taxpayer-Canadian-Democracy/dp/0774836725"><em>Give and Take: The Citizen-Taxpayer and the Rise of Canadian Democracy,</em></a> contains examples of protest letters that poured in to the federal Finance Department from people like Miss W.E. Drummond. She was a white-collar employee earning a decent wage. She detailed every item in her weekly budget and asked: “What am I to do, drop this Insurance for my old age? Let my home people starve or go on relief?” </p>
<h2>Tax forms were nightmarish</h2>
<p>To complaints like hers, James Lorimer Ilsley, then the finance minister, responded with concessions such as allowing a tax credit for some insurance premiums.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/213979/original/file-20180410-114128-srh96k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/213979/original/file-20180410-114128-srh96k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=804&fit=crop&dpr=1 600w, https://images.theconversation.com/files/213979/original/file-20180410-114128-srh96k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=804&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/213979/original/file-20180410-114128-srh96k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=804&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/213979/original/file-20180410-114128-srh96k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1010&fit=crop&dpr=1 754w, https://images.theconversation.com/files/213979/original/file-20180410-114128-srh96k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1010&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/213979/original/file-20180410-114128-srh96k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1010&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">James Lorimer Ilsley, Canada’s finance minister from 1940 to 1946, is seen in this undated photo.</span>
<span class="attribution"><span class="source">National Archives of Canada</span></span>
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</figure>
<p>But concessions made another tax problem worse: The forms. Their format was unchanged from the 1920s and 1930s, when federal income taxpayers were mostly professional men or business owners. Expressed in dense legalese, they were typeset mostly in six and seven point. If Miss Drummond wanted to know whether her insurance payments were deductible, she had to wade through 111 words of lawyer-ly instruction, 62 of them in tiny print, the rest of them smaller.</p>
<p>Confronted with these forms, semi-literate fishermen in coastal British Columbia and barely educated millworkers in New Brunswick (or their often equally ill-equipped employers) struggled to understand tax terms like “married status.”</p>
<p>“Married status” would lower their taxes, and unmarried people could claim it. But first <a href="http://wartimecanada.ca/sites/default/files/documents/1945%20T1%20special.pdf">they’d have to figure out</a> if they and a “<em>wholly</em> dependent relative” lived in a “self-contained domestic establishment… containing at least two bedrooms in which residence amongst other things the taxpayer as a general rule sleeps and has his meals prepared and served.” And served?!</p>
<h2>‘Tax conscious’</h2>
<p>Dreadfully inaccessible forms were not the only source of pain for wage-earning taxpayers.</p>
<p>Some people thought that paying income tax was meant to hurt, at least a little.</p>
<p>Former Prime Minister Arthur Meighen made this view clear in the <a href="http://parl.canadiana.ca/view/oop.debates_SOC1805_01/48?r=0&s=1">1939 Senate debate on war income taxation</a>. Exemption levels should be so low that almost every earner would be an income taxpayer. Only if they personally felt a pinch in the pocketbook would voters be “tax conscious.” Only then would they care about “preventing waste in government.”</p>
<p>Meighen’s wish came true. Not only did the wartime government lower exemptions in 1941, and <a href="http://publications.gc.ca/collections/collection_2016/fin/F1-23-1-1942-eng.pdf">drastically so in 1942</a>, they also told the nation’s payroll clerks to clip from paycheques only 95 per cent of the amount that would likely show up in employees’ year-end calculations of tax payable. </p>
<p>That way, at tax filing time, most employees would still owe income tax, beyond what the payroll clerk had been collecting all year. Pretty much everyone working for a wage would have to actually fork over some cash with their return.</p>
<p>To be fair, this was a way of avoiding any risk of over-deducting. But it also made taxpayers feel the pain of payment — to good moral effect, some thought.</p>
<h2>Debts went unpaid</h2>
<p>By 1951, however, tax administrators had discovered a downside to this exercise in moral instruction. Every year, <a href="http://parl.canadiana.ca/view/oop.debates_HOC2202_06/1035?r=0&s=4">hundreds of thousands</a> of small tax liabilities went unpaid. Collecting those debts placed the federal government in the role of big, bad collection agency garnishing some pretty small wages.</p>
<p><a href="http://parl.canadiana.ca/view/oop.debates_HOC2202_06/1035?r=0&s=4">The solution</a>: Abandon the practice of payroll clerks collecting throughout the year only 95 per cent of tax owing. Tell them to deduct 100 per cent instead. </p>
<p>No more making tax debtors out of struggling wage earners. Instead, most employee tax returns would produce — yippee! — a refund.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/213953/original/file-20180409-114105-1w2pux9.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/213953/original/file-20180409-114105-1w2pux9.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=737&fit=crop&dpr=1 600w, https://images.theconversation.com/files/213953/original/file-20180409-114105-1w2pux9.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=737&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/213953/original/file-20180409-114105-1w2pux9.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=737&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/213953/original/file-20180409-114105-1w2pux9.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=926&fit=crop&dpr=1 754w, https://images.theconversation.com/files/213953/original/file-20180409-114105-1w2pux9.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=926&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/213953/original/file-20180409-114105-1w2pux9.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=926&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Employment income tax forms by 1951 no longer tortured tax filers with legalese.</span>
<span class="attribution"><span class="source">Author provided</span></span>
</figcaption>
</figure>
<p>In the spring of 1952, Canadians <a href="https://books.google.ca/books?hl=en&lr=&id=qu07DwAAQBAJ&oi=fnd&pg=PP1&dq=%22shirley+tillotson%22+%22give+and+take%22&ots=H8NSJekiS5&sig=znKvo1BAj2s3itFpR5UzMLIUECs#v=onepage&q=enthusiastically&f=false">rushed enthusiastically</a> to file their tax returns (or so it was reported in the Toronto Daily Star).</p>
<p>But the Globe and Mail’s editors took a darker view. The revenue authority was collecting more tax than was owed. The collections were therefore “illegal,” “contrary to the principle underlying our constitution,” <a href="https://books.google.ca/books?hl=en&lr=&id=qu07DwAAQBAJ&oi=fnd&pg=PP1&dq=%22shirley+tillotson%22+%22give+and+take%22&ots=H8NSJekiS5&sig=znKvo1BAj2s3itFpR5UzMLIUECs#v=snippet&q=%22stupid%22&f=false">and “stupid.”</a></p>
<p>Why “stupid?” As the <a href="https://books.google.ca/books?hl=en&lr=&id=qu07DwAAQBAJ&oi=fnd&pg=PP1&dq=%22shirley+tillotson%22+%22give+and+take%22&ots=H8NSJekiS5&sig=znKvo1BAj2s3itFpR5UzMLIUECs#v=snippet&q=Winnipeg%20Tribune&f=false">editors of the Winnipeg Tribune argued</a>, if taxpayers didn’t actually pay cash at tax time, they might forget that “government was spending a great deal of money.” They’d no longer be tax conscious.</p>
<h2>Built revenue for pensions and medicare</h2>
<p>For the remainder of the Liberals’ term under Louis St. Laurent, opposition members like <a href="https://lop.parl.ca/sites/ParlInfo/default/en_CA/People/Profile?personId=14524">Waldo Monteith</a> pushed this point. But the system continued. It built revenue for the welfare state in much the same way that personal savings build when you set up a monthly deduction.</p>
<p>The over-payment method was not the only innovation in tax administration. For the 1948 tax year, <a href="http://jltax.ca/wp-content/uploads/2011/08/1948-T1-Short.pdf">a short T1 form was introduced</a>. Pamphlet-sized and legible, it was clearly the work of a skilled designer. Non-lawyers could read it without weeping.</p>
<p>These and other innovations have made reporting income and claiming credits on employment income relatively easy. Perhaps we’re now at the point where many of us — <a href="https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/income-statistics-gst-hst-statistics/t1-final-statistics/final-statistics-2017-edition-2015-tax-year.html">the 57 per cent of filers with income primarily from employment</a> — would be well-served by a <a href="http://www.taxfairness.ca/en/blog/how-we-could-improve-tax-paying-experience">more automated tax assessment</a>. The ritual of completing even a simplified form may be just another exercise in tax consciousness, a flogging of the form-phobic that only inflames anti-tax feeling.</p>
<p>For the other 43 per cent, and especially for small businesses where tax compliance competes painfully with other uses of time and money, the lesson of the 1950s is that tax administration matters. <a href="http://www.oag-bvg.gc.ca/internet/English/parl_oag_201711_02_e_42667.html">As Canada’s auditor general has recently reminded us</a>, when the revenue agency is underfunded, service shrivels.</p>
<p>We have seen the current government <a href="https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/canada-revenue-agency-quarterly-financial-report/canada-revenue-agency-quarterly-financial-report-15.html">increase CRA funding</a> to improve services to small business in particular and taxpayers generally. It’s too soon to tell (from publicly available information, at least) what impact this will have. </p>
<p>But making employees’ tax compliance easy helped make personal income tax the workhorse of Canada’s taxation system. Now we need to do the same for small business.</p>
<p>We should consider simplifying the law, of course. But even if legal complexity is required for fairness, as it often is, skilled administration can make paying taxes much less painful. And that might protect the revenue — as well as serving the taxpayer.</p><img src="https://counter.theconversation.com/content/94642/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shirley Tillotson received funding for this research from the Social Sciences and Humanities Research Council of Canada. </span></em></p>In the 1950s, Canada made it easy for employees to file their income tax. Now let’s simplify the process for others, too.Shirley Tillotson, Inglis Professor at University of King's College, Professor of Canadian History (Dalhousie University, retired), Dalhousie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/913282018-02-14T00:43:23Z2018-02-14T00:43:23ZFactCheck Q&A: are ‘almost 60%’ of small business owners paid ‘$50,000 or less’?<figure><img src="https://images.theconversation.com/files/205202/original/file-20180207-58152-ekn5aa.JPG?ixlib=rb-1.1.0&rect=0%2C1%2C1003%2C562&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australian Chamber of Commerce and Industry chief executive James Pearson, speaking on Q&A.</span> <span class="attribution"><span class="source">ABC Q&A</span></span></figcaption></figure><p><strong>The Conversation fact-checks claims made on Q&A, broadcast Mondays on the ABC at 9.35pm. Thank you to everyone who sent us quotes for checking via <a href="http://www.twitter.com/conversationEDU">Twitter</a> using hashtags #FactCheck and #QandA, on <a href="http://www.facebook.com/conversationEDU">Facebook</a> or by <a href="mailto:checkit@theconversation.edu.au">email</a>.</strong></p>
<hr>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/Ok3uy-QL0z4?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Excerpt from Q&A, February 5, 2018.</span></figcaption>
</figure>
<blockquote>
<p>Almost 60% of small business owners in this country are paid $50,000 or less.</p>
<p><strong>– Australian Chamber of Commerce and Industry chief executive James Pearson, <a href="https://www.youtube.com/watch?v=Ok3uy-QL0z4&feature=youtu.be">speaking on Q&A</a>, February 5, 2018</strong></p>
</blockquote>
<p>The Turnbull government is seeking parliamentary support to cut the company tax rate to 25% over the coming decade, arguing that cutting the rate will <a href="https://www.malcolmturnbull.com.au/media/keynote-address-toowoomba-queensland-thursday-1-february-2018">increase business investment, drive jobs growth</a> and <a href="http://www.smh.com.au/federal-politics/political-news/malcolm-turnbull-commits-to-keeping-company-tax-cuts-in-the-budget-until-next-election-20180209-p4yzto.html">lift wages</a> in Australia.</p>
<p>During an <a href="http://www.abc.net.au/tv/qanda/txt/s4758627.htm">episode of Q&A</a>, Australian Chamber of Commerce and Industry chief executive James Pearson said small business owners would benefit from a company tax cut in Australia. He said it would “help them be profitable”, allowing them to grow their businesses, employ more people and pay those workers more. </p>
<p>Pearson said “almost 60% of small business owners in this country are paid $50,000 or less”.</p>
<p>Is that right?</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/206319/original/file-20180214-174966-11w98qe.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/206319/original/file-20180214-174966-11w98qe.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=230&fit=crop&dpr=1 600w, https://images.theconversation.com/files/206319/original/file-20180214-174966-11w98qe.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=230&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/206319/original/file-20180214-174966-11w98qe.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=230&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/206319/original/file-20180214-174966-11w98qe.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=289&fit=crop&dpr=1 754w, https://images.theconversation.com/files/206319/original/file-20180214-174966-11w98qe.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=289&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/206319/original/file-20180214-174966-11w98qe.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=289&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<h2>Checking the source</h2>
<p>When asked for sources and comment to support James Pearson’s statement, a spokesperson for the Australian Chamber of Commerce and Industry provided The Conversation with the following graph.</p>
<p>It draws on unpublished Australian Taxation Office data and relates to the 2014-15 income year:</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/205637/original/file-20180209-180826-ikf8da.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205637/original/file-20180209-180826-ikf8da.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=428&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205637/original/file-20180209-180826-ikf8da.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=428&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205637/original/file-20180209-180826-ikf8da.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=428&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205637/original/file-20180209-180826-ikf8da.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=538&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205637/original/file-20180209-180826-ikf8da.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=538&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205637/original/file-20180209-180826-ikf8da.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=538&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Chart from the Australian Small Business and Family Enterprise Ombudsman using unpublished Australia Taxation Office data for the 2014-15 financial year. The data relate to individuals with a non-zero amount at any of the following labels on their 2014-15 tax return: distribution from a partnership or trusts (primary production or non-primary production) and/or net income or loss from business (primary production or non-primary production). The figures were produced to approximate the distribution of small business owners.</span>
</figcaption>
</figure>
<p>The spokesperson said:</p>
<blockquote>
<p>We combined the data for those earning less than $25,000 and those earning $25,000 to $50,000, to come up with the under $50,000 assessment of 58.1% earning less than $50,000.</p>
</blockquote>
<p>The spokesperson added “we understand the percentages we raised publicly are percentages of all business owners” – as opposed to small business owners. However: </p>
<blockquote>
<p>We don’t think it makes much of a difference. The overwhelming majority of Australian businesses are clearly small and medium-sized enterprises, and the majority of business owners are small business owners.</p>
</blockquote>
<hr>
<h2>Verdict</h2>
<p>James Pearson’s statement that “almost 60% of small business owners in this country are paid $50,000 or less” is in the ballpark. </p>
<p>Based on Australia Taxation Office data from the 2014-15 financial year and Census 2016 data, it’s reasonable to say that between 50% to 60% of small business owners or managers earned less than $50,000 in those years.</p>
<p>However, Pearson used this information in the context of company tax rate cuts, arguing that small business owners “want a tax cut that will help them be profitable”.</p>
<p>In reality, due to the way Australia’s tax system works, it’s the small business owner’s <em>personal</em> income tax rate that is more relevant for the profitability of their business.</p>
<hr>
<h2>Calculating small business owner salaries</h2>
<p>There’s <a href="https://www.ato.gov.au/business/small-business-entity-concessions/eligibility/">more</a> <a href="http://asic.gov.au/for-business/your-business/small-business/small-business-overview/small-business-what-is-small-business/">than</a> <a href="https://www.fwc.gov.au/termination-of-employment/unfair-dismissal">one</a> definition for ‘small business’ in Australia, and there’s no perfect data set against which to test Pearson’s statement.</p>
<p>But we can assess the Australian Taxation Office data Pearson’s office provided, and we can also look at Census 2016 data. </p>
<p>Pearson’s spokesperson provided The Conversation with a graph based on unpublished Australian Taxation Office data for the 2014-15 financial year. The Conversation verified the information in the graph with the Australian Taxation Office.</p>
<p>The graph shows that in 2014-15, 58.1% of the business owners listed earned less than $50,000. But the data aren’t specific to small business owners, and don’t include taxable income people received through companies – only through partnerships, trusts or as sole traders.</p>
<p>A spokesperson for the Australian Taxation Office told The Conversation the “figures were produced to approximate the distribution of small business owners”.</p>
<p>Now let’s look at <a href="http://www.abs.gov.au/websitedbs/censushome.nsf/home/2016">Census 2016 data</a>. </p>
<p><a href="http://asic.gov.au/for-business/your-business/small-business/small-business-overview/small-business-what-is-small-business/">According to</a> the Australian Securities and Investments Commission, “many regulators have informally adopted the definition of ‘small business’ used by the Australian Bureau of Statistics” – which is a business that employs <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/1321.0">fewer than 20 people</a>.</p>
<p>If we look at Census 2016 data using that measure, then we see that 50% of small business owners were paid less than $1,000 per week in 2016 – or $52,000 per year or less.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=498&fit=crop&dpr=1 754w, https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=498&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=498&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<h2>Putting Pearson’s statement in context</h2>
<p>In making his statement, Pearson described the financial struggles facing some small business owners. Pearson said these people “want a tax cut, they want a tax cut that will help them be profitable”. </p>
<blockquote>
<p>They’ll employ more people, they’ll offer longer hours, more people will have jobs, more people will be paid more. That’s how it works.</p>
</blockquote>
<p>Pearson added that when small business owners “see more productivity in their workforce, they can take the risk and grow their business”. </p>
<p>But the reality is, when an Australian resident is trying to decide whether to invest in their small business, it’s their personal income tax rate, not the company tax rate, that really matters. </p>
<p>Why?</p>
<p>Because company tax paid by Australian businesses on income earned in Australia acts as a ‘pre-payment’ of personal income tax when that income is distributed to shareholders in the company (or the owners of the company) via <a href="https://www.investopedia.com/terms/f/frankeddividend.asp">franked dividend payments</a>.</p>
<p><a href="https://data.gov.au/dataset/taxation-statistics-2014-15/resource/b51ea9cc-4eac-4b25-b45a-175d7797c9d5">Australian Taxation Office</a> statistics show that in the 2014-15 financial year, more than 95% of dividends paid to Australian households were franked.</p>
<p>The fact that Australian business owners can claim back any tax paid by their businesses when they lodge their <em>personal</em> tax returns makes their personal income tax rate the more relevant concern to the potential profitability of their business.</p>
<p>In addition, Pearson argued that company tax cuts would lead to higher wages, a statement supported by the <a href="https://treasury.gov.au/publication/analysis-of-the-long-term-effects-of-a-company-tax-cut/">Australian Treasury</a>. The Treasury modelling shows that the wage hike would be the result of greater foreign investment in Australia, leaving the owners of small businesses needing to pay higher wages to attract or retain workers.</p>
<p>Small business owners who receive their income via franked dividends won’t receive any tax relief to cover this expense. So it’s possible that cuts to the company tax rate could hinder small businesses, rather than benefit them. <strong>– Janine Dixon and Jason Nassios</strong></p>
<h2>Blind review</h2>
<p>This verdict finds a reasonable level of support from the available data.</p>
<p><a href="http://researchdirect.westernsydney.edu.au/islandora/object/uws:28654">Research</a> from the University of Western Sydney <a href="https://www.westernsydney.edu.au/newscentre/news_centre/story_archive/2014/australias_business_owners_income-poor_but_asset-rich">published in 2014</a>, based on <a href="http://melbourneinstitute.unimelb.edu.au/hilda">HILDA</a> data and Australian Bureau of Statistics data, found that business owner <em>households</em> (as opposed to individuals) reported an average weekly income of $1,975 in 2010. That’s around $103,000 per household.</p>
<p>If there were two adults per household, this would equate to $51,500 per person.</p>
<p>Also, because the ‘average’ is skewed upwards by high income earners, 50% of earners would earn less than the average, which lends further support to Pearson’s statement.</p>
<p><a href="https://www.payscale.com/research/AU/Job=Small_Business_Owner_%2F_Operator/Hourly_Rate">Information published</a> by an American company called PayScale suggests the average salary for a small business owner/operator in Australia is around $67,000 per year, and the median salary is $62,000. </p>
<p>If true, this would not be consistent with the claim that almost 60% of small business owners earn less than $50,000 per year. However, this information is based on a survey with a relatively small sample size. This source is a private sector consulting firm, and no other detail on their data source is provided. <strong>– Ross Guest</strong></p>
<hr>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Conversation FactCheck is accredited by the International Fact-Checking Network.</span>
</figcaption>
</figure>
<p><em>The Conversation’s FactCheck unit was the first fact-checking team in Australia and one of the first worldwide to be accredited by the International Fact-Checking Network, an alliance of fact-checkers hosted at the Poynter Institute in the US. <a href="https://theconversation.com/the-conversations-factcheck-granted-accreditation-by-international-fact-checking-network-at-poynter-74363">Read more here</a>.</em></p>
<p><em>Have you seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at <a href="mailto:checkit@theconversation.edu.au">checkit@theconversation.edu.au</a>. Please include the statement you would like us to check, the date it was made, and a link if possible.</em></p><img src="https://counter.theconversation.com/content/91328/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest has received funding from the ARC in the past. </span></em></p><p class="fine-print"><em><span>Janine Dixon and Jason Nassios do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>On Q&A, Australian Chamber of Commerce and Industry chief executive James Pearson said almost 60% of small business owners in Australia are paid $50,000 or less. Is that right?Janine Dixon, Economist at Centre of Policy Studies, Victoria UniversityJason Nassios, Research Fellow, Centre of Policy Studies, Victoria UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/848122017-10-04T22:00:10Z2017-10-04T22:00:10ZWhy we should listen to people angry about their taxes<figure><img src="https://images.theconversation.com/files/188419/original/file-20171002-12132-wxxpqy.jpg?ixlib=rb-1.1.0&rect=0%2C4%2C3000%2C2169&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Finance Minister Bill Morneau is not the first Canadian politician to hold the job who's been confronted with outrage over tax reform proposals. But it's time to listen to people who get riled up about tax increases. </span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Andrew Vaughan</span></span></figcaption></figure><p>Is it too much to expect people to talk calmly and reasonably about tax changes? Yes. Yes, it is too much.</p>
<p>As a historian of tax in 20th century Canada, I have read thousands of letters to ministers of finance, and they are often ferociously angry – similar to some of <a href="http://www.cbc.ca/news/politics/morneau-town-hall-1.4313754">the outrage being expressed now</a> by opponents of the Liberal government’s tax reform proposals.</p>
<p>It’s hard not to dismiss them as hysterical.</p>
<p>But we shouldn’t. The rocket-fuelled fury of the worried taxpayer is a constant feature of tax culture for good reasons.</p>
<p>In the <a href="http://collectionscanada.gc.ca/ourl/res.php?url_ver=Z39.88-2004&url_tim=2017-10-02T01%3A27%3A39Z&url_ctx_fmt=info%3Aofi%2Ffmt%3Akev%3Amtx%3Actx&rft_dat=35&rfr_id=info%3Asid%2Fcollectionscanada.gc.ca%3Apam&lang=eng">archives of finance ministers</a> since 1942 (when Canada got its mass income tax), I’ve seen how tax debate draws in free-floating anger and focuses it. On the surface, tax rage is about money. But it’s also about deeply held personal identities and hard-to-reconcile views on government. Angry tax talk tells us about more than just tax policy.</p>
<p>In observing our <a href="http://www.cbc.ca/news/canada/toronto/rally-tax-reform-morneau-1.4315740">current debate,</a> I’ve been especially reminded of the furore over the Benson White Paper. Launched in November 1969, the <a href="http://publications.gc.ca/site/archivee-archived.html?url=http://publications.gc.ca/collections/collection_2016/fin/F32-169-1969-eng.pdf">Benson tax proposals</a> formed the basis of the modern federal income tax act of 1971. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/188285/original/file-20171002-28509-15o3pj3.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/188285/original/file-20171002-28509-15o3pj3.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=805&fit=crop&dpr=1 600w, https://images.theconversation.com/files/188285/original/file-20171002-28509-15o3pj3.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=805&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/188285/original/file-20171002-28509-15o3pj3.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=805&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/188285/original/file-20171002-28509-15o3pj3.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1012&fit=crop&dpr=1 754w, https://images.theconversation.com/files/188285/original/file-20171002-28509-15o3pj3.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1012&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/188285/original/file-20171002-28509-15o3pj3.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1012&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Benson White Paper of tax proposals.</span>
<span class="attribution"><span class="source">(Shirley Tillotson)</span></span>
</figcaption>
</figure>
<p>What the government put on the table included full taxation of capital gains — a real challenge for high net worth Canadians, investment firms and pensioners. Another flashpoint was a proposal to eliminate the small business tax rate on annual business profits under $30,000 (<a href="http://www.bankofcanada.ca/rates/related/inflation-calculator/">$196,733</a> in 2017 dollars). Consultation took the small business rate off the table and modified the capital gains proposal.</p>
<p>The Benson changes also included tax relief for millions of very low income earners whose income tax payments truly cut into subsistence spending. In the end, abut 60 per cent of Canadians, many of them poor, saw their federal tax bill lowered, though less than originally proposed.</p>
<h2>Vows to move to Mexico</h2>
<p>In some quarters, this proposal inspired a furious response. Small business wanted to keep its lower tax rate (a sacred tradition since 1949). Middle-of-the-road Liberal Edgar Benson was called a radical and a socialist. Doomsayers predicted that the tax changes would kill the Canadian economy. Threats to move to Mexico were heard throughout the land.</p>
<p>Benson, who had been national revenue minister earlier in the 1960s, was accustomed to abuse, though it was usually pitched at a lower volume. Revenue ministers had been hearing since 1917 that income taxes were too high, tax compliance too complex, tax administration too inflexible.</p>
<p>Mitchell Sharp, Benson’s predecessor in Finance, called the annual review of letters from the public during the budget process a mixture of “interest, amusement, and boredom.” I’ve read the same letters, and <a href="http://www.ubcpress.ca/give-and-take">wrote about them</a> in my book <em>Give and Take:
The Citizen-Taxpayer and the Rise of Canadian Democracy,</em> and I know what Sharp meant. </p>
<p>The special pleading is snooze-makingly predictable. Colourful invective and crackpot remedies provide some comic relief.</p>
<p>But sometimes the letter writers went beyond the usual grinding of axes. Sometimes, and especially during the White Paper debate, they took a personal risk, and told the politicians something real about their lives and their communities.</p>
<h2>‘Lack of respect’</h2>
<p>One woman saw the big chain stores coming, and spoke for the local dress shops, independent gas stations and corner drug stores that added creativity and care, not just jobs, to their communities. Facing these threats in her business environment, she found the thought of an additional tax burden intolerable.</p>
<p>Others described how their business success was about more than money. A widow supporting her six children with modest investments in real estate was proud of how she had achieved independence through the exercise of her brains and energy. She saw in the tax changes a lack of respect for the effort that she had made.</p>
<p>And a father, stressed by having had to spend much of his disposable income on insurance premiums to protect his seven children and wife, worried that his father’s legacy to him, a trucking business, would not be passed on to his sons. </p>
<p>His concern about taxes cutting into his business’s income was about money, of course, but he and others who wrote that they were “frightened, angry, and frustrated” were also expressing their feelings as parents.</p>
<p>These types of letters made it clear that small business ownership was not just an economic interest but also an honourable personal identity, something that one tax reformer belatedly recognized was “as sacrosanct as motherhood.”</p>
<p>Pensioners also brought something bigger than money into the conversation. Many of them, born within a few years of 1900, shared a strong generational identity. In letters to Benson, they wrote something like: “We lived through two World Wars, the Great Depression, and now … galloping inflation.”</p>
<p>Some of them were proud of having saved in spite of these obstacles. But in the 1960s, even the thrifty savers saw inflation turning their comfortable living into mere subsistence. People who hadn’t been able to save depended on the Old Age Security pension. Its value had been steadily shrinking in relation to prices.</p>
<h2>Tax anger linked to personal identity</h2>
<p>Most weren’t wealthy, but they lived on the income from small savings. Some lived close to the bone and were easily alarmed. The 20th-century generation had endured so much. They really did need to catch a break.</p>
<p>Small business people and pensioners were not the only Canadians who brought to tax reform a point of view that went beyond economic interest into the realm of personal identity. </p>
<p>Letters to Finance, both for and against the reforms, came from artists, amputees, the mentally ill and their families, students, people living in the North, foster parents, First Nations, female professionals, firefighters, ultra-Protestants, parents of young children and more.</p>
<p>They saw in the federal income tax a tool that could help them or hurt them in any number of ways. They called for fair tax treatment, and they meant not just a financial break, but recognition and respect for their struggles.</p>
<p>Many fears find a focus in blistering tax talk. When that anger takes the form of mud-slinging and misrepresention, it’s unfortunate.</p>
<p>But if we look for the honourable sentiments in tax outrage, we can see where impersonal forces of change are making for personal stresses.</p>
<p>In 1969, a lot had changed since the introduction of the mass income tax in 1942. The age of easy money was ending, and it was time for Canadians to talk seriously about what the state should and could do and how it should be financed.</p>
<p>Today we should ponder the same questions. </p>
<h2>Small businesses have suffered</h2>
<p>The battering of credit markets in 2008 and the bumpy economic ride since then, including austerity programs and their failures, have landed hard on small business and savers. </p>
<p>It’s a good time to ask whether we can do better, as a community and through government, to collect revenue fairly and to spend it in ways that support security for all Canadians, including small business.</p>
<p>Tax reform, then and now, brings out deeply felt competing positions on these questions, and helpfully so. Rage at taxes can get in the way of good answers by making our objective too simple — lower taxes. </p>
<p>But if we listen to the stories that people tell when they’re angry about high taxes, we can learn about more than merely taxes. What we learn might lead to meaningful changes both inside and outside the tax system.</p><img src="https://counter.theconversation.com/content/84812/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shirley Tillotson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Outrage over tax reform is nothing new. But if we can’t be calm about tax, we can at least learn from the stories spoken in anger.Shirley Tillotson, Professor of Canadian History (retired), Inglis Professor of University of King's College, Dalhousie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/767732017-04-26T21:38:36Z2017-04-26T21:38:36ZWould Trump’s tax cut be the biggest ever? Fat chance<p>President Donald Trump has long been known for his fondness for superlatives when describing his projects and policies. His administration’s proposal for a tax cut is certainly no exception. </p>
<p>In a recent <a href="https://apnews.com/c810d7de280a47e88848b0ac74690c83">interview with the Associated Press</a> he declared:</p>
<blockquote>
<p>“It will be bigger, I believe, than any tax cut ever. Maybe the biggest tax cut we’ve ever had!”</p>
</blockquote>
<p>Americans just got their first taste of some of the details of his tax overhaul. Treasury Secretary Steve Mnuchin repeated his boss’ boast about the tax cut’s size and said it would slash the top corporate rate to 15 percent from 35 percent. It would also <a href="https://www.nytimes.com/2017/04/26/us/politics/trump-tax-cut-plan.html">simplify individual income rates</a> and reduce them a little, while doubling the standard deduction and eliminating certain itemized deductions. </p>
<p>In assessing whether his cuts might be the biggest ever, <a href="https://www.washingtonpost.com/news/wonk/wp/2017/04/25/trump-just-promised-the-biggest-tax-cut-in-history-heres-how-big-it-would-have-to-be/">many pundits have pointed to</a> President Ronald Reagan’s tax overhaul in 1981, which reduced government revenue by 2.9 percent of GDP. </p>
<p>But was that really the biggest U.S. tax cut ever? Hardly. In fact, we have to go back almost 150 years – immediately after the Civil War and the beginning of the income tax – to find the American whopper of tax cuts. Put simply, it would be very hard for Trump to exceed that cut.</p>
<h2>The costs of war</h2>
<p>During the 1860s, President Abraham Lincoln needed money to finance the Civil War. To do so, his administration levied the <a href="http://www.jstor.org/stable/1885003">first national income tax in 1862</a> to help pay northern troops. The tax was very successful since it paid for one-quarter of the North’s Civil War expenses.</p>
<p>To ensure poor people were not affected by the tax, <a href="http://legisworks.org/sal/12/stats/STATUTE-12-Pg432c.pdf">it was levied only</a> on families with income of US$600 or more. Prices have climbed <a href="https://www2.census.gov/library/publications/1975/compendia/hist_stats_colonial-1970/hist_stats_colonial-1970p1-chE.pdf">about 23 times since the Civil War</a>. Adjusting for this inflation means people were taxed only if their income was above $13,800 in today’s money.</p>
<p>The tax at first was very simple to compute. Families had to pay 3 percent of what they earned from $600 to $10,000. Those earning over $10,000 had to pay 5 percent of their income. The amount people paid in state and local taxes <a href="https://archive.org/details/unitedstatesfed00smitgoog">was deductible</a>.</p>
<p>However, other common deductions used today in the U.S. such as deductions for <a href="https://www.irs.gov/publications/p936/ar02.html">mortgage interest</a> and <a href="https://www.irs.gov/pub/irs-pdf/p526.pdf">charitable contributions</a> were not included in the first income tax.</p>
<p>Because the Civil War lasted longer and proved more costly than expected, in <a href="http://udel.edu/%7Epollack/Downloaded%20SDP%20articles,%20etc/academic%20articles/The%20First%20National%20Income%20Tax%2012-18-2013.pdf">1864 tax rates were raised</a>. The modified tax bill also introduced a third income bracket. People earning $600 up to $5,000 now paid 5 percent, those earning $5,000 to $10,000 paid 7.5 percent and the wealthiest, those earning over $10,000, paid 10 percent. </p>
<p>The income tax raised quite a bit of money. In 1866 <a href="http://udel.edu/%7Epollack/Downloaded%20SDP%20articles,%20etc/academic%20articles/The%20First%20National%20Income%20Tax%2012-18-2013.pdf">it brought in over $73 million</a>, which was about one-fifth of the federal government’s total revenues.</p>
<h2>The mother of all tax cuts</h2>
<p>The Civil War ended in 1865, and the costs to pay for the war began to wind down shortly thereafter. </p>
<p>Like today, the income tax was not popular, and so <a href="https://babel.hathitrust.org/cgi/pt?id=hvd.hl4ogc;view=1up;seq=13">Congress voted in 1870</a> to slash it. The bill immediately reduced income tax rates to 2.5 percent across the board – from as high as 10 percent – and raised the exemption to $2,000 from $600. Just two years later, all income taxes were eliminated entirely.</p>
<p>The income tax was not brought back <a href="http://businessmacroeconomics.com/">until 1894</a>.</p>
<p>At the moment, Trump’s ambitions are decidedly more modest, reducing today’s <a href="https://taxfoundation.org/2017-tax-brackets/">seven brackets</a>, ranging from 10 percent to 39.6 percent, to three brackets, 10 percent to 35 percent. While the increase in the standard deduction would help some, the elimination of popular itemized deductions such as state and local taxes would hurt others. </p>
<p>From what I can tell, the total elimination of the income tax is not on the table. That bar is the one Trump would need to beat to enact the “biggest tax cut we’ve ever had.”</p><img src="https://counter.theconversation.com/content/76773/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The bar for achieving that lofty goal was set almost 150 years ago when Congress cut taxes from as high as 10 percent to zero over two years.Jay L. Zagorsky, Economist and Research Scientist, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/760742017-04-12T00:38:17Z2017-04-12T00:38:17ZHow workers – not companies – are bearing the growing burden of government<p>Tax day is here once more, and <a href="http://theconversation.com/why-most-of-us-procrastinate-in-filing-our-taxes-and-why-it-doesnt-make-any-sense-39766">tens of millions of Americans will rush</a> to file their income taxes by this year’s deadline of April 18 (rather than April 15 <a href="http://time.com/money/4657921/when-are-taxes-due-2017/">for a variety of reasons</a>). </p>
<p>Although most of us probably identify the federal income tax with the revenue that ultimately fills the goverment’s coffers and allows it to spend our hard-earned cash, it actually makes up less than half of all revenue. What makes up the rest, and how those figures have changed in recent decades, <a href="http://www.pewresearch.org/fact-tank/2016/04/13/high-income-americans-pay-most-income-taxes-but-enough-to-be-fair/">is actually quite surprising</a>. </p>
<p>The <a href="https://www.gpo.gov/fdsys/search/pagedetails.action?collectionCode=BUDGET&granuleId=BUDGET-2017-TAB-3-1&packageId=BUDGET-2017-TAB&fromBrowse=true">official statistics</a> show that in the 1940s and 1950s, corporations picked up a major share of supporting the federal government. Today, it is taxes on workers that increasingly fund the military, entitlement programs, health care and other spending. </p>
<p>So as you prepare your taxes – at the same time that Congress and the Trump administration are gearing up to <a href="https://www.nytimes.com/2017/04/11/upshot/can-trump-and-congress-solve-the-rubiks-cube-of-tax-reform.html?_r=0">reform the tax code</a> – here’s a brief primer on how what you put on <a href="https://www.irs.gov/pub/irs-pdf/f1040.pdf">line 63</a> of your 1040 becomes a part of U.S. government revenue. </p>
<hr>
<iframe src="https://public.tableau.com/views/taxrevenue/Sheet1?:embed=y&:display_count=yes&:showVizHome=no&:embed=true" width="100%" height="600"></iframe>
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<h2>The income tax: Steady as she goes</h2>
<p>Since World War II the federal government’s revenue has come from four main sources.</p>
<p>The first place is individual income taxes. The U.S. has continuously had a <a href="https://www.irs.gov/uac/historical-highlights-of-the-irs">personal income tax</a> since 1913, when the 16th Amendment was ratified by two-thirds of the states. Prior to that, an individual income tax was deemed unconstitutional and most government revenue came from <a href="https://www2.census.gov/library/publications/1975/compendia/hist_stats_colonial-1970/hist_stats_colonial-1970p2-chY.pdf">customs duties</a>. </p>
<p>The income tax takes not only a portion of wages but also money earned from interest, dividends, capital gains and other sources. In 1945, the personal income tax provided a bit over 40 percent of all federal government revenue. In 2015, the latest available figures, personal income taxes provided 47 percent of revenue. This is a relatively small rise compared to the dramatic changes in the other three categories. </p>
<p>The wealthiest Americans pay most of this tax, with individuals with adjusted incomes of US$250,000 or more (2.7 percent of filers in 2014) <a href="http://www.pewresearch.org/fact-tank/2016/04/13/high-income-americans-pay-most-income-taxes-but-enough-to-be-fair/">covering 51.6 percent of the tab</a>. Those with incomes of less than $50,000 (62.3 percent of filers) paid 5.7 percent of federal income taxes that year.</p>
<h2>Companies bearing less of the burden</h2>
<p>The second category is corporate income taxes, which <a href="https://taxfoundation.org/house-gop-s-destination-based-cash-flow-tax-explained/">may be changed drastically</a> in coming months if some Republicans have their way. </p>
<p>These taxes take a portion of <a href="http://businessmacroeconomics.com/">businesses’ profits</a>. Many corporate leaders <a href="https://www.nytimes.com/2016/02/04/business/dealbook/walmart-sues-puerto-rico-claiming-an-unfair-and-onerous-tax-burden.html">complain bitterly about the taxes</a> they pay, pointing to the fact that the statutory rate is the <a href="https://taxfoundation.org/corporate-income-tax-rates-around-world-2016/">third-highest</a> in the world at 39 percent. </p>
<p>Nevertheless, many corporations have become quite <a href="http://www.itep.org/corporatestudy/">skilled at avoiding taxes</a>, meaning the effective rate they actually pay is considerably less, or an average of <a href="https://www.cbo.gov/sites/default/files/115th-congress-2017-2018/reports/52419-internationaltaxratecomp.pdf">19 percent</a> in 2012. As a result, overall businesses’ funding of the federal government has fallen dramatically since 1945. Back then, corporations provided over one-third of all federal revenue. In 2015, the figure was a bit over 10 percent, a three-fold reduction.</p>
<p>I’ll leave it to the reader to determine what to make of this fact as Congress considers lowering how much companies are taxed in coming years.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/164935/original/image-20170411-26726-1w68gut.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/164935/original/image-20170411-26726-1w68gut.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/164935/original/image-20170411-26726-1w68gut.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/164935/original/image-20170411-26726-1w68gut.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/164935/original/image-20170411-26726-1w68gut.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/164935/original/image-20170411-26726-1w68gut.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/164935/original/image-20170411-26726-1w68gut.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">It’s tax time, so get those pens and pencils ready.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/download/success?src=CwteClCts5C_LiQp_fTSFg-1-3">Tax forms via www.shutterstcok.com</a></span>
</figcaption>
</figure>
<h2>Taxing workers</h2>
<p>The third category is social insurance taxes. These are the taxes that pay for <a href="https://www.ssa.gov/">Social Security</a> and <a href="https://www.medicare.gov/">Medicare</a>. </p>
<p>They are what some people see listed on paystubs as FICA, which stands for <a href="https://faq.ssa.gov/link/portal/34011/34019/Article/3815/What-are-FICA-and-SECA-taxes">Federal Insurance Contributions Act</a> taxes. They are also called payroll taxes because they affect only people who are working, or on payrolls. In addition, since the Social Security <a href="https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/fica-social-security-tax-2017.aspx">tax affects only</a> the first $127,200 in income, middle- and lower-income Americans pay a larger share of this. </p>
<p>So even among people who earn so little income that they owe no federal income taxes, <a href="http://www.factcheck.org/2012/09/dependency-and-romneys-47-percenters/">most still had to pay payroll taxes</a>, as well as other levies. In fact, the vast majority of American families <a href="https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/Distribution-of-Tax-Burden-Administration-Policy-2017.pdf">pay more in FICA</a> than in federal income taxes. For example, the 17 million families in the fifth quintile of incomes are estimated to pay a total of $80 billion in payroll taxes in the current fiscal year but only $21 billion in federal income taxes. </p>
<p>In 1945, the government got less than 10 percent of its revenue from these sources. The amount and the <a href="https://www.ssa.gov/oact/progdata/taxRates.html">underlying tax rates</a> have risen dramatically over time. Today one-third of the U.S. government’s revenue comes from FICA, a four-fold growth. During the Great Recession, social insurance taxes reached a peak of 42 percent of all federal revenues.</p>
<p>In general, these taxes are <a href="https://www.ssa.gov/policy/docs/ssb/v75n1/v75n1p1.html">earmarked</a> to pay for the entitlements. And part of the growth has happened because of the <a href="http://www.nbcnews.com/id/29861648/ns/politics-capitol_hill/t/how-tax-burden-has-changed/#.WO0Q02e1taQ">addition of Medicare in the mid-1960s</a>. Another reason is that people in the U.S. are <a href="https://www.washingtonpost.com/national/health-science/us-life-expectancy-declines-for-the-first-time-since-1993/2016/12/07/7dcdc7b4-bc93-11e6-91ee-1adddfe36cbe_story.html?utm_term=.162964dce1b1">living longer today</a> than in the 1940s. This means the social security system has to support retirees for longer periods of time. </p>
<h2>Sinking excise taxes</h2>
<p>Finally, we come to excise and other taxes.</p>
<p>Excise revenues are money from taxing things like <a href="https://www.irs.gov/businesses/small-businesses-self-employed/excise-tax">gasoline</a>, <a href="https://www.ttb.gov/tax_audit/atftaxes.shtml">alcohol, tobacco</a> and telephone calls. Other taxes are revenue from sources like <a href="https://www.cbp.gov/travel/international-visitors/kbyg/customs-duty-info">customs duties</a> and <a href="https://www.irs.gov/pub/irs-soi/2015estatetaxonesheet.pdf">inheritance taxes</a>. </p>
<p>In the mid-1940s the government got about 16 percent of all revenue from this last group. Since then the figure has fallen and is now below 10 percent. Total revenue from this last category has increased steadily over time. Its share, however, has fallen primarily because income from the other sources has grown much faster.</p>
<h2>Why this matters</h2>
<p>Understanding these changes in the source of government revenue is important. And it’s quite surprising since most people focus their ire on the burden of income taxes each year. </p>
<p>Meanwhile Social Security and Medicare taxes are buried in paycheck stubs and rarely talked about. This leads many people to overlook these <a href="http://archive.fortune.com/2011/07/21/pf/stealth_taxes_impact.fortune/index.htm">stealth deductions</a> to their pay.</p>
<p><a href="http://www.nber.org/papers/w13745">Taxes discourage an activity</a> by either raising the cost of doing it or lowering the rewards.</p>
<p>Over time, the U.S. government’s tax policy has been shifting the burden of who pays to run the country <a href="https://www.nytimes.com/2016/04/14/opinion/the-real-welfare-cheats.html">from corporations to workers</a>. This benefits businesses and people who own shares in companies since they receive a larger share of profits. However, this discourages working. The rising importance of payroll taxes <a href="http://www.mitpressjournals.org/doi/abs/10.1162/003465300558623#.WO0E4me1taQ">reduces the incentive for people to work</a> more hours since the <a href="http://www.journals.uchicago.edu/doi/abs/10.1086/260246?journalCode=jpe">rewards are less</a>. And it even causes <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1465-7295.1977.tb00446.x/full">many people to retire early</a>.</p>
<p>This shift is troubling, and contrasts with a common refrain from Washington that hard work matters. To quote President Barack Obama’s introduction to his <a href="https://www.gpo.gov/fdsys/pkg/BUDGET-2013-BUD/pdf/BUDGET-2013-BUD-1.pdf">2013 budget</a>: </p>
<blockquote>
<p>“America was built on the idea that anyone who is willing to work hard and play by the rules can make it if they try – no matter where they started out.”</p>
</blockquote>
<p>It is a shame that this rhetoric does not match the federal government actions over time. Instead, the steady shift toward payroll taxes means politicians are increasingly <a href="https://www.gilderlehrman.org/history-by-era/immigration-and-migration/essays/history-times-nation-immigrants">penalizing the very foundation</a> on which the U.S. was built.</p><img src="https://counter.theconversation.com/content/76074/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As tax day approaches, here’s a primer on how your dollars help fund the U.S. government, and how your share has probably increased.Jay L. Zagorsky, Economist and Research Scientist, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/735312017-02-26T16:59:14Z2017-02-26T16:59:14ZSouth Africa needs to do more to plug its deficit than target the rich<figure><img src="https://images.theconversation.com/files/158278/original/image-20170224-32726-12suf30.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In an attempt to plug a growing deficit, South Africa is increasing wealth taxes</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Faced with a growing deficit, depressed revenue generators and a limited tax pool, South Africa’s finance minister, Pravin Gordhan, once again focused the tax increases on high income earners. By his own admission finding the right tax balance for the <a href="http://www.treasury.gov.za/documents/national%20budget/2017/">2017/18 budget</a> was a challenge.</p>
<p>South Africa is currently sitting with a deficit or shortfall of R28 billion – that’s by how much its spending plans outstrip its revenue. The minister has to find ways to plug the gap within the next two years. </p>
<p>Increased taxes are the most obvious and reliable source of government revenues. And so taxes had to be increased. But even within the tax space, the tax instruments available to the minister are limited because the country’s <a href="http://www.fin24.com/Economy/sas-low-economic-growth-shrinking-tax-base-20160209">tax base is limited</a>. </p>
<p>Of the 55 million people in South Africa, about 14 million are registered for tax and only 7.4 million are liable to tax, along with companies and trust. The other half of registered taxpayers fall outside the lowest tax bracket. Thus, from a direct income tax point of view only 14% of the population funds government expenditure, along with companies and trusts. </p>
<p>The trend to increase taxes on high income earners is in line with the progressive nature of the South African tax system. Its basic principle is, the higher you earn the more you will be taxed. Progressivity is a basic tenet of taxation and is applied worldwide – in developing and developed countries although more in some countries than in others. Economic inequality in South Africa makes this approach more important in the country.</p>
<p>But relying on tax increases – particularly on the wealthy – isn’t a sustainable solution on its own. Other ways of plugging the budget deficit would be to reduce or eliminate corruption and wasteful expenditure, and to cut government spending. The minister did emphasise the need to fight corruption, but he didn’t pronounce on any measures to reduce government expenditure.</p>
<h2>Squeezing high income earners</h2>
<p>This is not the first time the South African government has focused on high net worth individuals. Previous tax increases have targeted wealthy individuals who may not necessarily be high income earners. The focus in these cases has been on taxing events such as when assets are sold or dividends paid out or estate duties. </p>
<p>This time round the focus was on high income earners. The taxes the minister outlines come in different forms and shapes. These were the main ones:</p>
<p><strong>Personal income tax</strong></p>
<p>The highest rate of personal income tax for income above R1.5 million per year has been increased from 41% to 45%. This will affect about 100 000 taxpayers. It is expected to raise R4.4 billion in revenue in the 2017/2018 financial year. </p>
<p>High income earners face the biggest hike. But other income earners will be affected too. The minister tried to soften the blow for low and middle income earners by adjusting increases for their taxable income to account for inflation. Despite this, the net effect is that they will still be worse off.</p>
<p><strong>Withholding tax on dividends</strong></p>
<p>The withholding tax on dividends has been increased from 15% to 20%. This is a tax on dividends paid to residents and non-residents as well as corporates. Non-residents in countries with which South Africa has tax treaties will get relief from the tax. This tax won’t bring in much revenue as it will only affect the small number of people rich enough to own shares in companies – the same group of people who are likely to be affected by the 45% marginal personal income tax rate. In fact, the rate has been increased to discourage taxpayers who prefer to receive dividends as opposed to normal income. The increase is expected to raise R6.8 billion in revenue. </p>
<p><strong>Excise duties</strong></p>
<p>These taxes are the “feel-good-to-increase” taxes. They tend to be seen as trying to change bad behaviour such as alcohol abuse, smoking and indulgence in unhealthy foods. The truth, however, is that their primary purpose is to raise revenue. These taxes have been increased by more than inflation and are expected to bring in revenue of about R2 billion.</p>
<p><strong>Fuel levy</strong></p>
<p>The hike in the fuel levy will hit both the rich and the poor, although the poor will obviously feel it the worst. Fuel levies are passed onto consumers through higher fuel prices and higher transport prices. This increase is expected to bring in revenue of about R3.2 billion. </p>
<p><strong>Capital Gains Tax</strong></p>
<p>An increase in capital gains tax for companies and individuals was announced in 2016 to take effect in 2017. This tax applies to gains made on the disposal of capital assets such as a house and shares. The rate has been increased from 18.65% to 22.4% for companies and from 13.65% to 16.4% for individuals. The effect could be that taxpayers hold onto their assets rather than sell them.</p>
<p><strong>Value Added Tax (VAT)</strong></p>
<p>This remains unchanged at 14%. This is despite <a href="http://www.fin24.com/Budget/budget-2017-experts-share-tax-predictions-20170214-2">projections</a> that a 1 percentage point increase could generate between R15 billion and R20 billion per year. The rate was probably kept where it is because VAT isn’t a politically savvy tax to increase – it is a regressive tax, affecting the poor more than the rich. Also, an increase in VAT would increase inflation as companies would have to raise prices to collect the additional tax. This in turn would dampen already slow economic growth. </p>
<h2>Sustainable solutions</h2>
<p>By the minister’s own admission, continuing to raise the personal income tax burden over a long period could have negative consequences for growth and investment. On top of this, it’s not sustainable in the longer term simply to squeeze more and more out of taxpayers to fund government expenditure. The more they are squeezed, the more they are likely to resort to debt to maintain their lifestyles. There’s also the danger that people will simply revolt by finding ways not to pay tax.</p>
<p>What South Africa needs is a combination of economic growth and a reduction of expenditure – by tackling corruption as well as wasteful spending.</p><img src="https://counter.theconversation.com/content/73531/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thabo Legwaila does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In his 2017/18 budget speech, South Africa’s finance minister Pravin Gordhan opted to focus on taxing high income earners to find desperately needed money.Thabo Legwaila, Professor of Law, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.