tag:theconversation.com,2011:/us/topics/tax-deductions-16129/articlesTax deductions – The Conversation2023-11-21T12:13:10Ztag:theconversation.com,2011:article/2181362023-11-21T12:13:10Z2023-11-21T12:13:10ZAutumn statement: tax cuts could boost UK economy, but businesses also need more certainty<p>It’s the right time <a href="https://news.sky.com/story/rishi-sunak-promises-to-cut-taxes-as-autumn-statement-looms-13012154">to cut taxes</a> to grow the economy, according to Prime Minister Rishi Sunak. Both he and the chancellor have been discussing the “<a href="https://www.telegraph.co.uk/politics/2023/11/17/jeremy-hunt-interview-tax-cuts-autumn-statement-2023/">path to reducing the tax burden</a>” in recent days. </p>
<p>The government is set to make its autumn statement on its financial plans this week. With the UK tax burden at levels not seen <a href="https://news.sky.com/story/tory-public-service-pledges-and-corrective-measures-after-austerity-pushed-tax-burden-up-12972281#:%7E:text=Calculated%20as%20a%20share%20of,is%20not%20particularly%20heavily%20burdened.">since the 1940s</a>, Conservative party members have been increasingly calling for cuts ahead of the next general election.</p>
<p>Autumn statements aren’t always used to make major fiscal policy announcements. Last year’s statement provided an opportunity for a mini-budget and a raft of policy changes. But that was after <a href="https://theconversation.com/only-a-u-turn-by-the-government-or-the-bank-of-england-will-calm-uk-financial-markets-191523">the disastrous market reaction</a> to the package of unfunded tax cuts announced in September 2023 by Hunt’s predecessor Kwasi Kwarteng.</p>
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<a href="https://theconversation.com/emergency-budget-announcement-expert-reaction-to-new-uk-chancellors-attempt-to-calm-financial-markets-192669">Emergency budget announcement: expert reaction to new UK chancellor's attempt to calm financial markets</a>
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<p>This year, among expectations of <a href="https://theconversation.com/six-ways-the-upcoming-autumn-statement-could-affect-your-personal-finances-217854">personal finance issues</a> such as savings and pensions, the prospect of tax cuts has suddenly become a strong possibility. The chancellor has some unexpected “fiscal headroom” following <a href="https://theconversation.com/price-inflation-is-slowing-but-heres-why-it-still-feels-like-were-in-a-cost-of-living-crisis-218055">more favourable inflation figures</a> recently, and so it seems the government feels ready to announce tax changes sooner rather than later.</p>
<p>But given the government’s recent history of flip-flopping when it comes to business taxes, this week’s statement could provide the chance to take a firm stand in this area before the next general election.</p>
<h2>Extending ‘full expensing’</h2>
<p>The <a href="https://www.gov.uk/capital-allowances/annual-investment-allowance">Annual Investment Allowance</a> (AIA), and the threshold at which it’s charged, changed many times during the 2010s before settling at £1 million in 2020. This means companies can spend on new equipment and other capital costs up to this amount and deduct it from taxable profits each year. Before that, only a certain amount of capital spending could be fully claimed as a taxable allowance in the year of purchase.</p>
<p>When the government introduced full expensing in March 2023, it meant qualifying capital expenditures – including plant and machinery that would usually qualify for the “main rate” capital allowance of 18% – of any amount could be claimed in full as an allowance.</p>
<p>Full expensing was introduced as a way to encourage capital investment, and no doubt to soften the blow caused by <a href="https://www.theguardian.com/uk-news/2023/mar/12/hard-road-to-follow-for-uk-prosperity-says-jeremy-hunt-before-budget">a sharp increase</a> in the rate of corporation tax. It’s due to end in March 2026, but there is growing speculation that it could either be extended by one or two years, or become permanent. </p>
<p>This would be <a href="https://www.iod.com/news/uk-economy/iod-full-expensing-of-business-investment-very-welcome-to-drive-growth-urges-it-to-be-made-permanent/">welcomed by businesses</a>. It would be an opportunity to gain immediate tax savings from investments, rather than as a trickle over the years an asset is in use. It would also provide some stability, helping companies to plan. This hasn’t been easy in recent years when the government was constantly changing the AIA limit.</p>
<p>This seems like an unlikely vote-winner however, given that an extension to an existing allowance isn’t as instantly alluring as something like a new tax cut or increases to personal thresholds. </p>
<p>It also raises questions around what will happen after the next general election: if Labour forms the new government (as <a href="https://www.electoralcalculus.co.uk/prediction_main.html">recent polling</a> suggests could happen) would it be tempted to reverse this policy? It’s possible that Jeremy Hunt is thinking this could create a “wedge” issue that could draw away potential voters for any incoming Labour government that wants to appeal to business. </p>
<p>Since the chancellor has already <a href="https://www.theguardian.com/politics/2023/nov/19/jeremy-hunt-warns-against-fuelling-inflation-after-downplaying-income-tax-cuts?utm_term=655b13aa303588a628a7f5ce21fa5d27&utm_campaign=BusinessToday&utm_source=esp&utm_medium=Email&CMP=bustoday_email">pledged to avoid</a> any measures that could cause inflation, permanent full expensing could be the most businesses can hope for this autumn.</p>
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<img alt="Woman with glasses at a desk by a window, calculator, paper work, computer." src="https://images.theconversation.com/files/560491/original/file-20231120-16-2leoec.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/560491/original/file-20231120-16-2leoec.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/560491/original/file-20231120-16-2leoec.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/560491/original/file-20231120-16-2leoec.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/560491/original/file-20231120-16-2leoec.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/560491/original/file-20231120-16-2leoec.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/560491/original/file-20231120-16-2leoec.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">
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<span class="caption">Cutting business taxes could boost the economy but businesses need consistent messaging to plan.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/african-american-accountant-auditor-calculator-2039877848">Andrey_Popov/Shutterstock</a></span>
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<h2>Changing corporation tax</h2>
<p>One of the more startling elements of the Conservative government’s fiscal policy in recent years has been its change to the rate of corporation tax. This is the tax that all incorporated companies in the UK pay on their taxable profit, before dividends can be distributed to shareholders.</p>
<p>In 2010, George Osborne became the first Conservative chancellor for 13 years, and he set about <a href="https://commonslibrary.parliament.uk/research-briefings/sn05945/">significantly reducing</a> the headline corporation tax rate from 28% to 20% in 2016, followed by <a href="https://commonslibrary.parliament.uk/research-briefings/cbp-9178/">a further rate cut</a> to 19% in 2017. </p>
<p>In his 2021 budget, Rishi Sunak, appointed chancellor in 2020, made two significant announcements about this tax. First, that the main corporation tax rate would increase to 25% from April 2023. And while the short-lived Liz Truss-led government had planned to cancel this increase, it came to pass in 2023, as planned, after Jeremy Hunt took over as chancellor. </p>
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<a href="https://theconversation.com/corporation-tax-u-turn-why-the-latest-change-means-more-uncertainty-for-uk-business-192641">Corporation tax U-turn: why the latest change means more uncertainty for UK business</a>
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<p>Second, Sunak re-introduced a “small profits” tax rate, where companies that have annual taxable profits below £50,000 only incur a 19% corporation tax. Higher profits are taxed at a marginal rate of 26.5%, creating a tapered effect – that is, that a company’s effective tax rate would gradually increase if their profits also grow. The marginal rate exists for any profits up to £250,000 – any higher and everything incurs the 25% rate.</p>
<p>The government initially <a href="https://news.sky.com/story/budget-2023-corporation-tax-set-to-rise-from-19-to-25-in-april-12827274">justified the corporation tax increase</a> as a way to mitigate the loss of government revenue during COVID. But Truss and Kwarteng’s attempt to reverse the tax emphasised that increasing it is viewed by some in Conservative circles as a betrayal of the party’s low-tax philosophy.</p>
<p>Hunt may use the autumn statement for other measures that could gain broader voter support, but keeping the corporation tax rate the same will probably continue to frustrate MPs on the right of the Conservative party.</p><img src="https://counter.theconversation.com/content/218136/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gavin Midgley 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 UK government has recently indicated that it could make some surprise tax announcements in coming days.Gavin Midgley, Senior Teaching Fellow in Accounting, University of SurreyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1846412022-06-10T04:40:37Z2022-06-10T04:40:37ZDoes paying for tax advice save money? Only if you’re wealthy<figure><img src="https://images.theconversation.com/files/467652/original/file-20220608-24-8q96d0.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5738%2C2895&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>If you use a tax adviser to complete your income tax return you’re not alone. Australians use tax advisers more than any other nation <a href="https://www.aph.gov.au/%7E/media/02%20Parliamentary%20Business/24%20Committees/243%20Reps%20Committees/TaxRev/Tax%20Engagement%20Inquiry/Taxpayer%20Engagement%20-%20Final%20Report.pdf?la=en">apart from Italy</a>.</p>
<p>It’s easier, less stressful, gives you confidence the job is being done right and saves time.</p>
<p>But does it save you money? Our research says no – unless you’re one of Australia’s wealthiest individuals.</p>
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Read more:
<a href="https://theconversation.com/how-global-tax-dodging-costs-lives-new-research-shows-a-direct-link-to-increased-death-rates-152275">How global tax dodging costs lives: new research shows a direct link to increased death rates</a>
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<p>If you’re a typical wage earner, paying a tax adviser is likely to increase your final tax liabilities, even after you claim a tax deduction for the adviser’s fees.</p>
<p>In fact, after analysing 5 million individual tax returns over a four-year period, we’ve found tax advisers are more likely to act as “tax exploiters” for wealthy clients but “tax enforcers” for the rest of us.</p>
<p>For clients with annual taxable income more than A$180,000, whose financial affairs make tax rules complex or uncertain, tax advisers can help identify ways to save money. But for everyday wage earners they mostly ensure compliance with the tax rules.</p>
<h2>Greater benefit for the wealthy</h2>
<p>Our research is the first to explore this topic using the Australian Taxation Office’s <a href="https://alife-research.app/info/overview">ALife dataset</a>. This comprises a randomly selected (and anonymised) sample of 10% of all Australian taxpayers (about 1.4 million observations each year).</p>
<p>Analysing this data shows professional tax advice is very useful for the very wealthy to reduce their tax liabilities. Plus they get a tax deduction on paying for that advice.</p>
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<span class="caption">Tax advisers save time and stress for ordinary wage earners, but not money.</span>
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<p>Those on the highest levels of supplementary income – that is, business income, rental income, personal services income and income from partnerships and trusts – undertake more aggressive tax avoidance than individuals on lower incomes. </p>
<p>The more spent on tax professional services – and thus the higher the deduction – the more likely aggressive tax-avoiding behaviour.</p>
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Read more:
<a href="https://theconversation.com/explainer-the-difference-between-tax-avoidance-and-evasion-39777">Explainer: the difference between tax avoidance and evasion</a>
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<p>In effect, the tax deduction disproportionally helps the wealthy minimise their tax. </p>
<h2>Should the deduction remain?</h2>
<p>This raises an important question. Should the tax system provide generous tax deductions that only really benefit wealthy taxpayers in their efforts to pay as little tax as possible?</p>
<p>One solution would be do away with such tax deductibility altogether. </p>
<p>We propose, instead, a $3,000 cap on the amount that can be deducted for paying tax advisers. Currently there is no limit.</p>
<p>The Labor Party <a href="https://australiainstitute.org.au/wp-content/uploads/2020/12/P411-Cost-of-managing-tax-affairs-FINAL.pdf">proposed such a reform</a> in 2017, under Anthony Albanese’s predecessor Bill Shorten. </p>
<p>The Australia Institute supported this <a href="https://australiainstitute.org.au/wp-content/uploads/2020/12/P411-Cost-of-managing-tax-affairs-FINAL.pdf">with research</a> showing only those with incomes higher than $500,000 were likely to be affected by the $3,000 cap. The average (mean) deduction for tax advice was $378, and the median deduction just $165. </p>
<p>Prior to the 2019 election the Parliamentary Budget Office <a href="https://www.aph.gov.au/-/media/E8016D9FAFC6486AA95C8E90CC5F34A2.ashx">estimated the cap</a> would save about $120 million a year, rising to $130 million a year in 2022-23. After Shorten’s election loss, however, the policy was dropped.</p>
<h2>Maintaining integrity</h2>
<p>Of course, there is always a danger with such reforms that taxpayers and their advisers will look for ways around the new rules. </p>
<p>Our <a href="https://theconversation.com/yes-some-millionaires-pay-no-tax-but-crimping-deductions-mightnt-help-139279">previous research</a> indicates tax advisers may look to get around the deductions cap by shifting the expense to other line items in an income tax return. </p>
<p>For example, instead of claiming tax advisory fees on a wealthy taxpayer’s personal tax return, they might allocate the fees to a related entity, such as a trust or company controlled by that individual. </p>
<p>But this is not an insurmountable issue. There are ways to prevent such manipulation through so-called “ring-fencing” rules.</p>
<p>Nothing needs to change for those of us who use a tax adviser for the convenience and certainty.</p><img src="https://counter.theconversation.com/content/184641/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors 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>Tax advisers are more likely to act as “tax exploiters” for wealthy clients but “tax enforcers” for the rest of us.Youngdeok Lim, Senior Lecturer, Accounting, UNSW SydneyAnn Kayis-Kumar, Associate Professor, UNSW SydneyChris Evans, Professor, School of Taxation & Business Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1765162022-02-06T11:30:41Z2022-02-06T11:30:41ZAustralia is seeing a ‘great reshuffle’ not a ‘great resignation’ in workforce: Frydenberg<p>The Morrison government will ensure COVID tests are tax deductible for workers and exempt from fringe benefits tax for businesses when purchased for work-related purposes.</p>
<p>Treasurer Josh Frydenberg will announce on Monday that the government will remove uncertainty around the tax treatment of these tests, including PCR tests and RATs.</p>
<p>This will require legislation which will be backdated to July last year.</p>
<p>He will also announce the Productivity Commission’s second five yearly productivity review will develop a map for reforms to improve productivity as the country comes out of COVID.</p>
<p>In a speech to the Australian Industry Group Frydenberg says Australia’s labour market is experiencing a “great reshuffle”, in contrast to the “great resignation” that has happened in the United States and other advanced economies.</p>
<p>“Treasury analysis shows that over one million workers started new jobs in the three months to November 2021. The rate at which people are taking up new jobs is now almost 10% higher than the pre-COVID average.</p>
<p>"In the last three months, a record number of around 300,000 workers say they left a job because they were looking for better job opportunities,” Frydenberg says in his speech, released ahead of delivery. The pick up in switching has been across all industries.</p>
<p>“Switching jobs allows workers to move up the job ladder for better pay,” with Treasury’s analysis based on single touch payroll data showing workers who moved jobs typically had pay increases of 8-10%.</p>
<p>“They also move to more productive firms, helping those firms grow.”</p>
<p>In the US 2.8 million fewer people are employed than pre-pandemic, with participation rates there and in the UK, Canada, Japan and Italy now lower than before COVID. In contrast, Australia’s participation rate is near its record high.</p>
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Read more:
<a href="https://theconversation.com/view-from-the-hill-aged-care-residents-are-paying-for-lessons-not-learned-fast-enough-176472">View From The Hill: Aged care residents are paying for lessons not learned fast enough</a>
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<p>Frydenberg predicts that as the Omicron peak passes, “we will again see the economy surge ahead”.</p>
<p>He also says it is now time to “draw some clear lines in the sand”.</p>
<p>He acknowledges there will be problems with workforce shortages, supply chain disruptions and the return of higher inflation.</p>
<p>But “now is the time to start confidently moving back towards normalised economic settings.</p>
<p>"It is time to let businesses get back to business. Time to get people back safely to our CBDs, back moving freely around their communities.</p>
<p>"And it is time for the private sector, who have taken the baton, to continue to run hard,” Frydenberg says.</p>
<p>“The economy simply cannot be conditioned to the level of unprecedented support that has been required over the last two years.</p>
<p>"This level of government intervention must not become entrenched and become a permanent feature of our system. Continued support at crisis levels would do more economic harm than good.”</p><img src="https://counter.theconversation.com/content/176516/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan 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 Morrison government will ensure COVID tests are tax deductible for workers and exempt from fringe benefits tax for businesses when purchased for work-related purposes.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1450272020-09-02T05:45:31Z2020-09-02T05:45:31ZLet working graduates claim a tax deduction for their HECS-HELP debt<figure><img src="https://images.theconversation.com/files/355730/original/file-20200901-18-hxohb8.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4902%2C3258&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-attractive-desperate-woman-suffering-stress-435542989">Shutterstock</a></span></figcaption></figure><p>Most graduates leaving university today do so with a massive debt hanging over their heads. They will take many years to repay their accrued HECS-HELP debt through the taxation system. There will be little relief for these graduates as the government has slammed the door shut on the tax deductibility of their tuition costs against the income they earn as a result. </p>
<p>The government also intends, for new students from 2021, to increase the amount many students pay towards their education. Popular courses such as humanities, commerce and law will <a href="https://www.dese.gov.au/document/better-university-funding-arrangements-reducing-complexity-and-targeting-job-ready">cost them A$14,500 a year</a>. A combined commerce/law or arts/law course, which are the most popular study choices for aspiring lawyers, will cost them over A$70,000.</p>
<p>The government constantly reminds us government-supported students’ <a href="https://www.studyassist.gov.au/help-loans/hecs-help">HECS-HELP</a> debts are deferred. Only when they reach the annual income threshold (<a href="https://www.studyassist.gov.au/paying-back-your-loan/loan-repayment#:%7E:text=The%20compulsory%20repayment%20threshold%20is,(ATO)%20at%20any%20time.">A$45,881 for 2019-20</a>) do they start repaying their debt. </p>
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Read more:
<a href="https://theconversation.com/lowering-the-help-repayment-threshold-is-an-easy-target-but-not-the-one-we-should-aim-for-94910">Lowering the HELP repayment threshold is an easy target, but not the one we should aim for</a>
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<p>The underlying rationale is that students are receiving an interest-free loan, as the HECS-HELP debt is only <a href="https://www.studyassist.gov.au/paying-back-your-loan/loan-indexation#:%7E:text=There%20is%20no%20interest%20charged,they%20are%2011%20months%20old.">indexed to inflation</a> (CPI, which measures cost-of-living increases). HECS-HELP provides eligible students with a loan to pay their student contribution for a Commonwealth-supported place in their chosen course. </p>
<p>Another scheme exists for those students not eligible for a Commonwealth-supported place. This is called FEE-HELP. These students receive a loan to pay tuition fees for units of study in their chosen course. A FEE-HELP debt is also indexed each year. </p>
<p>Graduates repay these HELP debts if and when their earnings rise above the threshold. </p>
<p>However, as explained below, postgraduate students with a FEE-HELP loan can claim a tax deduction for their tuition fees.</p>
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Read more:
<a href="https://theconversation.com/students-low-financial-literacy-makes-understanding-fees-loans-debt-difficult-45088">Students' low financial literacy makes understanding fees, loans, debt difficult</a>
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<h2>Two student loan schemes, two different rules</h2>
<p>The usual rule for taxpayers is that expenses incurred in earning assessable income are deductible. Taxpayers can <a href="https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Education-and-study/">claim self-education expenses</a>, which includes undertaking university courses, where they are able to show the study is connected with their income-earning activity. These deductible expenses include tuition fees which can be paid through the <a href="https://www.studyassist.gov.au/help-loans/fee-help">FEE-HELP</a> scheme. </p>
<p>In contrast to <a href="https://www.education.gov.au/higher-education-administrative-information-providers-march-2020/31-fee-help#:%7E:text=Students%20may%20be%20eligible%20for,tuition%20fees%2C%20contact%20the%20ATO.">FEE-HELP tuition costs being deductible</a>, student debt under the HECS-HELP scheme has specifically been rejected as a tax deduction under <a href="http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s26.20.html">section 26-20 of the Income Tax Assessment Act 1997</a>. These students are unable to claim a tax deduction for their university fees regardless of whether they are earning relevant income during their course or when they get a job as a graduate after completing their course. </p>
<p>Graduates start paying income tax on amounts above the normal tax-free threshold of A$18,200 but may not actually earn above the HECS-HELP threshold amount. On this basis graduates may be paying their fair share of tax on their income, but their HECS-HELP debt continues to grow over time. When graduates reach the threshold, they start paying both income tax and repayments of their HECS-HELP debt. In short, there is no tax relief for graduates.</p>
<p>The inequity between graduates and other taxpayers becomes clearer when you consider the additional self-education expenses these other taxpayers can claim. If already working within their chosen job and studying part-time, but not confined by the HECS-HELP tag, they can claim for textbooks, student union fees, computer expenses, internet costs for online learning and stationery. </p>
<p>Crucially, FEE-HELP recipients can also claim for the cost of their tuition fees. Once they reach an income threshold, their debt is also <a href="https://www.studyassist.gov.au/paying-back-your-loan/loan-repayment">repaid through the taxation system</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/five-things-senators-and-everyone-else-should-know-about-changes-to-help-debts-84843">Five things senators (and everyone else) should know about changes to HELP debts</a>
</strong>
</em>
</p>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/355732/original/file-20200901-22-194dyuv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Young woman with calculator smiling as she looks at laptop screen." src="https://images.theconversation.com/files/355732/original/file-20200901-22-194dyuv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/355732/original/file-20200901-22-194dyuv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=430&fit=crop&dpr=1 600w, https://images.theconversation.com/files/355732/original/file-20200901-22-194dyuv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=430&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/355732/original/file-20200901-22-194dyuv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=430&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/355732/original/file-20200901-22-194dyuv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=540&fit=crop&dpr=1 754w, https://images.theconversation.com/files/355732/original/file-20200901-22-194dyuv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=540&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/355732/original/file-20200901-22-194dyuv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=540&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Come tax time, students with FEE-HELP debts are smiling compared to those with HECS-HELP debts.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/portrait-smiling-young-woman-calculating-finance-166290524">Shutterstock</a></span>
</figcaption>
</figure>
<h2>Treat all self-education expenses equally</h2>
<p>It is time to revisit the tax deductibility of HECS-HELP repayments. The current regime is complex, difficult to comprehend and has inbuilt inequities. The basic rule of tax deductibility should apply across the board, regardless of what type of support the government is providing to university students. </p>
<p>If we accept the arguments from the government that full-time students are receiving interest-free loans for their education and that the debt is deferred until they earn above the threshold, then there is an equally strong argument that graduates should then be able to defer, until that time, a tax deduction for the payment.</p>
<p>The general rule that a tax deduction is allowed to a taxpayer for expenses directly incurred in deriving income should apply to all relevant taxpayers. All taxpayers should be treated equally when spending on self-education. There should be no distinction between students receiving different types of HELP from the government.</p>
<p>At the moment undergraduate students tend to receive HECS-HELP while postgraduate students tend to receive FEE-HELP. These postgraduate students can immediately claim the cost of their tuition fees as a tax deduction even when this is funded through the FEE-HELP loan. This is because postgraduates are normally working in their chosen field and satisfy the necessary link between expense and income earned.</p>
<p>Undergraduate students tend to be studying full-time and working in casual jobs, which are not relevant to their studies. Students in this situation would not be able to claim their fees as a tax deduction regardless of the HECS-HELP tag. It would be equitable to amend the Tax Act to allow graduates to claim deductions for their tuition costs later when they are working in their chosen field.</p>
<hr>
<p><em>Correction: This article has been corrected to clarify that FEE-HELP recipients can claim a tax deduction on tuition fees even when this cost is funded through FEE-HELP, but not on repayments of the loan.</em></p><img src="https://counter.theconversation.com/content/145027/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael William Blissenden 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>Taxpayers, including those paying tuition fees with FEE-HELP loans, can claim a deduction for self-education expenses that relate to the work they do. But graduates with a HECS-HELP debt can’t claim.Michael William Blissenden, Professor of Law, University of New EnglandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1392792020-07-12T19:59:38Z2020-07-12T19:59:38ZYes, some millionaires pay no tax, but crimping deductions mightn’t help<figure><img src="https://images.theconversation.com/files/346838/original/file-20200710-26-ntfq4h.jpg?ixlib=rb-1.1.0&rect=161%2C622%2C3622%2C1532&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://unsplash.com/@thepeoplesdigital">Fiona Smallwood/Unsplash</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>For some people tax time will result in no tax paid this year, and if past years are anything to go by, <a href="https://www.smh.com.au/politics/federal/meet-the-48-millionaires-who-pay-no-income-tax-not-even-the-medicare-levy-20170419-gvnkxh.html">about 50 of them</a> will be millionaires.</p>
<p>Not mere millionaires, but millionaires earning more than A$1 million per year.</p>
<p>For some of these 50 or so very high earners, managing tax will be expensive. The two dozen or so that typically claim deductions for the “cost of managing tax affairs” claim an average of about <a href="https://www.smh.com.au/politics/federal/tax-stats-meet-the-56-millionaires-who-pay-next-to-nothing-20160321-gnndna.html">$1.7 million each</a>.</p>
<p>It might have been with this in mind that during last year’s election campaign Labor promised to cap the size of the deduction people could claim for “managing tax affairs”. The proposed cap was <a href="https://web.archive.org/web/20190518084803/https://www.alp.org.au/policies/deduction-cap-for-managing-tax-affairs/">$3,000</a>.</p>
<p>Tax agents would still be able to charge more than $3,000 – a lot more if they want to, even an additional million or more – but their clients would only be able to deduct $3,000 of it from their income when submitting their tax return.</p>
<h2>Labor wanted to cap deductions</h2>
<p>The rationale was straightforward: if people are claiming over $1 million in deductions on money spent managing their taxes, then putting a ceiling on those deductions ought to stop it.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/346803/original/file-20200710-54-ndaar6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/346803/original/file-20200710-54-ndaar6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/346803/original/file-20200710-54-ndaar6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=970&fit=crop&dpr=1 600w, https://images.theconversation.com/files/346803/original/file-20200710-54-ndaar6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=970&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/346803/original/file-20200710-54-ndaar6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=970&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/346803/original/file-20200710-54-ndaar6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/346803/original/file-20200710-54-ndaar6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/346803/original/file-20200710-54-ndaar6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Labor leader Bill Shorten wanted to cap the deduction for the cost of managing tax affairs at $3,000.</span>
<span class="attribution"><span class="source">DAVID CROSLING/AAP</span></span>
</figcaption>
</figure>
<p>Not so fast.</p>
<p>Often in tax we plug holes quickly rather than stepping back and looking at the whole system and its interactions. And then we have to plug another one.</p>
<p>The question to ask first is whether capping this individual line item would prevent or move the leakage.</p>
<p>We went to the source by conducting a <a href="https://www.taxinstitute.com.au/tiausttaxforum/to-cap-or-not-to-cap-policy-options-for-dealing-with-the-costs-of-managing-tax-affairs-deduction-in-australia">nationwide survey</a> of Australia’s most senior tax professionals to glean their perspectives.</p>
<p>Our findings reflect the views of people who, to paraphrase <a href="https://inews.co.uk/culture/well-he-would-wouldnt-he-bbcs-the-trial-of-christine-keeler-gets-famous-quote-right-374825">Mandy Rice Davies</a>, “would say that, wouldn’t they”.</p>
<h2>It might not have worked</h2>
<p>Nonetheless, the detail of what they told us was surprising.</p>
<p>Here’s what they said.</p>
<ul>
<li><p>Most of the targets would be unaffected. They would be able to switch their deductions into associated corporate entities. This interchangeability of personal and corporate tax deductions highlights the importance of considering the system as a whole.</p></li>
<li><p>Because of this it might, counter-intuitively, have the opposite effect to what was intended, creating a saturation where the truly wealthy could escape the cap, but those of lesser means could not.</p></li>
<li><p>A better solution would be for the tax office to conduct more tax audits. Studies suggest the decisions of high wealth individuals to engage in aggressive tax planning practices are <a href="https://www.researchgate.net/publication/321052694_Tax_malfeasance_of_high_net-worth_individuals_in_Malaysia_tax_audited_cases">strongly</a> <a href="https://www.ibfd.org/sites/ibfd.org/files/content/pdf/aptb-versionAug2012.pdf">influenced</a> by the probability of being selected for audit.</p></li>
<li><p>There are definitional ambiguities in relation to the subcomponents of the deduction that make it hard to work out what is going on. Sometimes “litigation” includes tax planning, other times it does not. “Other” is a grab bag that can include <a href="https://www.ato.gov.au/Individuals/Tax-return/2020/Tax-return/Deduction-questions-D1-D10/D10-Cost-of-managing-tax-affairs-2020/">software costs, travel costs and reference material</a>. It would help if the tax office provided guidance.</p></li>
<li><p>High wealth individuals often employ tax advisers to cope with complexity and uncertainty of the tax system rather than to reduce tax.</p></li>
</ul>
<p>As we said, you are welcome to consider the possibility that the observations of the tax professionals are self-serving, but their overwhelming embrace of more tax audits and their pleas for the tax law to be easier to understand also suggest a keenness to ensure that taxpayers do the right thing.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/be-careful-what-you-claim-for-when-working-from-home-there-are-capital-gains-tax-risks-141364">Be careful what you claim for when working from home. There are capital gains tax risks</a>
</strong>
</em>
</p>
<hr>
<p>Labor’s proposal to cap the deduction for the cost of managing tax affairs at $3,000 (when for most people the deduction is <a href="https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Taxation-statistics/Taxation-statistics-2016-17/?anchor=Individuals#Table6">closer to $300</a>) was understandable, although it might not have worked as intended.</p>
<p>It was a reminder of the oft-quoted maxim that for every problem there is a solution that is simple, neat – and wrong.</p>
<hr>
<p><em>For further details, please see: Kayis-Kumar A, Evans C and Lim Y, <a href="https://www.taxinstitute.com.au/tiausttaxforum/to-cap-or-not-to-cap-policy-options-for-dealing-with-the-costs-of-managing-tax-affairs-deduction-in-australia">To cap or not to cap? Policy options for dealing with the costs of managing tax affairs deduction in Australia</a> (2020) 35(2) Australian Tax Forum.</em></p><img src="https://counter.theconversation.com/content/139279/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors 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>Some tax deductions for the cost of managing tax affairs exceed $1 million, but high wealth individual\s can write off the expense in other ways.Ann Kayis-Kumar, Associate Professor, UNSW SydneyChris Evans, Professor, School of Taxation & Business Law, UNSW SydneyYoungdeok Lim, Senior Lecturer, Accounting, UNSW SydneyLicensed 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>
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<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>
</strong>
</em>
</p>
<hr>
<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/1097032019-01-15T00:35:31Z2019-01-15T00:35:31ZDonating to charities shouldn’t result in tax breaks<figure><img src="https://images.theconversation.com/files/253297/original/file-20190110-43510-4ge53a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's time to seriously rethink giving tax breaks for charitable donations, since ultimately taxpayers foot the bill for the deductions anyway.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>My smartphone is finally cooling off. It all started three weeks before Black Friday, in late November. Because I make most of my charitable contributions through a website, I need to offer my email address to receive a tax receipt. This has led to a proliferation of retailers and charitable organizations alike seeing me as fair game.</p>
<p>Weeks before Black Friday, I started to receive notices about “Black Friday in October.” Then when December arrived, I experienced increasingly persistent messages that I had only so many days “to make a donation to receive a tax receipt.”</p>
<p>The din continued until Dec. 31 as my phone became almost too hot to handle from the incoming barrage. Then all was quiet.</p>
<p>It’s my fault, of course. I could simply make out a cheque and mail it to the charities of my choice, but online giving is too easy. And getting immediate tax receipts via email allows me to easily corral all of the information to receive my just rewards in the form of a reduced tax bill.</p>
<h2>Are charity deductions a bribe?</h2>
<p>But as tax season approaches, now is a good time to ask whether it’s sound policy to offer what could be considered a bribe of reduced taxes in exchange for donating to charity. What are the positives and negatives from such a policy? What would be the effect of eliminating these tax benefits?</p>
<p>For every dollar I donate to an eligible charity, I get about 20 to 25 cents in the form of a tax refund. But the dirty little secret is that all taxpayers, including me, must make up these 25 cents through increased taxes.</p>
<p>And so, like all tax benefits, the charitable tax credit raises the overall tax burden.</p>
<p>Whenever government adjusts taxation rules to offer a deduction or credit, economists call this a “tax expenditure” to distinguish it from the direct expenditures authorized by treasury boards.</p>
<p>Just like any public spending, the taxpayer finances these tax expenditures. The more generous the relief granted for charitable donations, the more onerous becomes the tax burden.</p>
<p>Just how much money is involved? Last year the Canadian federal government made $289 billion in <a href="https://www.fin.gc.ca/taxexp-depfisc/2017/taxexp1702-eng.asp">tax expenditures</a>, of which $6.1 billion were the tax benefits associated with charitable donations. </p>
<p>This may seem a pittance in the big picture, but we need to delve deeper. Canada incurs much of its tax expenditures by giving up tax rights to provinces; this accounts for about $56 billion. The basic personal exemption accounted for $36 billon and the credits for investing in various registered savings plans cost the Canadian taxpayer $89 billion in lost tax revenues.</p>
<h2>Money could have alternate uses</h2>
<p>A better basis for comparison among tax expenditures is the GST exemptions on things like child care and tuition, which accounted for $5.7 billion in 2017. Among the direct expenditures, Canada’s public broadcaster, the CBC, has a budget of about $1.2 billion, the Department of Defence consumes $20 billion and the federal government spends $3.5 billion on the RCMP.</p>
<p>In this context, the $6 billion the federal government gives up because we make charitable contributions could have many alternate uses. So what’s the value of stimulating and encouraging charitable donations?</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/253296/original/file-20190110-43507-bocg22.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/253296/original/file-20190110-43507-bocg22.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=249&fit=crop&dpr=1 600w, https://images.theconversation.com/files/253296/original/file-20190110-43507-bocg22.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=249&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/253296/original/file-20190110-43507-bocg22.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=249&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/253296/original/file-20190110-43507-bocg22.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=313&fit=crop&dpr=1 754w, https://images.theconversation.com/files/253296/original/file-20190110-43507-bocg22.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=313&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/253296/original/file-20190110-43507-bocg22.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=313&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Giving tax deductions for charitable donations should be relegated to the past. Donors will likely give anyway, and taxpayers have to foot the bill for the deductions.</span>
<span class="attribution"><span class="source">Rawpixel/Unsplash</span></span>
</figcaption>
</figure>
<p>When we donate to charities, we directly support a favoured cause at a discount. And perhaps the incentive of a tax credit may induce more giving. However, here’s the kicker: <a href="https://warwick.ac.uk/fac/soc/economics/staff/blockwood/giving-givers-130717.pdf">Recent research</a> suggests that most of us give not for the tax break, but the “warm glow.” And so it may be unnecessary to offer a tax reduction to stimulate charitable donations. </p>
<p>Because we all share in the burden of tax credits, we are unwittingly supporting charities we either do not care about or whose goals we don’t share. Sometimes charities appear to support a cause when masking a completely different goal. I recall the shock at seeing gun manufacturers’ displays at the annual show of Ducks Unlimited.</p>
<h2>Tax advantage is highlighted</h2>
<p>Many appeals from charities stress the tax advantage to the donor, tainting an altruistic act with selfishness.</p>
<p>The tax credit may also encourage charities and non-profits to become lazy, relying more on the lure of tax credits than showing donors their impact. With few exceptions, non-profits do not routinely subject their investments to independent audits to measure impact or report donation efficiency.</p>
<p>One recent counter-example is the Bill and Melinda Gates Foundation that appears to have spent almost half a billion U.S. dollars to <a href="https://www.businessinsider.com/bill-melinda-gates-foundation-education-initiative-failure-2018-6">improve teaching effectiveness</a> and failed.</p>
<p>Most of the big guns in Canada’s charity industry issue glossy annual reports replete with anecdotes of how they spend your dollars, but few issue systematic and independent audits to show the net impact of the charity’s investments.</p>
<h2>Where do charity dollars actually go?</h2>
<p>Donation efficiency — the percentage of donations that translate to direct service — requires work to learn what percentage of total revenues actually flow to end uses. </p>
<p>For example, based on its most recent financial statements, the Canadian Cancer Society <a href="http://www.cancer.ca/en/about-us/financial-statements/?region=on">directed 53 per cent</a> of its revenue to research and programs, its stated purpose for raising funds in the first place. The remainder went to fundraising, administration and advocacy. </p>
<p>Contrast this to the Canadian Red Cross, where based on its most recent annual report, <a href="https://www.redcross.ca/about-us/about-the-canadian-red-cross/annual-reports-and-strategy">90 per cent of revenues flow to programs</a>. One charity I support has a donation efficiency of <a href="https://apps.cra-arc.gc.ca/ebci/haip/srch/t3010form22quickview-eng.action?&fpe=2017-12-31&b=118779081RR0001">85 per cent based on independent financial audits.</a> </p>
<p>Several countries — namely Austria, Finland, Ireland, Italy, Sweden and Switzerland — have removed tax benefits for charitable donations. </p>
<p>It is time for Canada to follow suit. My phone will be thankful.</p><img src="https://counter.theconversation.com/content/109703/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gregory C Mason receives funding from the Thorlakson Foundation for research into telemedicine and electronic health records.</span></em></p>Several countries — namely Austria, Finland, Ireland, Italy, Sweden and Switzerland — have removed tax benefits for charitable donations. Here’s why Canada should follow suit.Gregory C Mason, Associate Professor of Economics, University of ManitobaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/959452018-05-07T04:31:25Z2018-05-07T04:31:25ZFive ways the Treasurer could boost the budget bottom line<p>Treasurer Scott Morrison faces a difficult balancing act in the federal budget. He wants <a href="http://www.abc.net.au/news/2018-05-06/budget-2018-morrison-says-tax-cut-wont-be-mammoth/9732626">to cut income taxes</a>, deliver new <a href="https://theconversation.com/budget-policy-check-do-we-need-ribbon-cutting-infrastructure-for-jobs-and-growth-95362">infrastructure spending </a>and still reach a surplus by at least 2019. If he’s serious about maintaining the surplus, here are five ways the Treasurer could boost revenue to make the numbers work. </p>
<h2>1. Scrap age-based tax breaks</h2>
<p>Winding back tax breaks for older Australians could boost revenue by <a href="https://grattan.edu.au/report/age-of-entitlement/">A$700 million a year</a>. </p>
<p>Many seniors pay less than younger workers, on the same income, as a result of the <a href="https://www.ato.gov.au/Individuals/Income-and-deductions/Offsets-and-rebates/Senior-Australians/">Seniors and Pensioners Tax Offset</a> and a <a href="https://www.ato.gov.au/Individuals/Medicare-levy/Medicare-levy-reduction-for-low-income-earners/">higher Medicare levy income threshold</a>. Seniors currently do not pay tax until they earn A$32,279 a year, whereas younger households have an effective tax-free threshold of A$20,542. </p>
<p>These tax breaks – along with the introduction of <a href="https://grattan.edu.au/news/tax-free-super-is-intergenerational-theft/">tax-free superannuation</a> for retirees – have <a href="https://theconversation.com/why-every-generation-feels-entitled-70405">almost halved the proportion of older Australians</a> paying tax in the past 20 years.</p>
<p>For a start, the government could scale back the Seniors and Pensioners Tax Offset so that only pensioners qualify, while those with enough income to not qualify for a full Age Pension should pay some income tax. The higher Medicare levy income threshold for seniors should also be abolished. </p>
<h2>2. Better target the research and development tax incentive</h2>
<p>The government will forgo A$3.5 billion in revenue this year through the research and development tax incentive. Tightening eligibility could substantially reduce the cost of the scheme.</p>
<p>The research and development tax incentive was introduced in 2011 to encourage activities that otherwise would not be conducted, including by smaller firms. But the cost has blown out and there are concerns that <a href="http://www.afr.com/news/policy/tax/rd-tax-break-costs-significantly-more-than-forecast-20160211-gmr8sl">the scheme is being rorted</a>. The scheme now accounts for around one third of total government support for innovation. </p>
<p><a href="https://www.industry.gov.au/innovation/InnovationPolicy/Research-and-development-tax-incentive/Documents/Research-and-development-tax-incentive-review-report.pdf?_cldee=amJldmVyMUBrcG1nLmNvbS5hdQ%3d%3d&recipientid=contact-669db99d9af8e61180f8c4346bc4beac-20effeea5db14293b064208081f92d76&utm_source=ClickDimensions&utm_medium=email&utm_campaign=R%26D%20Email%20Campaign%20-%2031%20Jan%202018&esid=65ad6a3c-ee53-4c0a-b7a3-550b44b95e83">A 2016 review of the incentive</a> concluded the scheme could be made more sustainable by tightening the definition of eligible research and development. This includes an emphasis on novelty, capping the annual amount that is refundable in each year (as well as a lifetime cap) for smaller business, and making the scheme available only to larger businesses that allocate more than 1% of their total spending to research and development. </p>
<h2>3. Wind back negative gearing and reduce the capital gains tax discount</h2>
<p>Winding back negative gearing and reducing the capital gains tax discount to 25% would boost revenue by <a href="https://grattan.edu.au/report/hot-property/">A$5.3 billion a year</a>.</p>
<p>These tax breaks distort housing investment decisions, leading investors to favour capital gains over rental returns, and to maximise borrowing, to fund the investments. This <a href="http://www.abc.net.au/news/2017-04-04/negative-gearing-and-banks-under-criticised-by-rba-governor/8415530">makes housing markets more volatile</a> and <a href="https://www.theguardian.com/australia-news/2018/jan/13/australian-house-prices-will-fall-if-negative-gearing-goes-study-says">reduces home ownership</a>. Like most tax concessions, the tax breaks <a href="https://theconversation.com/three-myths-on-negative-gearing-the-housing-industry-wants-you-to-believe-54732">largely benefit the wealthy</a>. </p>
<p>Negative gearing should change so that investment losses can’t be written off against labour income, <a href="https://grattan.edu.au/report/hot-property/">in line with international practice</a>. Reducing the capital gains discount to 25% would still allow some compensation for the effects of inflation on investment returns, but it would reduce some of the distortions in investment decisions created by the current discount. </p>
<h2>4. Abandon planned increases in the Super Guarantee</h2>
<p>Abandoning plans to increase compulsory super contributions to 12%, could boost revenues by A$500 million in 2021-22, rising to over <a href="https://grattan.edu.au/report/whats-the-best-way-to-close-the-gender-gap-in-retirement-incomes/">A$2 billion a year by 2025-26</a>.</p>
<p>The Super Guarantee is legislated to <a href="https://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?page=23">rise</a> from 9.5% of wages today to 12% by July 2025. But increasing compulsory super contributions will reduce wages today and <a href="http://insidestory.org.au/not-so-super/">do little to boost the retirement incomes </a>of many low-income workers. </p>
<p>It will also cost the Budget billions in extra super tax breaks. Instead of workers receiving wages tax at full marginal tax rates, the extra super contributions will be taxed at a flat 15%. The 2014–15 budget calculated that delaying an increase to the Super Guarantee of 0.5 percentage points <a href="http://www.budget.gov.au/2014-15/content/bp2/download/BP2_consolidated.pdf">saved A$440 million in 2017–18</a>. </p>
<p>These budget savings would endure even in the long-term: a <a href="https://treasury.gov.au/programs-and-initiatives-superannuation/charter-of-superannuation-adequacy/report/part-2/">Treasury analysis</a> estimated the tax revenue foregone as a result of a 12% Super Guarantee would exceed the budgetary savings from lower age-pension spending until about 2060. </p>
<h2>5. Offer another scheme in place of company tax cuts</h2>
<p>The government could boost investment at a lower long-run cost to the budget by replacing the proposed reduction in company taxes to 25% with a <a href="https://grattan.edu.au/news/evaluating-the-case-for-cutting-the-company-tax-rate/">permanent accelerated depreciation scheme</a>. </p>
<p>Accelerated depreciation schemes allow businesses to depreciate their capital investments at a faster rate. These schemes cost less than company tax cuts in the long run for a given boost to investment, but the cost to the budget in the initial years is higher. </p>
<p>An immediate tax deduction of 22% on all new capital purchases would cost the government about a third more than a company tax cut in the first year, and it would not be until the sixth year that the annual budget cost would fall below that of a tax cut. However, by the tenth year the cost of the accelerated depreciation scheme would be 18% lower than a company tax cut and after two decades it <a href="https://grattan.edu.au/report/stagnation-nation/">would cost 40% less per year in forgone revenues</a>. </p>
<p>This is clearly a pre-election budget. But whatever announcements are made, the <a href="http://sjm.ministers.treasury.gov.au/transcript/064-2018/?utm_source=wysija&utm_medium=email&utm_campaign=Transcript+-+Interview+with+Chris+Uhlmann%2C+Today">planned return to surplus</a>
shouldn’t be sacrificed. The government should tighten spending wherever possible. But they will also need to sure up revenues if they cut income taxes.</p><img src="https://counter.theconversation.com/content/95945/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities as disclosed on its website.</span></em></p><p class="fine-print"><em><span>Brendan Coates 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>Here are five ways the Treasurer could boost revenue to make the numbers work.Danielle Wood, Program Director, Budget Policy and Institutions, Grattan InstituteBrendan Coates, Fellow, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/860392017-10-25T23:39:39Z2017-10-25T23:39:39ZHow the US tax code bypasses women entrepreneurs<figure><img src="https://images.theconversation.com/files/191891/original/file-20171025-25502-hzuzhf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Attendees chat during Dell Women’s Entrepreneur Network conference in 2014. </span> <span class="attribution"><span class="source">Jack Plunkett/AP Images for Dell</span></span></figcaption></figure><p>As Republicans in Congress <a href="https://www.nytimes.com/2017/10/19/us/politics/tax-bill-trump-senate.html?_r=0">put the finishing touches</a> on a tax plan that’s aimed at overhauling the system, there is one other reform they should consider: making the U.S. tax code fairer to women entrepreneurs.</p>
<p>Currently, federal tax incentives targeted to help small businesses grow and access capital either effectively exclude or bypass altogether the majority of women-owned firms, according to <a href="http://www.american.edu/kogod/research/blindspot.cfm">groundbreaking research I conducted</a> on how the tax code affects women business owners through American University’s Kogod Tax Policy Center. For the first time, my research considered specifically whether women business owners can (or do) take advantage of tax breaks intended for small businesses. </p>
<p>Our findings uncovered a significant blind spot when it comes to women business owners and the U.S. tax code. In fact, our survey data – together with our review of <a href="https://ideas.repec.org/e/pli161.html">existing tax research</a> <a href="https://www.researchgate.net/publication/253659404_Women_Entrepreneurs_Moving_Front_and_Center_An_Overview_of_Research_and_Theory">on the topic</a> – suggest that many women-owned companies are unable to fully access more than US$255 billion worth of tax incentives Congress has designed to help small businesses. </p>
<p>My question for lawmakers is this: Will Congress seize the once-in-a-generation opportunity to pass comprehensive tax reform that recognizes the challenges women business owners face and how we can help them through the tax code? </p>
<h2>A growing economic contribution</h2>
<p>Since Congress last overhauled the tax code in 1986, the <a href="http://www.womenable.com/content/userfiles/2016_State_of_Women-Owned_Businesses_Executive_Report.pdf">number of women business owners has spiked</a> from 4.1 million to more than 11 million at the end of 2016, making up more than a third of all U.S. businesses. They employ 9 million people, contribute $1.6 trillion to the economy and <a href="https://www.sba.gov/sites/default/files/advocacy/Womens-Business-Ownership-in-the-US.pdf">nearly every single one</a> is a small business. </p>
<p>More recently, <a href="http://www.womenable.com/content/userfiles/2016_State_of_Women-Owned_Businesses_Executive_Report.pdf">their ranks have swelled</a> at a rate five times faster than the national average for all businesses, surging 45 percent from 2007 to 2016 – a period that included the <a href="https://theconversation.com/us/topics/great-recession-13707">Great Recession</a>.</p>
<p>Even more impressive than their rate of growth is the fact that women have achieved all of this without the full benefit of tax breaks targeted to small businesses. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/191926/original/file-20171025-28053-1i98qdi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/191926/original/file-20171025-28053-1i98qdi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=419&fit=crop&dpr=1 600w, https://images.theconversation.com/files/191926/original/file-20171025-28053-1i98qdi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=419&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/191926/original/file-20171025-28053-1i98qdi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=419&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/191926/original/file-20171025-28053-1i98qdi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=527&fit=crop&dpr=1 754w, https://images.theconversation.com/files/191926/original/file-20171025-28053-1i98qdi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=527&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/191926/original/file-20171025-28053-1i98qdi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=527&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Small Business Administration, currently led by Linda McMahon, issued a report earlier this year that said women-owned businesses lag behind in revenue and employment.</span>
<span class="attribution"><span class="source">AP Photo/Alex Brandon</span></span>
</figcaption>
</figure>
<h2>Tax myopia</h2>
<p>Over the years, Congress has done a number of things to promote women’s business ownership by passing legislation targeting discriminatory lending practices and promoting federal contracting and counseling opportunities for women business owners. </p>
<p>For example, the <a href="https://www.justice.gov/crt/equal-credit-opportunity-act-3">Equal Credit Opportunity Act of 1974</a> outlawed discrimination in granting credit based on sex or marital status, and the <a href="https://www.congress.gov/bill/100th-congress/house-bill/5050">Women’s Business Ownership Act of 1988</a> supported women small business ownership and established the <a href="https://www.nwbc.gov">National Women’s Business Council</a>. </p>
<p>Also, the <a href="https://www.congress.gov/bill/106th-congress/house-bill/5667">Small Business Reauthorization Act of 2000</a> set up a program to help women-owned businesses <a href="http://www.aptac-us.org/women-owned-small-business/">access federal contracts</a>. </p>
<p>But lawmakers have been myopic in terms of the severe disadvantages women face accessing capital to grow their businesses, even as they’ve repeatedly targeted this common problem among small business owners in the tax code. </p>
<p>Earlier this year, the Small Business Administration’s Office of Advocacy <a href="https://www.sba.gov/sites/default/files/advocacy/Womens-Business-Ownership-in-the-US.pdf">issued a report</a> that found that women-owned companies consistently lag behind in terms of revenue and employment. <a href="https://www.sbc.senate.gov/public/_cache/files/3/f/3f954386-f16b-48d2-86ad-698a75e33cc4/F74C2CA266014842F8A3D86C3AB619BA.21st-century-barriers-to-women-s-entrepreneurship-revised-ed.-v.1.pdf">Other congressional research</a> has found that just $1 of every $23 in conventional small business loans goes to a woman-owned business. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/191927/original/file-20171025-28083-148ycc6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/191927/original/file-20171025-28083-148ycc6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=372&fit=crop&dpr=1 600w, https://images.theconversation.com/files/191927/original/file-20171025-28083-148ycc6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=372&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/191927/original/file-20171025-28083-148ycc6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=372&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/191927/original/file-20171025-28083-148ycc6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=467&fit=crop&dpr=1 754w, https://images.theconversation.com/files/191927/original/file-20171025-28083-148ycc6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=467&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/191927/original/file-20171025-28083-148ycc6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=467&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Psyche Terry, owner of Urban Intimates, posses for a photo next to some of her products for sale at Indulge Your Senses boutique in Little Elm, Texas.</span>
<span class="attribution"><span class="source">AP Photo/LM Otero</span></span>
</figcaption>
</figure>
<p>For my report, “<a href="http://www.american.edu/kogod/research/blindspot.cfm">Billion Dollar Blind Spot: How the U.S. Tax Code’s Small Business Expenditures Impact Women Business Owners</a>,” I worked with Women Impacting Public Policy – a nonprofit trade association devoted to promoting women entrepreneurs – to survey 515 women business owners and analyze how they use four key tax expenditures designed to foster small business growth and investment:</p>
<ul>
<li><p><a href="https://www.law.cornell.edu/uscode/text/26/1202">Section 1202</a> allows an exclusion from capital gains tax for any profits from a sale of certain qualified small business corporation stock. The provision, which is expected to cost taxpayers $6.2 billion over the next five years, expressly excludes service companies from qualifying (most women-owned businesses are in the service sector). </p></li>
<li><p><a href="https://www.law.cornell.edu/uscode/text/26/1244">Section 1244</a> allows investors in small business corporations to treat any losses as ordinary losses. It’s estimated to cost $500 million over the next 10 years.</p></li>
<li><p><a href="https://www.law.cornell.edu/uscode/text/26/179">Section 179</a> is an accelerated equipment tax deduction for investments tangible personal property with a price tag of more than $248 billion over the next five years.</p></li>
<li><p><a href="https://www.law.cornell.edu/uscode/text/26/195">Section 195</a> offers a $5,000 deduction for startup costs and is estimated to cost at least $400 million over five years.</p></li>
</ul>
<p>The results were illuminating.</p>
<p>The first three provisions are so limited in design that the majority of women-owned businesses simply can’t use them, making accessing capital through tax breaks impossible for these business owners. The rules either explicitly exclude service companies or effectively bypass any business that isn’t a “C corporation” or that has few investments in capital intensive equipment and can’t claim the deduction. </p>
<p>This is problematic because 61 percent of women-owned businesses <a href="http://www.womenable.com/content/userfiles/2016_State_of_Women-Owned_Businesses_Executive_Report.pdf">are concentrated in service industries</a>, while the majority of all small businesses <a href="https://www.sba.gov/sites/default/files/advocacy/SB-FAQ-2017-WEB.pdf">are organized</a> as something other than a C-Corp. This makes it a lot harder to attract investors.</p>
<p>Our survey data confirmed these findings: very few respondents said they had ever taken advantage of sections 1202 (less than 1 percent) or 1244 (less than 6 percent), while we found that more than half aren’t fully benefiting from section 179.</p>
<p>As a result, women business owners are potentially missing out on the more than $255 billion in aid the U.S. will spend over the next few years on these provisions. At the same time, our survey data confirmed that when women business owners could take advantage of a tax break, they did. Almost 60 percent of our respondents claimed the startup deduction, for example. </p>
<p>Equally troubling is that we found a complete lack of government research on how the tax code affects women business owners. To date, the House and Senate tax-writing committees have never held a full hearing on the challenges of women business owners and whether the tax code’s small business tax incentives are operating as intended with respect to these companies. And there are scant data from relevant government agencies on these critical questions. The Internal Revenue Service, the Treasury Department and the SBA don’t even track tax data on women-owned companies, which <a href="http://www.womenable.com/content/userfiles/2016_State_of_Women-Owned_Businesses_Executive_Report.pdf">make up almost 40 percent</a> of all U.S. businesses.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/191924/original/file-20171025-28045-1kerap2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/191924/original/file-20171025-28045-1kerap2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=411&fit=crop&dpr=1 600w, https://images.theconversation.com/files/191924/original/file-20171025-28045-1kerap2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=411&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/191924/original/file-20171025-28045-1kerap2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=411&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/191924/original/file-20171025-28045-1kerap2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=516&fit=crop&dpr=1 754w, https://images.theconversation.com/files/191924/original/file-20171025-28045-1kerap2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=516&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/191924/original/file-20171025-28045-1kerap2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=516&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The majority of women-owned businesses, such as Smashing Golf & Tennis in Illinois, are in the service industry.</span>
<span class="attribution"><span class="source">AP Photo/M. Spencer Green</span></span>
</figcaption>
</figure>
<h2>Positive signs</h2>
<p>Notwithstanding this current state of affairs, there have been some positive signs in recent weeks that lawmakers will not ignore the questions raised by our report. Members in both the Senate and House have reviewed our research and are considering the importance of its findings. </p>
<p>Democratic Senator Jeanne Shaheen <a href="https://www.sbc.senate.gov/public/index.cfm/hearings?ID=39E2134C-D9AE-499C-887B-E33AC497A90D">cited our report</a> during a committee hearing in June, and <a href="https://smallbusiness.house.gov/calendar/eventsingle.aspx?EventID=400301">I testified</a> before the House’s Committee on Small Business earlier this month. </p>
<p>However, the absence of government data and congressional oversight on these small business tax expenditures deprives lawmakers of vital information and raises unanswered questions about whether these tax provisions are operating as Congress intended. <a href="https://www.nwbc.gov/sites/default/files/Access%20to%20Capital%20by%20High%20Growth%20Women-Owned%20Businesses%20(Robb)%20-%20Final%20Draft.pdf">Academic</a> and government research have consistently identified access to capital as a barrier women business owners encounter. </p>
<p>Congress simply doesn’t have the information needed to make decisions to help these 11 million small businesses overcome existing barriers to growth. This flies in the face of the <a href="https://www.cep.gov/about.html">commitment Congress made in 2016</a> to pursue evidence-based policymaking. Policymakers have opportunity to act on behalf of the nation’s women business owners as they prepare to overhaul the U.S. tax code.</p><img src="https://counter.theconversation.com/content/86039/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Caroline Bruckner 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>Republicans rewriting the tax system have a rare opportunity to fix a major problem: most women-owned companies can’t take advantage of key provisions designed to help small businesses like theirs.Caroline Bruckner, Executive in Residence, Department of Accounting and Taxation, American University Kogod School of BusinessLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/783232017-06-28T01:41:56Z2017-06-28T01:41:56ZWhy Congress should let everyone deduct charitable gifts from their taxes<figure><img src="https://images.theconversation.com/files/175888/original/file-20170627-24760-66ii6h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The number of Americans who can get a tax break through their charitable contributions could tumble during the Trump administration.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/horizontal-image-man-carrying-donated-items-416899081?src=UfB3iNGhyluSc8MHPHNt7w-1-0">Helen's Photos/www.shutterstock.com</a></span></figcaption></figure><p>The <a href="https://taxfoundation.org/who-itemizes-deductions/">30 percent</a> of American taxpayers who itemize are free to deduct every dollar they donate to an IRS-approved charity from up to half of their taxable income. While neither the White House nor lawmakers are trying to scrap the charitable deduction, which is nearly as old as the income tax and marks its <a href="https://www.congress.gov/bill/115th-congress/house-concurrent-resolution/34/text">100th anniversary</a> this year, some of the changes to the tax code that Republicans in Congress and <a href="https://www.cnbc.com/2017/09/27/read-the-full-gop-tax-proposal-here.html">President Donald Trump</a> are proposing could discourage charitable giving as an unintended consequence.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/175884/original/file-20170627-12943-2mr927.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/175884/original/file-20170627-12943-2mr927.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/175884/original/file-20170627-12943-2mr927.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/175884/original/file-20170627-12943-2mr927.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/175884/original/file-20170627-12943-2mr927.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/175884/original/file-20170627-12943-2mr927.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/175884/original/file-20170627-12943-2mr927.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/175884/original/file-20170627-12943-2mr927.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&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 charitable deduction dates back to the administration of Woodrow Wilson, shown here addressing Congress.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/World-War-One-Centenary-Timeline/8135bd7bf12a42fa823a81bad3570d05/2/0">AP Photo</a></span>
</figcaption>
</figure>
<p>As a scholar of the economics of philanthropy, I recently <a href="https://scholarworks.iupui.edu/handle/1805/12599">co-led a study</a> that modeled how donors would respond to two major tax reforms Republican lawmakers and the Trump administration support. We determined that both would reduce giving.</p>
<p>We also predicted the effects of another concept backed by some lawmakers and many experts: letting every American who pays income tax take advantage of the charitable deduction.</p>
<h2>The Republican proposals</h2>
<p>People give to charities for many reasons. Tax breaks cannot be the main one, as giving your money away can’t make you better off financially, regardless of your tax bracket. However, Americans tend to donate more when the government gives us incentives to do so. Similarly, we give less when Uncle Sam scales those advantages back.</p>
<p>That is why <a href="https://assets.documentcloud.org/documents/3678871/Donald-Trump-s-tax-proposal.pdf">three of the changes</a> being proposed could potentially change how much money Americans give to charities. They include:</p>
<ol>
<li>Cutting the top <a href="http://www.investopedia.com/terms/m/marginaltaxrate.asp?lgl=myfinance-layout-no-ads">marginal tax rate</a> for the highest-earning Americans to 35 percent from 39.6 percent.</li>
<li>Roughly doubling the <a href="https://www.irs.gov/pub/irs-pdf/p501.pdf">standard deduction</a> from the current levels of US$6,300 for individuals and $12,600 for couples. </li>
<li>Doing away with the <a href="http://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax">estate tax</a>, which is levied on the very richest Americans and applies only to the inheritance left by about one out of every 500 people who die.</li>
</ol>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/175882/original/file-20170627-24756-j1mhvj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/175882/original/file-20170627-24756-j1mhvj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/175882/original/file-20170627-24756-j1mhvj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/175882/original/file-20170627-24756-j1mhvj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/175882/original/file-20170627-24756-j1mhvj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/175882/original/file-20170627-24756-j1mhvj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/175882/original/file-20170627-24756-j1mhvj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/175882/original/file-20170627-24756-j1mhvj.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"></a>
<figcaption>
<span class="caption">Treasury Secretary Steve Mnuchin is one of the architects of the Trump administration’s tax policy.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Trump-Tax-Plan/8a58e1f767f14a59995ca9701309048c/1/0">AP Photo/Andrew Harnik</a></span>
</figcaption>
</figure>
<h2>Discouraging donations</h2>
<p>To gauge the impact the first two of these three changes – as well as universal access to the charitable tax deduction – might have on giving, I co-led an Indiana University Lilly Family School of Philanthropy study. <a href="https://www.independentsector.org/">Independent Sector</a>, which advocates on behalf of the entire nonprofit and philanthropic sector, commissioned it, but our approach to all of our research projects is designed to be completely impartial. We plan to study the effects of eliminating the estate tax on charitable giving later.</p>
<p>Perhaps unsurprisingly, we found that as income declined, households were more sensitive to this cost. In addition to pretax family income levels, we controlled for other variables such as age, the presence of children living at home and marital status. We partnered with the American Enterprise Institute, a conservative-leaning think tank, to simulate the impact of these hypothetical changes in tax policy on federal individual income tax revenue and total charitable giving by households.</p>
<p>Our results suggest that dropping the top marginal tax rate to 35 percent would reduce charitable giving by 0.8 percent, or $2.1 billion, from the estimated <a href="https://givingusa.org/tag/giving-usa-2017/">$282 billion</a> American households gave to charity in 2016, according to an annual report that my colleagues research and produce together with the Giving USA Foundation.</p>
<p>The nonpartisan Joint Committee on Taxation, a congressional committee, has estimated that at most <a href="https://waysandmeans.house.gov/camp-releases-tax-reform-plan-to-strengthen-the-economy-and-make-the-tax-code-simpler-fairer-and-flatter/">5 percent of households</a> would itemize their income tax returns following the changes the Trump administration aims to make, down from roughly 30 percent.</p>
<p>High-income Americans are already far more likely to itemize their taxes. For example, 92 percent of Americans earning more than $200,000 per year itemized, compared with only 6 percent of those making less than $25,000, in 2013, according to the nonpartisan <a href="https://taxfoundation.org/who-itemizes-deductions/">Tax Foundation</a>. That disparity would grow even larger should the White House’s tax proposal take effect.</p>
<p>In addition, this dramatic increase in the standard deduction, we found, would would hurt charities even more than cutting tax rates: Giving would fall by 3.9 percent, or $11 billion.</p>
<p>Further, we projected that both lowering tax rates and doubling the standard deduction could reduce charitable giving by households in 2016 by up to $13.1 billion – an approximately 4.6 percent decline.</p>
<p>We also calculated that giving to churches and other religious charities would drop slightly more than giving to secular nonprofits.</p>
<p>There are only slight differences between the increases now being officially proposed in the standard deduction and the increases we used in our study. However, Trump and the GOP propose eliminating personal exemptions, effectively folding them into the larger standard deduction. I believe that would reduce the value of the standard deduction.</p>
<p>In turn, charitable giving might decline slightly less than we originally anticipated should these changes be implemented.</p>
<h2>A universal tax break</h2>
<p>Our findings about how those changes would probably depress donations garnered <a href="http://www.cnbc.com/2017/05/22/tax-reform-could-reduce-charitable-giving-by-up-to-13-billion-per-year.html">broad media coverage</a>. But we also considered the potential impact of a universal charitable tax deduction, which was on the books <a href="http://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/the-new-ebate-over-a-charitable-deduction-for-nonitemizers.pdf">from 1982 to 1986</a>. </p>
<p>We determined that giving would rise if the government were to let all taxpayers deduct their charitable gifts from their federal taxes, even if tax rates fell and the standard deduction doubled. That conclusion drew less attention. If paired with those other two changes, we estimate that charitable giving would rise by $4.8 billion, a 1.7 percent gain.</p>
<p>Without the changes Republicans are proposing, we estimated that making the charitable tax deduction universal alone would generate up to $12.2 billion in additional giving, a 4.3 percent gain.</p>
<p></p><hr><p></p>
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<p></p><hr><p></p>
<h2>Safeguarding charitable giving</h2>
<p>During the presidential campaign, Trump proposed <a href="http://thehill.com/homenews/administration/329419-trump-eyes-cap-on-charitable-deductions">capping all itemized deductions</a>, including charitable contributions, at $100,000 for individuals and $200,000 for couples. The current Republican tax proposal does not take that approach, which would discourage giving by high-income taxpayers.</p>
<p>Rather than limit incentives for giving to only the richest Americans, the government could instead choose to make this tax break universally available – an approach that the White House and Republican congressional leaders haven’t embraced so far.</p>
<p>What’s more, U.S. charities are likely to lose government funding in the near future due to the Trump administration’s proposed budget and <a href="http://www.cnn.com/2017/05/23/politics/trump-budget-cuts-programs/index.html">spending priorities</a>. </p>
<p>Extending the charitable deduction to all taxpayers would not shield nonprofits – including groups that do educational, cultural and environmental work and organizations that provide social services – from the fallout they anticipate following the proposed federal budget cuts and tax code overhaul.</p>
<p>However, creating a universal deduction would provide some relief to charities from those budget cuts, as well as the reduction in giving some of the proposed tax policy changes could bring about.</p>
<p><em>Editor’s note: This is an updated version of an article originally published on June 27, 2017.</em></p><img src="https://counter.theconversation.com/content/78323/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>This research was commissioned by Independent Sector and funded by a consortium of nonprofit organizations. Patrick Rooney and his employer, the Indiana University Lilly Family School of Philanthropy, have received numerous research and operating grants over the past 30 years from foundations, charities, and individuals. Indiana University Lilly Family School of Philanthropy, however, strives to make all its research unbiased and nonpartisan.</span></em></p>The tax changes Trump and GOP lawmakers propose would reduce charitable giving, research suggests. But letting everyone use a tax break mostly enjoyed by the rich might prevent that.Patrick Rooney, Executive Associate Dean for Academic Programs, Professor of Economics and Philanthropic Studies, IUPUILicensed 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/761342017-04-13T19:47:44Z2017-04-13T19:47:44ZWhy you may be paying more income tax than you should<p>Springtime brings many things, from proverbial showers to birds chirping and warmer weather. It also signals tax season is upon us once more.</p>
<p>Every year 140 million U.S. taxpayers spend countless hours gathering receipts and statements, filling out a variety of schedules and forms and submitting their 1040s and various other supporting documents to the Internal Revenue Service. This year the deadline is April 17. </p>
<p>As an economist, I wondered whether this tax filing burden results in us paying more taxes than we should. <a href="https://www.ntanet.org/wp-content/uploads/proceedings/2015/213-benzarti-taxing-tax-filing-leaving-money.pdf">What I found</a> is quite surprising and should be especially disturbing for those of you who <a href="https://theconversation.com/why-most-of-us-procrastinate-in-filing-our-taxes-and-why-it-doesnt-make-any-sense-39766">still haven’t filed</a>.</p>
<h2>A choice of deductions</h2>
<p>Income taxes represent the government’s largest source of tax revenue and <a href="http://www.taxpolicycenter.org/statistics/amount-revenue-source">involve about US$1.54 trillion</a>, or 8.3 percent of GDP, being transferred from our wallets to the federal Treasury every year. </p>
<p>Research into the transaction costs of saving shows that people frequently leave money on the table, such as in <a href="http://www.retirementmadesimpler.org/Library/The%20Power%20of%20Suggestion-%20Inertia%20in%20401(k).pdf">saving for retirement</a> and <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-9868.2006.00543.x/abstract">claiming government benefits</a>. I wanted to know if the same thing was happening when we file our taxes. </p>
<p>Individual tax filers can choose whether to itemize deductions, such as for charitable giving or mortgage interest, or claim a standard deduction. Itemizing requires some effort but can provide large tax savings. Opting for the standard deduction saves time but may result in a larger tax tab. </p>
<p>I exploited this choice to estimate the costs of filing taxes. That is, if compliance costs don’t exist, taxpayers would presumably itemize if the benefit of doing so is greater than zero. If there are costs, then itemizing is beneficial only if it reduces the tax bill by more than the cost of itemizing. </p>
<h2>What’s left on the table</h2>
<p>When people pick the standard deduction, we don’t actually know how much they could have saved had they itemized. </p>
<p>To get around this problem, I examined data from two years in which there were large increases in the standard deduction: 1971 and 1988. To understand why, imagine that the standard deduction last year was $10,000 and increased this year to $15,000. Now taxpayers with total deductions just above $15,000 will have to decide whether to bear the pain of itemizing or just go with the standard deduction. </p>
<p>By comparing the percentage of taxpayers just above the standard deduction before and after the large increase in the standard deduction, I was able to reconstruct the distribution of foregone benefits. Long story short, it showed me that some taxpayers choose the standard deduction even though itemizing would have saved them money, resulting in an average of $644 being left on the table.</p>
<p>After breaking the results down by income levels, I found that wealthier individuals are more likely to sacrifice the tax savings from itemization to avoid the time it would take to do it. Further calculations led me to estimate that itemizing deductions is perceived on average to take 19 hours of pain and effort. </p>
<p>Altogether, I use this analysis to estimate the burden of filing our taxes. It turns out it amounts to about $200 billion, or about 1.2 percent of GDP, which is two to three times larger than <a href="https://www.researchgate.net/profile/Joel_Slemrod/publication/5188998_The_Compliance_Cost_of_the_US_Individual_Income_Tax_System/links/54aea8dc0cf21670b358682e.pdf">previously estimated</a>. </p>
<p>This is where it gets worse for procrastinators, who pay a price for delaying the inevitable. By waiting until the deadline to do their taxes, I found that people are more likely to forgo those itemized deductions. Perhaps it’s because they lack the time. Or it may be because the perceived time cost of rummaging for all the receipts and papers and doing all the calculations just doesn’t seems worth the effort – even if might be.</p>
<h2>Why don’t we fix this?</h2>
<p>While <a href="https://www.oecd.org/tax/administration/36280368.pdf">several countries</a> have solved this problem, the U.S. is trailing behind. The solution to drastically reducing compliance costs is pretty simple and benign, and it’s what countries from Denmark to Chile have done. </p>
<p>It turns out that the Internal Revenue Service knows most of the information that we are required to enter in our return – such as wages, mortgage interest, state taxes, etc. – and could send us prepopulated returns that we could verify for accuracy and sign. The whole ordeal could take less than an hour. </p>
<p>Why are we not there yet? <a href="https://www.warren.senate.gov/files/documents/Tax_Maze_Report.pdf">Some suggest</a> that the tax preparation industry may have something to do with it, since anything that makes it substantially easier could cost it potentially hundreds of million of dollars in revenue. </p>
<p>While the IRS’ free file program has made it a bit simpler, it still requires a lot of record-keeping, and the percentage of taxpayers who actually file for free remains very low, at <a href="https://www.wsj.com/articles/why-free-file-for-taxes-isnt-so-popular-1422633546">fewer than 3 percent as of 2014</a>.</p><img src="https://counter.theconversation.com/content/76134/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Youssef Benzarti has previously received funding from the Robert D. Burch Center for Tax Policy and Public Finance and the Center for Equitable Growth. </span></em></p>The burden of filing our taxes appears to be growing, especially for those who tend to wait until the last minute to fill in their 1040s.Youssef Benzarti, Assistant Professor of Economics, University of California, Los AngelesLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/743252017-03-10T08:52:27Z2017-03-10T08:52:27ZSouth Africa’s grant scandal exposes myths about how the state should run things<figure><img src="https://images.theconversation.com/files/160286/original/image-20170310-3696-12kel8h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africans waiting in line to register for social grants.</span> <span class="attribution"><span class="source">EPA/Nic Bothma</span></span></figcaption></figure><p>The social grants <a href="https://theconversation.com/the-real-risks-behind-south-africas-social-grant-payment-crisis-73224">scandal</a> rocking South Africa has been greeted with understandable shock. It’s also challenged two popular ideas about how government should operate. </p>
<p>The first is that public-private partnerships <a href="http://www.ppp.gov.za/Pages/whatisppp.aspx">(PPP)</a> are efficient. The second is that national government is better at running things than provincial government (the equivalent of states or counties).</p>
<p>Both are so widely supported that they seem obviously true – but in the wake of the social grants’ saga their truth now seems far less obvious. Both are implicated in an unfolding scandal which threatens to disturb payment of social grants to about 17 million South Africans who depend on them.</p>
<p>The idea that PPPs are efficient needs another look. The principle behind them is well known. Because the government lacks the capacity to perform some of its functions, it needs the expertise of private, for-profit, companies who have the ability to do what it can’t, presumably because they wouldn’t be in business if they didn’t. </p>
<p>The second truism under a cloud is the view that, if you want something in government done, you must take it away from the provinces that are wasteful and incompetent. It’s firmly believed across the spectrum: even critics of national government often assume that, if there’s any chance people will be effectively served, it rests with the centre, not the provinces.</p>
<p>The unfolding social grant crisis has come to prove that these widely held assumptions could be misplaced.</p>
<h2>Public Private Partnerships</h2>
<p>At first glance the PPP model sounds like a classic ‘win-win’: government gets the expertise it needs while the private provider expands its business. Citizens also win because they get the service they need. What, besides ideology, could possibly prompt anyone to object? </p>
<p>Court <a href="http://www.heraldlive.co.za/news/2017/03/08/constitutional-court-wants-answers-sassa-department-payment-grants/">proceedings</a> confirm that the PPP between the government and <a href="http://www.net1.com/business-structure/transactional-solutions-cluster/cash-paymaster-services-(cps)/">Cash Paymaster Services</a>, the company contracted to distribute the grants, may have worked for both parties – but not for millions of grant beneficiaries. The private partner received more than its fee for distributing each grant. It also used its position to <a href="https://theconversation.com/the-real-risks-behind-south-africas-social-grant-payment-crisis-73224">market services</a> provided by a network of subsidiary companies: funeral policies, microloans, smart cards, airtime and insurance. </p>
<p>It’s also <a href="http://probonomatters.co.za/who-is-responsible-for-the-sassas-epic-social-grant-distribution-disaster/">claimed</a> that grant recipients are bombarded with sms messages selling these products. If they bite, the money is deducted from their grants. The company denies this but confirms that it uses its position to sell services. </p>
<p>Using PPPs to market products to a captive audience who may well believe that what they are being asked to buy has official sanction is not what the advocates of PPPs have in mind. The social development department and the South African Social Security Agency (<a href="http://www.sassa.gov.za/">SASSA</a>) did nothing to ensure that the poor and vulnerable were protected and so it’s not clear in what way this was a partnership. It seems more like a takeover by the private provider.</p>
<h2>The public interest</h2>
<p>This doesn’t mean that all PPPs should be tarred with the same brush: there clearly are cases in which government can increase its capacity by working with private providers. </p>
<p>But it does show that PPPs are not a guaranteed cure for government incapacity: unless government has the capacity to ensure that these arrangements serve the public, they are not partnerships, but surrenders to private interests. </p>
<p>Without the necessary controls, PPPs may do more to help the government and businesses than to serve citizens: since much corruption in this country stems from collusion between public and private actors at citizens’ expense, corruption could be seen as a particular popular type of PPP. </p>
<p>The capacity which governments need to ensure that PPPs are in the public interest is the ability to assess citizens’ needs and to ensure that the agreement will meet them. This requires an understanding of what citizens want and the will and ability to negotiate terms which will give it to them. Social Development and SASSA seemed to lack either the will or the ability to do either.</p>
<p>This should challenge the simplistic idea that, to do its job, government need simply call in private providers. PPPs will not achieve their stated purpose if they are buck-passing exercises: the government is still responsible for the service and it’s failing the public unless it can ensure that its private partner really is meeting the needs of citizens.</p>
<h2>The role of provinces</h2>
<p>Before SASSA was formed, social grants were distributed by provinces. In the Eastern Cape in particular, grants weren’t paid efficiently and the courts were forced to intervene. It was widely assumed that this showed the dangers of assigning grants to provinces – a single national distribution agency would, it was assumed, solve the problem.</p>
<p>SASSA was created in 2005. Twelve years later, it still lacks the capacity to distribute grants itself or to negotiate terms with the private provider which protects beneficiaries. While grant distribution seems more efficient, beneficiaries are now subject to commercial pressures they did not face when provinces distributed grants. The shift hasn’t been the magic bullet the country was promised.</p>
<p>There was, to be fair, one good reason for changing the provinces’ mandate to distribute grants. The amount to be paid and who was eligible for grants was fixed by national government – the provinces had no say. But provinces don’t levy taxes and so they receive a fixed sum from which they must fund all their obligations. Grants were a large and growing expense and, whenever they were raised, provinces had less to spend on their other needs. A system in which a government entity must provide a service but has no control over what it costs is unfair and unworkable.</p>
<p>But this problem need not have been solved by creating a single grants agency: provinces could have been given separate funding for grants so that other budget items were not affected. </p>
<p>The problems in the provinces are not an illusion – the bad press is often justified. But the SASSA case shows that they are not necessarily solved by taking provinces out of the equation.</p>
<p>Incompetence, patronage and indifference are not a provincial monopoly: which sphere of government provides a service may be less important than whether citizens have the muscle to ensure that it works for them. There’s no reason why this should be easier at a national than a provincial level (it is easier for organised interest groups to influence government at national level, but that doesn’t make citizens any more powerful). </p>
<p>Centralising government functions creates the illusion of greater effectiveness because it makes it easier to issue orders from the top. But it gives no guarantee of greater effectiveness: the orders may be no more reasonable and they may be ignored.</p>
<p>Fixing government is about increasing citizen power and ensuring that officials and politicians are more accountable. It’s not about shifting services to national level in the forlorn hope that officials will push buttons and all good things will follow. </p>
<p>In both cases, the ‘obvious’ needs another look. Bringing in private providers and excluding provinces are not automatic gateways to better government. The social grants scandal shows that improvement requires creative thinking, not relying on truisms which are less true than they seem.</p><img src="https://counter.theconversation.com/content/74325/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Friedman 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>South Africa’s social grant scandal seems to back up highly regarded views on public governance that Public Private Partnerships aren’t naturally efficient.Steven Friedman, Professor of Political Studies, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/401662015-04-15T20:36:38Z2015-04-15T20:36:38ZGovernment inquiry takes aim at green charities that ‘get political’<p>The <a href="http://www.environment.gov.au/system/files/pages/1fbfb20f-5749-4468-b008-feaf1804e969/files/register-environmental-organisations-2015.pdf">almost 600 environmental groups</a> that hold tax-deductibility status in Australia are being scrutinised by a federal government <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House/Environment/REO">inquiry</a>, with reports that <a href="http://www.abc.net.au/news/2015-04-10/environment-groups-could-lose-tax-concession-status/6384554">more than 100 of them face being struck off the list</a>.</p>
<p>Some, like the state and territory <a href="http://www.theguardian.com/environment/planet-oz/2014/may/15/budget-axe-of-small-grant-fund-will-hurt-conservation-groups-across-australia">Conservation Councils</a> and <a href="http://www.abc.net.au/environment/articles/2013/12/18/3914079.htm">Environmental Defenders Offices</a>, are still reeling from cuts to their programs and core funding. Others, such as Greenpeace, The Wilderness Society, and Friends of the Earth, could lose access to the tax-deductible donations that help sustain their work. </p>
<h2>Encouraging donations</h2>
<p><a href="https://www.ato.gov.au/Non-profit/Gifts-and-fundraising/Deductible-gift-recipients/">Deductible gift-recipient status</a> allows eligible organisations, such as those on the environmental register, to receive tax-deductible gifts and contributions. Consistent with similar schemes in the <a href="http://www.law.unimelb.edu.au/files/dmfile/35_2_2.pdf">United States and Europe</a>, the environmental register was established as an incentive for citizens and corporations to fund organisations that are active in the public sphere, while also feeding into the logic of small government and shifting the burden of catering for social needs back onto the community. </p>
<p>In Australia, an environmental organisation is <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s30.260.html">defined</a> as a body or society whose <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s30.265.html">primary purpose</a> is to protect the environment or conduct education and research. </p>
<p>Importantly, however, in 2010 the <a href="http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/2010/42.html">High Court ruled</a> that groups with tax-deductible status also have the right to engage in political debate and advocacy. The judgement described the freedom to speak out on political issues as “indispensable” for “representative and responsible government”. </p>
<p>Moreover, the court pointed out that there is no general rule that excludes “political objects” from charitable purposes. Instead, the key consideration is whether the organisation “contributes to the public welfare”. The ruling has been used as a precedent both in Australia and overseas, such as when Greenpeace won a <a href="http://www.nzlii.org/nz/cases/NZSC/2014/105.html">favourable decision from the New Zealand Supreme Court last year</a>.</p>
<h2>Why is Australia holding the inquiry?</h2>
<p>The review’s chair, Liberal MP Alex Hawke, <a href="http://www.aph.gov.au/DocumentStore.ashx?id=3d5ff3ed-c1d4-4623-983c-917aa024ccb2">said</a> the inquiry aims to: </p>
<blockquote>
<p>…ensure that tax deductible donations, which are a generous concession from the taxpayer, are used for the purpose intended and expected by the community. </p>
</blockquote>
<p>His colleagues’ comments have given some more insight into what Hawke means by the adjectives “intended” and “expected”.</p>
<p>Nationals Senator Matthew Canavan <a href="http://www.abc.net.au/7.30/content/2015/s4214478.htm">said he is concerned</a> by the development of environmental groups from “a niche village industry” into “serious professional organisation[s]”, while highlighting what he described as a “large minority” of “100 or 150” groups that are “clearly engaged primarily” in stopping fossil fuel and industrial development in Australia. </p>
<p>Liberal MP Andrew Nikulic <a href="http://www.theguardian.com/environment/2014/jun/30/liberal-party-environmental-groups-charitable-status">sought to distinguish</a> groups like the Bob Brown Foundation who “campaign against the government” from “real charities” like “St Vinnies and Salvos”. Ignoring the fact that the latter groups have been <a href="http://www.smh.com.au/nsw/charities-warn-they-cant-fill-in-the-gaps-if-abbott-cuts-welfare-20140416-36qzd.html">vocal critics</a> of government cuts to welfare spending, Nikulic has also made <a href="http://www.abc.net.au/7.30/content/2015/s4214478.htm">unsubstantiated claims</a> that green groups have been involved in “illegal activities”. </p>
<p>His Liberal National Party colleague George Christensen <a href="http://www.theguardian.com/environment/2015/mar/25/great-barrier-reef-nationals-mp-says-environmentalists-are-guilty-of-treason">went even further</a>, labelling certain groups as “terrorists” and accusing them of treason. </p>
<p>Their views are echoed by Gary Johns, a former Labor MP and now columnist for The Australian newspaper, who has <a href="http://www.theaustralian.com.au/opinion/columnists/give-eco-charities-a-check/story-fn8v83qk-1227293363933">criticised</a> the entire rationale for tax-deductible status on the basis that it contradicts the “voluntary nature of charity”. </p>
<p>While conceding that the Hawke review may be interpreted as an “attack on [environmental organisations’] efforts to protect the environment”, Johns also argued that governments “should be reticent” about supporting organisations that “promote viewpoints on issues where there is reasonable disagreement in the electorate”.</p>
<p>It is difficult to see what organisations would satisfy such a test. Certainly not the <a href="http://www.abc.net.au/news/2012-02-24/hamilton-the-shadowy-world-of-ipa-finances/3849006">Institute of Public Affairs</a>, the <a href="http://www.chifley.org.au/our-mission/">Chifley Research Centre</a> or <a href="http://www.menzieshouse.com.au/?page_id=4560">Menzies House</a>, which also enjoy tax deductibility but seem unlikely to face the same scrutiny advocated by Hawke.</p>
<h2>The political context</h2>
<p>Clearly, we have strayed some way from Hawke’s official justification for the inquiry. His vague reference to the undisputed notion that tax-deductible donations should be subject to public scrutiny disguises deeper political and ideological goals.</p>
<p>To properly understand those goals, we must interpret the current inquiry in the appropriate political context. Parts of this have been described by Joan Staples in an <a href="https://theconversation.com/step-by-step-conservative-forces-move-to-silence-ngos-voices-29637">earlier Conversation article</a>, and by Mike Seccombe in the <a href="http://www.thesaturdaypaper.com.au/news/politics/2014/07/26/brandis-ties-ngo-funding-non-advocacy/1406296800">Saturday Paper</a>. </p>
<p>In terms of the wider political context of this inquiry, we might also consider:</p>
<p>• last year’s attempt by Liberal MP Richard Colbeck to <a href="http://www.theguardian.com/environment/2014/apr/02/coalition-review-of-consumer-laws-may-ban-environmental-boycotts">ban environmental boycotts</a>;</p>
<p>• incidences of <a href="http://www.smh.com.au/nsw/state-funds-come-with-proviso-not-to-protest-20130523-2k3wb.html">gag clauses</a> being written into the contracts of community legal centres;</p>
<p>• the <a href="http://www.theguardian.com/environment/planet-oz/2014/may/15/budget-axe-of-small-grant-fund-will-hurt-conservation-groups-across-australia">defunding</a> of voluntary environment, sustainability and heritage organisations and national environmental defenders’ offices; and</p>
<p>• the drafting of <a href="http://www.abc.net.au/news/2015-03-18/attorney-general-dismisses-concerns-over-protest-laws/6330504">anti-protest laws</a> in states such as Western Australia.</p>
<p>Against this backdrop, the inquiry can be seen as part of a trend towards quieting the environment movement. Even if it does not result in substantive changes to the law, the inquiry is forcing poorly funded groups to spend time and resources on making submissions to justify their status. </p>
<p>Another difficulty is the committee’s desire to frame the “public welfare” requirement in terms of ill-defined community “expectations”. These can be difficult to discern and for this reason we ought to strive for the broadest possible political debate, rather than attempting to narrow it. If that means that taxpayers subsidise perspectives with which they don’t necessarily agree, it is a small price to pay for a robust public sphere. </p>
<p>Finally, given the urgency of the environmental crisis, an <a href="http://www.theguardian.com/environment/2014/jun/03/lowy-poll-more-australians-seriously-concerned-about-climate">increasing number of Australians</a> recognise that we need environmental groups who do more than plant trees. </p>
<p>In the run to this year’s <a href="https://theconversation.com/au/topics/paris-2015-climate-summit">Paris climate talks</a> and next year’s federal election, we need laws that encourage full-blooded political participation.</p><img src="https://counter.theconversation.com/content/40166/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Burdon is affiliated with the International Union for the Conservation of Nature.
Between 2005-2009 he volunteered with Friends of the Earth, Adelaide. He also volunteered on the management committee of Conservation SA between 2007-2010 and on the executive of the Environmental Defenders Office SA between 2011-2013.</span></em></p>A federal government inquiry that reportedly threatens the tax-deductibility status of dozens of environmental groups is the latest move towards quieting outspoken green groups, writes Peter Burdon.Peter Burdon, Senior lecturer, University of AdelaideLicensed as Creative Commons – attribution, no derivatives.