Is this the end of tax returns for 11 million Aussies?
Picture a tax system where everyone is entitled to a $3000 standard deduction, free of the rigmarole of deductions such as investment expenses, charitable giving, and interest on negatively geared property.
That's what has been proposed by a report by Blueprint Institute, aptly titled "Bye-bye tax returns."
The report estimates that implementing a standard deduction would end up providing 80% of taxpayers (around 11 million people) with a tax cut of $400-$1000 per year, while all income levels would pay on average $400-600 less tax per year.
"This would reduce the tax they pay according to their marginal tax rate—by $900 for someone on the 30% rate, for example."
The change could have myriad other benefits, according to the report, including reducing compliance costs by $4 billion per year, stamping out gaming, eliminating 7-9 million tax returns per year at a saving of $750 million, and cost the budget less than $5 billion annually.
Not that you'd be forced to receive the standard deduction. Those with high work expenses, for instance, could still submit an old-school tax return, deductions and all.
The thrust of the proposal centres on the elimination of complex and open-ended deductions.
"When you get your phone bill, the phone company doesn't ask you to itemise all the calls you made, on what dates, for how long, and to whom," the report states.
"They send you a bill. And that's exactly how our tax return process should work."
A standard deduction would assumedly be bad news for tax agents but good news for our hip pocket. The report states that 70% of taxpayers use a tax agent, while half of people spend more than $175 a year managing tax.
"And, indeed, tax preparation costs are themselves tax deductible, so taxpayers end up picking up around a third of the tab."
In other words, those who do their own tax returns currently subsidise the fees charged to those who get them done professionally.
The report also states that the standard deduction option would also increase equality in the tax system.
"Those who know how (and are willing) to game the system do so—and pay less tax than everyone else as a result," it states.
"That means that, in order to raise a given amount of revenue, taxes must be higher on everyone else."
The idea isn't radical; tax systems with standard deductions already exist in the US, Japan, France, Germany, Belgium, Spain, Poland, Korea, and Sweden.
Nor is it a new idea in Australia. The 2009 Henry Review, 2015 Re:think Tax Discussion Paper and the 2017 Inquiry into Tax Deductibility all toyed with the idea of a standard deduction, yet none led to meaningful reform.
Adrian Raftery, from the accounting and tax service Mr Taxman, believes those who claim less than $3000 would jump at the changes, while those who usually claim more will continue business as usual.
"The reality is that those in the first basket usually do their tax returns themselves so they aren't going to save anything in terms of tax preparation fees, and those in the other basket are only going to diddle themselves out if they elect to not see a tax agent and accept the $3000 standard deduction."
Raftery also worries that a standard deduction would leave a hole in the government balance sheet.
"The reality is that there will be less tax collected by the ATO - so where does Blueprint Institute suggest this will be funded? There needs to be a reduction somewhere else in the Federal Budget to balance the books."