Adding Standard Deduction to Income Tax Policy

Continuing the discussion from Tax & welfare policy (v2.0):

Hi Everyone

Another idea we could consider incorporating into our tax policy: adding a standard deduction for income tax filers.

From the Henry Tax Review:

“Currently over 70% of tax filers seek advice from a tax agent, however, 86 per cent either claim no deductions at all or only claim work related expenses, gifts and costs of managing tax affairs. Australia’s use of tax agents is high by international standards; second only to Italy’s.”

This adds extra costs to individuals in terms of employing the services of a tax agent and costs to the public in the form of bureaucracy to process these expense claims and tax returns.

There is currently a complex array of claimable expenses. Instead of having to navigate this (or pay for a tax agent), we should give people the option of simply claiming a standard deduction and leaving it at that. They would not have to keep records/receipts or use a tax agent. We should aim for this to be done electronically and set up so the automatic deduction comes off fortnightly pay as part of the PAYG system rather than having to wait for the EOFY, giving taxpayers more money in their pocket every pay cycle. This would effectively remove the need for the majority of tax payers to have to prepare a tax return, instead allowing them to lodge a default return prepared by the ATO.

The exact amount of the standard deduction would have to be discussed, but could be a percentage discount (say somewhere between 1-2%) off your tax rate up to a certain capped amount.

This could be combined with tighter rules regarding the deductibility of the expense and its role in producing income which would also constrain the scale of work-related deduction claims. However, people with more complex affairs or high expenses would not be disadvantaged as taxpayers would still have the option of substantiating a claim for all eligible expenses if they didn’t want to just claim the standard deduction.

I think this would appeal to a large number of people and fits well with reducing bureaucracy and waste and improving social equity.

Interested to hear peoples thoughts.

Note the line – “Limit tax exemption to charitable donations and items purchased for the purpose of disability support”.

The policy aims to substitute a higher universal tax-free threshold for the tangle of individual deductions and offsets we have now. We probably wouldn’t need a standard deduction in pirate-topia because so few deductions would exist.

Ahhh sorry I must have missed that when I was reading the policy document - makes sense.

Pirate-topia is sounding better all the time!

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I worked in the ATO for almost two decades. The sad fact is that our government already has enough information on most of us that they don’t really need income tax returns. I doubt there’s a salary & wage earner for whom the tax office couldn’t generate a return, present it to the taxpayer and say “sign here”. For that group, I’d say it’s possible to pretty much eliminate the need for lodging.

Corporations and high-wealth individuals present problems. Where income is high enough, there’s incentive (and capacity) to evade income tax. The question then arises; is income taxation the best answer?

There was once a proposal for a corporate consumption tax. Effectively a very high GST on all consumption by any entity that isn’t a flesh-&-blood person. I wasn’t part of that project; how it was intended to handle things like trusts an partnerships, I don’t know.