Cross-posted from Gavin Putland:
Australia’s one million employers collect income tax payable by fewer than 12 million employees. One collection point for every 12 taxpayers, without allowing for employees with multiple part-time jobs, is not much of an economy of scale. Nor is it an economy of specialization. Employers collect tax, not because they are competent to do so, but because the government won’t let them do business unless they also collect tax — even if that requirement renders their business unviable.
The argument that red tape creates jobs for those who handle it is therefore a fallacy. If an enterprise, or a nation, can afford to employ a certain number of workers who handle tax compliance, it can afford to employ a larger number who actually create value. The same applies to workers in professions that we associate with tax: if an enterprise, or a nation, can afford to employ a certain number of accountants to handle tax compliance, it can afford to employ a larger number of accountants to support new productive ventures. The greater the fraction of paid staff time that an enterprise must spend on compliance rather than production, the greater the probability that the enterprise will fail — throwing all its employees onto the dole queue — or not be started in the first place. The more unpaid time a businessman must spend on tax compliance, the more he will be inclined to work for someone else instead of himself — to take your job instead of creating his own. Making work destroys jobs.
Our wages and salaries, net of the tax deducted by our one million employers, are deposited directly or indirectly in financial institutions. According to the RBA (March 2012), Australia has only 167 Authorised Deposit-taking Institutions (ADIs), comprising 65 banks, 9 building societies and 93 credit unions. If our PAYG personal income tax were collected by ADIs instead of employers, the average number of taxpayers per collection point would rise from 12 to 70,000. That’s economy of scale. It’s also economy of specialization: collecting tax means moving money, which financial institutions do best.
The Federal Parliament, using its powers in respect of taxation, banking, corporations, and “matters incidental” thereto, can:
- require employers to pay wages and salaries into ADI accounts and to inform the ADIs that such payments are taxable,
- require each employee to nominate a single account into which all income earned as an employee will be paid,
- require the ADIs to deduct and remit PAYG tax from such accounts, and
- pay the ADIs for their services, to ensure compliance with s.82 of the Constitution.
This system would greatly simplify the handling of multiple part-time jobs, intermittent employment, and regular charitable donations. If you’re an employee, your bank would know that deposits from certain sources are taxable, and that debits to certain payees are deductible against taxable income. After each taxable deposit, the bank would recompute your taxable income for the year to date, compute the tax payable thereon (pro rata), deduct the tax paid to date, and pay the balance. Credit remaining at the end of the year could be carried forward. An annual tax return would not be needed unless you had further deductions or additional income.
For present purposes, the definition of employee should preferably include all suppliers whose customers are required to withhold personal income tax. Child-support deductions, which employers are currently compelled to handle, and income-testing of welfare could be brought into the same framework.
If we must have PAYG personal income tax, it should be collected by financial institutions. Requiring employers to collect it is a relic of the pre-digital age. In every respect — scale, qualifications and experience, and access to relevant information — financial institutions are better placed to do the job.