A better way to collect tax

ScreenHunter_64 Jul. 29 15.04

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.

Comments

  1. migtronixMEMBER

    Certainly a more rational approach. I’d prefer to pay as you owe rather than go (i.e. end of the fin year) but removing one more obstruction to the employer is certainly better

  2. GunnamattaMEMBER

    I think the idea has plenty of merit.

    The banks could carry out the service as some sort of exchange for the implicit guarantee which reduces their borrowing costs.

    And imagine the sighs of relief from the zillions of small business types. Banks could do super, medicare/health insurance levies, and HECS etc as well

    • Brilliant. Let’s just give even more power/control to the banker class. And of course, all eloquently couched in terms that appeal to our well-indoctrinated “economic expert” intelligentsia’s myopic (yet strangely arrogant) minds — the oh so wonderful benefits of “economy of scale” and “specialisation”.

      What’s that you say, Coles and Woolworths?

      Hey, here’s an idea! Why not go the extra step, eliminate the retail banking system, and have the RBA do the lot.

      Centralisation baby.

      I weep for humanity.

      • migtronixMEMBER

        That’s a little bit unfair I don’t think we’d give the banks tax farming status but we could set up an electronic system that could collate earnings and have them cross referenced to deposits etc. I know banks aren’t the answer but burdening the sme isn’t either.

        Btw the CBA was once the lender of last resort for the government and any Australian citizen! Westpac and ANZ still managed to be competitive. Then the RBA was invented…

      • “burdening the SME”?? What rot.

        I’ve owned and operated SME’s since my early 20’s [EDIT: And always done the bookkeeping myself]. This is just another BS excuse — couched in oh so plausible-sounding economic terms — to introduce something having the result of increasing the power/control of the banks.

        It is in just the same vein as the LNP’s brilliant (/sarc) idea — since stolen by the ALP — to introduce the “Small Business Superannuation Clearing House”. Purportedly to “help” SME’s by “encouraging” them (for now) to send employees’ super payments in with their BAS payments … ie, direct to the ATO.

        Hallelujah! All that time and effort saved. No more sending payments to X different super funds!! Jeebus, has noone heard of automated payments in their SME’s bookkeeping/banking software?!

        Noone pauses to think of the ramifications of having (what should be) employees’ pay (siphoned off as “super”) going to their super funds via the ATO.

        F*** me, the world is full of naivety.

      • migtronixMEMBER

        Ok red that’s really unfair. Add up all the time you spent managing employee withholdings and multiply it by gross profit/hour. If you’re saying managing withholding/HECS has no cost to an SME (as opposed to a large corp with HR/finance departments) that’s crazy. If you’re saying its better than the banks yes but I believe the banks were just being used inter alia because they have exposure to the data. We DON’T want them controlling the process but we could force ADIs to implement software that manages such transactions. After all retailers are forced to implement software that brokers through the banks (or they could setup bitcoin!)

      • “Add up all the time you spent managing employee withholdings…”

        So inconsequential as to not be worth calculating. Seriously, in the age of computerised SME bookkeeping software with payroll functionality, it’s child’s play. And I say that as someone who has done it for up to 20 employees at once, with a varying mix from salaried to f/t to p/t and casuals.

        I do not resile one bit from my argument. This proposal is nothing more than banker-enabling BS, under a veneer of “economic” theoretical respectability.

      • migtronixMEMBER

        Red: Fair enough. I don’t have the direct experience except for managing contracts (i.e. 1 man show) and but I remember setting up thing like MYOB back in the early 90s for dad and it didn’t seem like childs play (and I’m a geek!).

    • Yes good idea as someone who battles with Tax and Super in an smallish business!!!

      However trusting the damned Banks with this stuff. Those parasites will find a way of ripping the system off and impoverishing us in the process! They’ve never failed yet. They lie and they cannot be trusted with anything.

      • +10. I remember the time when CBA stole regularly $2 every year around Christmas from our account. We never left the issue unresolved and at the end the bank gave up and stooped doing it. It was always excused with some software problem or mistake or just something which no one could explained. They are all criminals as we very well know now after GFC.

    • The deposits guarantee scheme is worse than worthless, according to the IMF … it actually “increases moral hazard greatly” (page 26).

      Indeed, in suggesting how to go about making the FCS viable, they also say that “in a highly concentrated banking system, such as Australia’s, it may be difficult to establish a fund of sufficient size that the deposit guarantee would seem credible”

      http://www.apra.gov.au/AboutAPRA/Publications/Documents/Financial%20Safety%20Net%20and%20Crisis%20Management%20Framework%20%E2%80%93%20Technical%20Note%20%E2%80%93%20November%202012.pdf

      Basically, we’re f***ed, coming and going. By bankers.

      This proposal by Mr Putland is akin to saying “bend over a little further”.

      • Aren’t they prepared for bail-in according to G20 documents? If it is so, then we don’t need any special fund for the deposit guarantee.

      • Yes, we are. Prepping for bail-in, per our G20 obligations (thanks Julia), is the key “strategic initiative” for APRA, as stated in the 2013-14 Portfolio Budget document.

        The FCS is needed as cover. So all the little “deposit” holders believe that their “money” in the bank is safe.

  3. What a great idea! But I can’t help but think there might be some problems with implementation…. how would it handle eg employer super contributions?

  4. CornflakesMEMBER

    There might be a few hurdles when dealing with short term overseas workers who don’t have local bank accounts but the rest has merit.

  5. Good idea, but not much help for people who never know whether they are under the PSI rules until May each year.

    • migtronixMEMBER

      Absolutely! Cleaning up PSI would be great too but I’d be happy to move from contractor to employer with PAYG/Super taken out of the equation

  6. Thank you, Dr Putland. An immediate productivity benefit.

    I see a problem in the visibility of taxation: The geese will hiss when they feel each feather plucked. Even more so if that disgusting state impost – Payroll Tax – is included and thus revealed.

  7. Asking the employer to collect PAYG isn’t simply a relic of the pre-digital age. It’s because they have access to the employment contract.

    At the moment, the salary banked into an acccount doesn’t reflect the employee’s taxable income.

    Deductions for HECS, family support, etc aren’t tax deductible, but the reduce the cash salary banked.

    Conversely, employee reimbursements are normally tax-free, but are included in the cash banked.

    The Bank will need to start receiving data related to these amounts – they can’t simply withhold based on cash.

    • This is the best idea I’ve heard in a long time. It does take time to figure out all this crap for employees that could be spent elsewhere.
      As for payments that are not taxable they could simply be paid using a different code or something that the banks would recognize.
      HECS, Family support, etc are the biggest pain the in neck. the employer didn’t cause these deductions why should they have to administer them.
      It makes a lot of sense to me for the administration impost to be passed onto the banks where economies of scale can be enjoyed.

      • Pconners has a good reply to this, below.

        Most businesses tend to outsource payroll. The smaller places tend to “outsource” it to one of the thousands of book keeping services out there. The larger business go to places like Talent2.

        I doubt that the banks could/would offer a cheaper service, especially when their need to make a 15%+ ROI is factored into their pricing.

        I also doubt that the economies of scale are as significant as you believe. Each employment contract is unique – they can’t be commodified in the same way that, say, car finance loans can be.

  8. Why don’t we leave the governing to the banks too? They have anyway already usurped the power of creating money and the sovereignty of our “democratic” societies.

  9. The Householder

    Interesting idea and could well have merit. The only difficulty I can see straight up is the calculation of FBT.

  10. 1. I wonder what proportion would switch to cash in hand

    2. I’ve got multiple bank accounts – who taxes me how much? Maybe each would look like I’m below the tax-free threshold for the year.

  11. To succeed such an idea in practice we have to have fully automated (with a general software) system of tax payment, which means no tax credit, no tax benefits, no any tax expenditure.

    Banks are the most efficient entities of serving their own interest and they will never agree to anything which can inflict with their simplified system of easy money making from nothing.

    They could have done much more for the efficiency of all other productive sectors and ways of payments, but what they are interested in is only to make money circulation cost tending toward zero and their profit sky rocketing. Paying taxes wouldn’t be their cup of tea if they have to deal with our complicated tax rules, which wouldn’t be easily transformed in an automated “production line” like home loans for example.

    Have anyone asked the question why home loans had the greater growth in developed countries than other productive loans? When one answers this question then he will understand why such an idea need fundamentally different conditions (absolutely free market and 10% government only). This is not the capitalism people would dream of.

  12. Well, as a part owner in a small business, we outsource all of our payroll matters to an external specialist provider. I doubt whether the banks would be able to get more efficiency gains than these firms.

    Plus there’s a certain level of admin that needs to be retained within the business (eg salary levels, employment dates, leave etc). The actual remittance of tax is a pretty small component of the overall employee management function.

    Doesn’t seem like a big deal to me, but maybe there are even smaller firms that can’t afford the outsourced solution…

  13. Thanks to Leith for posting this article, and to the commenters who responded.

    Matt (July 29, 4:33pm) asks how the system would handle employer-funded super contributions. One way is to roll them into wages and salaries and let the banks deduct super as they deduct tax. Another is to fund super contributions out of general revenue, as I proposed in the third paragraph of an earlier comment headed “Internal devaluation by tax reform“.

    The first paragraph of that comment has an alternative method of reducing the cost of PAYG deductions: “Contrary to conventional wisdom, it’s possible to increase the GST without raising the cost of living. The trick is to use the extra GST to replace the PAYG component of personal income tax — that is, the component withheld from wages by employers. Employees continue to receive credit for the withheld PAYG tax (calculated on their “grossed-up” wages). But businesses, instead of forwarding the withheld PAYG tax to the ATO, pay a higher GST. In the aggregate, the withheld PAYG tax covers the additional GST, so there’s no need to raise prices. And there’s no reduction in after-tax wages or widening of after-tax wage inequalities.” And of course I’m aware that the GST is not the only possible substitute for PAYG tax!

    If the collection of PAYG tax is delegated to banks, as I propose in the above article, the compliance cost is removed from the cost of labour but the tax itself isn’t — whereas if employers retain withheld PAYG tax, as I proposed in the earlier comment, the tax itself is removed from the cost of labour but the compliance cost isn’t.

    Having proposed two alternatives, I’m not about to die in a ditch defending one against the other. I welcome the comments especially because of their implications concerning the relative merits of the two options.

    . . .

    Cornflakes (July 29, 4:41pm): If banks collect PAYG tax, short-term foreign workers will need a local bank account. That issue doesn’t arise if employers retain PAYG tax.

    HFW (July 29, 4:42pm): I hadn’t thought of the Personal Services Income rules. If banks collect PAYG tax, I don’t see why they can’t do the same for PSI income if and when it is eventually paid out as wage/salary income. If employers retain PAYG tax, I don’t see how the PSI problem gets any worse.

    migtronix (July 29, 4:49pm) notes that if banks deduct PAYG tax, there will be less temptation to avoid employer/employee relationships. The same can be said of allowing employers to retain PAYG tax while employees still get credit for it (although this might raise its own avoidance issues).

    jgmell (July 30, 1:20pm) says that if banks deduct PAYG tax, “payments that are not taxable… could simply be paid using a different code or something that the banks would recognize.” I suggest a different source account. The issue doesn’t arise if employers retain PAYG tax.

    The Householder (July 29, 5:17pm): As FBT is payable by employers, I don’t see any way to involve employees’ banks. If it were payable by employees, I suppose paying it through employees’ banks would be possible but clunky. If employers retain PAYG tax, there will no longer be any need for FBT: if they pay a worker more in kind and less in money, they will retain less PAYG tax out of the worker’s total income.

    Karan (July 29, 5:42pm): If banks deduct PAYG tax, it will not become easier or harder to evade tax through cash-in-hand payments, and it will not be easier to claim multiple tax-free thresholds through multiple bank accounts than it now is to claim multiple tax-free thresholds through multiple employers. If employers retain PAYG tax, they will not gain any advantage by paying employees cash-in-hand.

    pconners (July 30, 12:02pm): Yes, in the collection of PAYG tax, employees’ banks would achieve greater efficiencies than specialist payroll firms, because an employee’s bank would see the combined income from multiple employers, whereas a payroll firm engaged by one employer would not. But if, as you say, “the actual remittance of tax is a pretty small component of the overall employee management function,” then allowing employers to retain PAYG tax will be much more attractive than requiring banks to handle it.

    Thanks again for the feedback.

  14. If a cloudprovider is used (software as a service) it could be organized by the ATO as a special purpose vehicle.

    The ATO could leverage scale to gain contractual pricing benefits and then pass this onto SME or micro business.
    Standardized contracts could be used made available with standardized addons HR/legal support being similarly available.

    This help/service should not be charged for until a business hits viability or other metric.

    You want to help SME’s great help them but using the tbtf – not a good idea.