I have a cunning plan. Iâ€™m intend to withdraw all my savings and invest them in â€œThe Daily Chrenkâ€. Then, when the current financial year comes to a close and it is time to file a tax return, Iâ€™m going to declare significant losses. This will not only reduce my tax liability for 2016/17 to zero, but is also likely to carry over into subsequent financial years. In truth, all this is not really necessary because one actually needs an income to pay income tax (so please help me monetise â€œThe Daily Chrenkâ€. Arianna Huffington? Anyone?) but all the cool kids are doing it and I feel like Iâ€™m missing out.
If you are a masochist, you must by now be familiar with the story, based on Donald Trumpâ€™s 1995 New York state tax returns leaked to â€œThe New York Timesâ€, that Donald has suffered a loss of $US915,729,293 in federal taxable income that year, which might have enabled him not to pay federal taxes for up to two decades subsequently.
Queue in the outrage.
Including from â€œThe New York Timesâ€ itself, which as â€œForbesâ€ reminded us earlier this year â€œpaid no taxes [for the tax year 2014] and got an income tax refund of $3.5 million even though they had a pre-tax profit of $29.9 million in 2014. In other words, their post-tax profit was higher than their pre-tax profit. The explanation in their 2014 annual report is, â€˜The effective tax rate for 2014 was favorably affected by approximately $21.1 million for the reversal of reserves for uncertain tax positions due to the lapse of applicable statutes of limitationsâ€™.â€
Or from Hillary Clinton, who was mad that Trump â€œapparently got to avoid paying taxes for nearly two decadesâ€”while tens of millions of working families paid theirs.â€ Except that Hillary herself used exactly the same mechanism as Trump did, writing off long term capital losses of $US699,540 to reduce her tax liability in 2015.
If there is any story â€“ or scandal â€“ here it is the not exactly new or shocking revelation that rich individuals and companies minimise their taxes, and the richer you are the easier it gets, not just because you can afford nimble and innovative tax lawyers and accountants to manage your finances but because there is a large number of schemes, devices, vehicles, and deductions applicable and available to higher incomes. This is the inherent unfairness of many if not most taxation systems throughout the developed world: up to half of the population â€“ those at the lower-income end â€“ effectively pay no income tax any more, while those in the top 1 to 5 per cent of the income scale are able to effectively minimise (often drastically) their tax liability through a number of quite legal mechanisms (with the emphasis on legal). And so the overwhelming burden of taxation falls on the middle class â€“ too well-off not to pay tax, and not well-enough-off to pay little tax.
My friends in tax law who do the sort of work done for Trump, â€œThe New York Timesâ€, Hillary Clinton and hundreds of thousands of others tell me that their clientsâ€™ attitude can be simply stated as: the way the government wastes taxpayersâ€™ money I will be damned if I give them one cent more than I absolutely have to. Having worked for the government for many years I can only agree with this sentiment, and so I cannot in good faith blame the Donald Trumps of this world for trying to use every possible legal loophole to reduce as much as possible the taxes they have to pay. But as a quintessential member of the middle class I can only wish I was in a position to do the same, not even in the sense of being able to earn a few millions a year to get me into that high-income-high-minimisation category (though that would be nice too) but so that there would be mechanisms available to middle income earners to enable them to reduce their tax liability to the same extent as the high and very high income earners can.
This is pretty much the reason why Iâ€™m a big fan of flat taxes. They will never happen in Australia (or the United States for that matter) because our society is by now too wedded to what it is sees as the inherent fairness and equity of the progressive tax system. The social democratic idea that the more you earn the greater proportion of your earnings you should turn over to the state might sound good in practice, particularly if you are a social democrat, but it works less than perfect in practice. Recall my whinge a few paragraphs before about the real-life tax impact: Lower-income earners either pay no tax at all, or effectively pay no tax because they receive more in government support than they pay in tax, while at the other end, the high income earners successfully minimise their tax liability. How progressive is this income/tax pyramid?
Hence my love of flat tax. It reduces the current mind-boggling libraries-ful of tax legislation and regulation to a one-page document, it eliminates the need for tax lawyers and accountants (sorry guys) and it guarantees fairness and equality (even if not in the social democratic sense) â€“ under flat tax there are no deductions, write-offs, exemptions, loopholes, or schemes; if the flat tax is 20 per cent (or pick any other number) you pay 20 per cent, and so does everyone else. By the way, you also set the company tax at the same level, so there is no incentive for individuals to incorporate so as to effectively lower their high marginal tax rate, and you similarly get rid of the myriad exemptions, concessions and deductions businesses use to reduce their liability to the taxman (and woman).
And so, some morning, while in the shower, I softly croon to myself:
Imagine thereâ€™s a flat tax
I wonder if you can
No loopholes or deduction
Tax equity of man
Imagine all the people
Paying all the same… You…
You may say I’m a dreamer
But I’m not the only one
I hope someday you’ll join us
And the world will pay as one
But like John Lennonâ€™s utopia (John was a new-born conservative towards the end of his life, by the way), Iâ€™m not expecting it to ever come true.