Asessing and addressing tax system complexity

This article suggests that the proposals for a standard deduction for work related expenses and the costs of managing tax affairs of individual taxpayers, due to be introduced from 1 July 2012, are flawed from a number of perspectives. After briefly reviewing international practice and examining the proposed policy option for Australia in some detail, the authors suggest that it might not be appropriate policy to provide such deductions in the first place. The article then identifies a number of difficulties associated with the policy design of the standard deduction, focusing on three specific issues: the take up ratio of the proposed standard deduction option; the revenue impact; and the potential simplification impact of the proposed policy. In the concluding section, some modifications or alternatives to the currently proposed standard deduction are suggested. Overall, it is concluded that the proposed policy will not achieve its policy objectives, and that - in particular - it is very unlikely that there will be any significant simplification outcomes as a result of the policy proposal.

The chapter is derived from an Australian Research Council (ARC) Linkage project being conducted by the author in conjunction with Professor Chris Evans (UNSW Australia), Professor Richard Krever (Monash University) and Dr Phil Lignier (University of Tasmania) together with the Institute of Chartered Accountants in Australia (ICAA). The views expressed in this paper are those of the author and do not necessarily reflect those of the ARC or ICAA. This chapter also draws from previously published materials by the author. Most of these materials have first appeared in Australian Tax Forum and have been reproduced with permission from the Tax Institute.

The most recent, significant tax reform review in Australia, popularly known as the Henry Review, was publicly released just over six years ago. This article provides a critical examination of Australia's experience in tax complexity management since the Henry Review. Two main observations are put forward. First, not surprisingly, very few of the Henry Review's recommendations related to tax simplification have been implemented. The Henry Review has achieved relatively more with respect to personal income taxation than business income taxation. Second, tax complexity in Australia has been increasing since the Henry Review from both the legal and economic perspectives. An attempt is then made to explain why it is so hard to simplify the tax system in Australia and elsewhere.