Old wives and tax

According to the managing director of a law firm -- possibly a law firm which specialises in tax law -- there are some old wives' tales about what can and cannot be claimed as a tax deduction. Claimed deductions include some that are deliberately false -- and some that are more innocent mistakes.

What?! There are people who make innocent mistakes when completing their tax returns? Are there really people who don't clearly understand every one of the thousands of rules and regulations regarding what can and cannot be claimed? Goodness.

Well, that could explain why there are law firms which make a good living entirely on their claimed knowledge of tax laws. Because no-one else will claim to know all the ins and outs of tax laws. Large corporations employ tax law experts. Individual taxpayers have no hope at all.

Our tax laws are incredibly complex. Yet we -- each and every person who earns or could earn anything at all -- is expected to complete an accurate and honest tax return. Each and every year.

Unless we convince the tax office that we will never again earn enough to be liable for tax. And it takes a good knowledge of tax law to gain that happy status.

What is the reason for the complexity of tax laws? After all, we earn money and the government expects to gets its share of whatever we earn. That sounds simple enough.

A lot of the complexity is due to tax deductions. Deductions are the cause of many "innocent mistakes" and "deliberately false" claims. Why is that?

Because the rules for allowable deductions are complex. And because they continually change.

Old wives' tales may have been spot on last year. That does not mean that they will be correct this year. By next year, the old wives' tales will be just that: old wives' tales.

Why are there so many -- and such complicated -- rules for tax deductions?

Because the government wants to reward inefficient businesses.

*In* efficient? Yes.

You pay tax on your earnings -- less the cost of the earning. So the more it costs to earn a dollar, the less tax you pay. The more it costs -- the less efficient your earning -- the smaller the share demanded by the government. If you can reduce the cost of running your business -- the government will charge you more in tax.

Tax deductions are a way in which the government rewards bad business.

That's why everyone is encouraged to increase tax deductions. Encouraged to decrease the efficiency of their efforts to earn. Because will be rewarded by government for being bad at business.

To encourage better business, income tax should be a tax on income. Purely on income. With no rewards for slipshod business processes.

Here is a better -- and simpler -- approach to income tax:

Earn money, pay income tax.

If it costs you a lot to earn the money -- improve your business efficiency.

If you can't improve efficiency -- charge more for your product. Or accept a smaller profit margin. Or learn some basic facts about operating a business.

If you can't charge more -- you are in a failing business. No-one wants your goods or services. Try another business -- one that is in demand.

For every dollar that comes in you pay, for example, ten cents to the government. Simple! No need for tax lawyers. No need for specialist tax accountants. No need for high risk tax avoidance schemes. Old wives will save thousands each year because they will not need to emply a tax accountant.

And Australian business will be more efficient.

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Dr Nick Lethbridge / Consulting Dexitroboper
Agamedes Consulting / Problems? Solved.
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"Wow, I never thought of it like that before." … Joan D. Vinge