Australian Tax Receipts - pros and cons

If you lodged an Australian tax return for the 2013-2014 financial year, you probably received a "tax receipt".

I like the concept. Of the many thousands, tens of thousands, or even hundreds of thousands of dollars of tax you paid in that year, it purports to explain, in numbers and graphics, how that money was spent by the government. It has the potential to create a greater degree of knowledge and engagement about what our tax dollars are spent on. 

To my mind, however, there are a couple of issues (and possibly more) with the way it is currently executed. 

The chart doubles up on "welfare" expenditure

The first is that the way it is presented can create the impression that more is spent on welfare expenditure than is really the case. Essentially, it represents welfare expenditure twice. The first item on the receipt is "welfare". About 37% of government expenditure (as set out on the receipt) consists of welfare. Immediately below this item, the receipt separates this larger figure into five different categories. From highest to lowest, "aged" (15% of government expenditure - higher than I thought would be the case), "families", "disability", "unemployed" (less than 3% of government expenditure - lower than I thought would be the case), and "other". 

Any reasonable person paying attention to the graph will see that this is double up. And I appreciate that providing this more nuanced information is valuable. But we don't respond rationally to graphs and as presented, I think there's an argument it over-represents the government spend on welfare.

This doesn't mean that I think the government spends too much or too little on welfare. It just means that the way it's currently presented doesn't necessarily help us have informed intuitions upon which to debate this. 

The chart ignores "tax expenditures", or "spending through the tax code"

As far as bar charts go, it's fairly attractive. But something that is attractive isn't always clear. And the bigger issue I have with the concept is that it focuses on one type of expenditure and conceals another, equally important, type of government expenditure.

Think of it this way. In very simple terms, if the government wants to provide an incentive for a person to do something, and they want to use financial incentives, there are two basic ways they can do it. They can provide you with the thing or service or subsidise it. Alternatively, they can provide you with tax benefits for doing it.

If the government provides you with the thing or service, or subdises it, then this is a clear expenditure, and will show up in the tax receipt. 

If they provide you with tax benefits, it won't. 

The government obviously thinks there are good policy reasons for me undertaking CPD activities. If I pay for them myself, I can claim the expenses against my taxable income. To make it easy, let's say I spent $100 and my marginal tax rate is $30. In effect, the government has given up on $30 worth of tax income it would have otherwise received to encourage me to undertake CPD.

In a very real way, this is equivalent to me paying the $30 in tax and the government giving the $30 back to me in the form of a subsidy for this CPD. However, because it is done through tax, it won't show up on the tax receipt.

Another example, that I've spoken in a degree of detail about, is concessional treatment of superannuation contributions. Remember the "15%" of government benefits the government spends on "aged" welfare? Treasury forecasts that in several years, tax expenditures relating to superannuation are going to exceed direct expenditures relating to the aged pension. 

But because this "tax expenditure" isn't covered by the receipt, it's something that we become even more blind to, and is even less likely to enter into the conversation about how the government operates. 

Sonnie Bailey

Sonnie is the founder and principal of Fairhaven Wealth.

Before founding Fairhaven Wealth, Sonnie worked in the legal and financial services industries for over a decade.

Sonnie first became involved with financial advice as a specialist financial services lawyer. For many years, he was an “adviser of advisers”, reviewing thousands of advice files prepared by hundreds of financial advisers, and providing feedback in relation to the quality and appropriateness of advice; industry best practice; risk management; and regulatory compliance. He has published work in industry publications and spoken at various financial advice conferences.

Sonnie has also worked with banks, investment management firms, insurers, and derivatives providers.

Sonnie has worked as a private client lawyer, focusing on succession, estate planning and trusts. He ran his own legal firm in Australia before relocating to New Zealand. He has also acted in independent trustee and company director positions.

Sonnie is passionate about helping people achieve their goals and manage the risks to which they are exposed.

He has written extensively on his blog, New Zealand Wealth and Risk, which can be found at www.wealthandrisk.nz.

Sonnie is married to his wonderful wife Chrissy, and has two young children, Ben and Anna.