Australians, like many people around the world, have a pathological desire to minimise tax. We go to all sorts of effort to minimise our tax including borrowing money to buy a property we may not want, or putting it into a complex trust we don’t understand.
I understand the inclination. We all work hard for our respective incomes and when, for every extra dollar you earn, 30 cents, 40 cents or even 50 cents gets taken out by the Tax Man, then it can get pretty frustrating.
However, I think it is worth revisiting what tax is all about and also checking out a cautionary tale of what happens when people don’t pay tax.
As you probably know, our taxes are what pay for government spending. Taxes put out fires, keep our streets safe, build us new roads, provide our children with an education, provide our families with healthcare, ensure our food and water are safe and provide us with beautiful parklands. In short, the taxes we pay provide us with benefits every hour of the day and every day of the year.
And, not to put too fine a point on it, almost all of the things I mentioned above are simply not possible for us to do on our own. We couldn’t build a highway, employ a police force or educate teachers without pooling our collective taxes together. By bringing these funds together we get to build a local area, a state and a country we can be proud of (cue the patriotic trumpet blast).
Many of us could imagine ways that our taxes could be spent better. In fact, at election time, EVERYONE seems to be able to imagine a way our taxes could be spent better. However, aside from the most corrupt governments, our taxes do directly benefit each and every one of us in sometimes unpredictable ways.
I am lucky enough to live a street back from Sydney Harbour. It’s not that I am in some penthouse apartment perched over the water, hardly that. However I do live in a lovely village suburb along the harbour and so, no matter where I need to go, I end up driving past and glancing over its glistening waters. In fact, our harbour is the defining feature of our city – more than the Opera House or the Harbour Bridge, simply because neither of them would be quite so unique or beautiful if they weren’t on our gorgeous harbour.
Now imagine Sydney Harbour as a swamp. Smelly, green and full of all sorts of waste. No one would picnic by it, no one would swim in it, and there wouldn’t be much interest in living near it.
The difference between those two images is my taxes at work. Street cleaners keep things like cigarette butts from ending up in our waterways and, ultimately, in our harbour. Likewise, a myriad of other public servants work constantly to keep the harbour at its glistening peak.
And I have to admit, I’m okay with that. In fact, I am more than okay with the fact that my lucky lifestyle and beautiful environment is paid for in part by the taxes I pay.
And there are even more direct benefits of taxes. Many of us will, at some point, have to visit the Emergency Room. While the whole process can seem torturous, the key thing to remember is exactly where would we go for that type of “drop of a hat” care if all our taxes didn’t pay for it to be there? I don’t know about you, but pay- as-you-go healthcare means I need to be able to predict when I need to see my doctor, as I won’t be able to get an appointment with him any earlier than one week out. That doesn’t exactly work when your appendix bursts!
So, hopefully I have given you some insight into the connection between taxes and the greater good. To highlight this, how about we tell the tale of a place where that connection has been forgotten – Greece.
(I should probably disclose that I am married to a gorgeous Greek Australian boy and love the culture to death. The handling of their government’s finances? Not so much.)
Tax evasion as a national pastime
First of all, let’s explain a term you would have heard during the Global Financial Crisis back in about 2007/8 and, depending on where you live, you may hear all the time.
‘Budget deficit’ – this simply means not having enough money to pay the year’s bills. If we use it in our own situations, then generally this means we end the year with a higher credit card debt because we have spent more than we earn. The money has to come from somewhere, so we borrow to pay the bills we have left.
When you use this to describe a government, it means that they have spent more than they earn from taxes. Now in the case of a government, they don’t end up with a credit card debt (although they can end up with pretty bad interest rates), but for every year that they have a deficit, the amount they owe to whoever lends them that money builds.
In Greece it has been building for some time.
Now when all of this went pear-shaped for Greece in and around the late 2000s, there was a lot of focus on their overspending government. They had blown all of their budgets on infrastructure in preparation for the 2004 Olympics and, due to their massive build-up of debt, were also spending a lot of money just paying the interest.
However what all of this focus on their spending ignored is one simple truth – tax evasion is a national pastime in Greece.
Each and every year the government was receiving far less money than it was owed by its citizens. When a study done by Adair Morse and Margarita Tsoutsoura6 provided mathematical evidence of this, no one was surprised. This was because it had been an open secret within Greece for some time.
In one part of their study, they focused on self-employed professionals like doctors, accountants and lawyers and, using their loan applications with some leading banks, estimated that they had “hidden” 28 billion euros of income when reporting to the tax agency in 2009. If taxed at 40%, then the unpaid tax for this group alone came to nearly one third of that year’s government budget deficit or shortfall.
To get a sense of how pervasive this is in the culture, when applying for a loan from the bank, while they may give the bank their annual tax return or tax lodgement as evidence of their income, the lender knows they will need to adjust that income up to get an accurate estimate of the income they are actually earning.
To repeat that, their banks weren’t using the income they put on their application, they were increasing it because they knew that they would be earning more than that, but they didn’t want to tell the Tax Man.
This absolutely blows my mind. Here in Australia when you apply for a loan, if there is any part of your income that isn’t 100% verifiable then the bank won’t count it. Period. The thought of ADDING income to what you have put on your application would give most bankers here a heat rash, let alone doing that when they have no proof of what you are actually earning. (I might just go and give that a try and see what happens!)
When tax evasion is acceptable at an institutional level, you know you are dealing with something that is part of the cultural psyche.
Unfortunately this isn’t the end of the story. In Greece, the tax system was also riddled with loopholes and exemptions – singers and athletes were given better tax rates while shipping tycoons I believe paid no tax at all. None, zip.
Imagine how that feels to the battler, working two jobs to make ends meet, when you see that going on in the fancy part of town. Where is the incentive for you to pay the tax you owe? I think most people are broadly happy with the concept of paying tax for the greater good. However, when we get a sense that our fellow citizens aren’t doing the same (as is the case in Greece) then we become jaded in our perception of not just the tax system but of our government. We then potentially stop paying our tax, and so what does the government do? Increase the tax rates for the people who will pay. This ends up with a model where those obeying the rules bear the burden for those that don’t.
Add to this efforts by the government to reduce spending by implementing massive cuts in things like aged pension payments, and riots ensue ... as they did in Greece.
This type of cultural behaviour is very hard to reverse, so there is definitely a long road ahead for Greece to get to the point where they have a citizenry broadly happy to pay taxes to a government that works to keep its spending under control.
So what’s the lesson here? A society that stops paying its taxes will ultimately begin to dissolve. Roads will stop getting built, hospitals will stop caring for the poorest of their patients and things will, in general, go to hell.
The point, Peita?
The point, my fellow Action Heroes, is that if you are lucky enough to live in a society where your fellow citizens broadly pay their taxes, and your district, state and country in general can therefore afford to build roads and fund hospitals and schools, then I say we should simply be grateful.
That will probably mean that when we get a pay rise we will pay some more tax, but please remember this came about because you were EARNING MORE MONEY. And that is a good thing. It breaks my heart when I see people’s excited response to a pay rise or bonus instantly wiped out when they realise they will have to pay some of that in tax. This response is crazy and is missing the point.
While there may be some exceptions, if you are paying more tax, then you are earning more money ... yeah you!!!
One last thing on tax ... and tax minimisation
So, we are all now going to do our best and enjoy our pay rises and extra income as the awesome things they are. However, when it comes time to do your tax return and those thought gremlins return, there are just a few things I would like you to keep in mind:
Paying $2,000 in accounting fees each year to pay $1,000 less tax is bonkers – I can see you wisely nodding your head in agreement, however lots of the tax minimisation strategies people encourage their accountants to set up actually cost more than they save. Do your numbers, and if you struggle to do them, then ask your accountant to give you estimates over the next few years of the tax savings versus the costs.
Choose your investments based on their long-term return value, not their tax savings – every year there are new tax investments designed to reduce people’s tax bills. The problem is that this often causes us to ignore whether the thing we are investing in is actually a worthwhile investment. If it is a bad investment, then tax benefits won’t save it. It is still a bad investment. The tax savings mean you will perhaps lose a little less money . . . but you will still lose.
Things can change – after putting complex and expensive structures in place to save tax, many people have then been caught out years down the track when tax law is changed and their structure no longer saves them anything. In fact, the cost of unwinding or taking apart the complex structure can often end up costing them more than the tax they have saved to that point.