Reforms should lighten the taxpayer’s burden

THE statement some weeks ago by the deputy director-general of our tax agency was both interesting and revealing.

He decried the fact that employers tend to over deduct the monthly tax instalments due from employees' salaries. As a result, the IRB (Inland Revenue Board) is burdened with the need to make more tax refunds than is really necessary.

In his words: “There is a lot of tax relief that can be applied by employees and it will be great if deductions are accurately done ... if possible, we do not want a sen more or a sen less from taxpayers.”

His expectations are understandable. In seeking to process tax refunds quickly, to avoid severe criticisms, which the agency suffered in the past, he would need to divert resources away from more productive' functions.

This focus on efficiency is laudable and should be the aim of every organisation, especially public sector agencies.

However, it seems odd that the tax agency, a major service provider, of sorts if you like, would complain about its clients over-paying. Such sentiment would be unthinkable of a private sector organisation operating for profit.

Think of how a bank would view its customers' current account credit balances where the bank pays no interest. The more the better, surely.

Yet, the deputy director is not to be faulted. He was, in effect, telling us that he is not free to manage the cash funds received in the way a private sector organisation could and would do. Tax collections go straight into the Treasury's coffers and tax refunds come out of funds specifically allocated to the IRB for this purpose.

Nonetheless, tax over-payments, unless refunded promptly, allow the government free use of funds or credit. The owners of those funds need to be compensated for such use. In the real world of finance, free credit is virtually non-existent and the granting of credit carries with it a cost, which is interest both from a legal and economic sense.

So taxpayers have a valid basis to expect interest to be paid on their late refunds. This is one aspect of reform to our tax law, which seems overdue.

After all, on the flip side, taxpayers are financially penalised when they make late payments of what is due from them. Setting a level playing field is a further driver to reform here.

The aim for the IRB to be cost efficient should not result in the taxpayer being saddled with added costs. Unfortunately, if employers were to attempt to calculate each of its employee's tax to take account of the many reliefs available to each employee, it will mean added costs to them.

The costs do not come from mere calculation of additional data but from the time and expense incurred in obtaining the said data from employees. Firms with a large payroll and recalcitrant employees will experience a heavier burden.

The employer is not the taxpayer here but is being made to collect the tax of others on behalf of the IRB.

In medieval times, they would have been called tax farmers' except that tax farmers in those days get to keep a portion of the tax collected.

The modern day tax farmer receives no similar carrot but instead get the stick in the form of default penalties.

Making employers do more in order to lessen the task of the IRB, as was suggested here, seems like a case of rubbing salt.

The one aim of tax reform, which will benefit everyone, is the reduction of tax collection cost.

The burden of collecting taxes falls on society as a whole and not on the tax agency alone. Thus every time a businessman is required to undertake a tax task or process, which he will not otherwise do, collection cost goes up.

Since such costs do not result in economic benefits, an efficient tax system often is one where the cost of tax collection is kept low.

If we follow the tax official's vision to its ultimate end, an employee should not need to file a tax return.

This is what Britain did when it introduced the PAYE (pay as you earn) system in 1944, which brought to an end its declaratory system'.

But we need to first do away with our unwieldy relief system which has too many small tax breaks, the result of` annual lobbying over the years.

This could be offset by reducing tax rates and tax bands. Then the task of an employer not deducting a sen more or a sen less' could be an acceptable reality.