Governments often have to balance income tax with allowing tax deductions.

Tax deductions work by allowing a person to reduce their income before tax is calculated and taken out. Tax deductions are useful for promoting individual investment into a certain area that the govt wishes ( eg new tech, R&D ), or for promoting giving ( eg making donations to charity tax deductible ).

However, as the tax laws are so complex, wealthy individuals are able to do "creative accounting” to reduce their taxable income to very low levels, so they pay little tax. This can be done in myriad ways and by using legal loopholes or complex personal tax arrangements. These are often hard for the government to discover and costly to fight through the court system. By the time a ruling has been made, the individual has simply re-arranged their affairs. In addition, closing too many loopholes can stagnate investment.

This proposal is for a “Fair go” tax. This is a flat rate tax set at a certain rate that applies on pre-tax income, regardless of income and regardless of deductions. However, deductions of any legal sort are still allowed up to this level.

For example – a person earns $100,000. They would normally pay $30,000 tax if no claims were made (based on a fictitious graduated tax scale ). The “Fair Go” tax rate is set at 15%

Person 1 earns $100,000 and makes no claims – they pay $30,000 tax

Person 2 earns $100,000 and makes $10,000 worth of claims. This means they pay ( for example ) $19,000 tax under the normal deduction system. They still pay $19,000 tax

Person 3 earns $100,000 and makes $50,000 worth of claims. This would mean that they would normally only pay $10,000 tax under a straight deduction system. However, the “Fair go” tax kicks in as they have gone above the deduction limit and they instead pay $15,000 tax.

The win for governments is that they can spend a lot less time fighting high worth individuals and complicated tax avoidance schemes in the courts, yet retain flexible deduction laws. It isn’t perfect, and doesn’t stop all fraud, but helps for many cases.

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