The Pros And Cons Of WRE
Agenda, Volume 5, Number 1, 1998, pages 49-60
Abolishing Income Tax Deductions for Work-Related Expenses
Jonathan Baldry
NDER the Australian personal income tax, wage and salary earners are allowed to claim tax deductions for work-related expenses (WREs). In income year 1993/94, 67 per cent of wage and salary earners (59 per cent of all personal income taxpayers) claimed deductions for WREs amounting to $4.86 billion, or 2.6 per cent of total declared wages and salaries. The most important component of the claims was for ‘other work-related expenses’, which includes tools, professional and trade journals, subscriptions to professional bodies, and conference fees; the total claimed amounted to $2.05 billion. The second most impor1 tant …show more content…
These observations assume that labour markets do not adjust for the differential consumption benefits, or indeed, where these are zero or are outweighed by the non-consumption characteristics of WRE items, for the differential costs associated with the WRE requirements of particular occupations. However, depending on the flexibility of labour markets and the ease of entry into particular occupations, some adjustment could reduce the arbitrary equity impact of deductibility. If the WRE items required by a particular occupation do not generate any consumption benefits, workers entering that occupation will require compensation for the additional net-of-tax costs associated with that occupation. If, for example, $100 of WREs with no consumption benefits are required, the supply price of labour to that occupation will increase by $100 by comparison with similar occupations with no WRE requirements: with a tax rate of 30 per cent and deductibility of WREs, a wage increase of $100 will give a worker a net wage increase of $100 if this is matched by deductible WREs of $100; and after this amount is spent on WRE items, there is no change in the amount available for private consumption. If the supply of labour to the occupation were perfectly elastic, the gross wage would rise by $100 in this case. But in general, the outcome …show more content…
However, it is likely that abolition of WRE deductibility would shift the cost of these items from employee to employer. Shifting the Cost of WREs to Employers ‘Pure’ WRE items are simply productive inputs which happen to be supplied by employees rather than employers. For such inputs to be supplied by employees, the relevant items must be comparatively cheap, because an employee would otherwise be unlikely to be able to afford them. With WRE deductibility for employees, it is a matter of indifference in the long run (allowing for labour market adjustments) to both employer and employees who shoulders the cost. Suppose the assumptions of the earlier example hold (WREs of $100, with a 30 per cent employee tax rate) and, in addition, the tax rate on the employer’s profit is 40 per cent. If the cost of the WRE items is shifted from employee to employer, then the employer’s net profit is reduced by $60 per employee, which is the net cost of the employer’s increased expenditure on WRE items. However, holding employment constant, the gross wage will fall by $100, reflecting the elimination of the employee’s WRE cost, and this will increase net profit by $60. The overall impact is that the net positions of both employer and employee are unchanged. Why then do employees bear the cost as WREs of some productive inputs? One possible explanation is that use of the relevant inputs is difficult to control, and that the employer saves on monitoring costs by
Abolishing Income Tax Deductions for Work-Related Expenses
Jonathan Baldry
NDER the Australian personal income tax, wage and salary earners are allowed to claim tax deductions for work-related expenses (WREs). In income year 1993/94, 67 per cent of wage and salary earners (59 per cent of all personal income taxpayers) claimed deductions for WREs amounting to $4.86 billion, or 2.6 per cent of total declared wages and salaries. The most important component of the claims was for ‘other work-related expenses’, which includes tools, professional and trade journals, subscriptions to professional bodies, and conference fees; the total claimed amounted to $2.05 billion. The second most impor1 tant …show more content…
These observations assume that labour markets do not adjust for the differential consumption benefits, or indeed, where these are zero or are outweighed by the non-consumption characteristics of WRE items, for the differential costs associated with the WRE requirements of particular occupations. However, depending on the flexibility of labour markets and the ease of entry into particular occupations, some adjustment could reduce the arbitrary equity impact of deductibility. If the WRE items required by a particular occupation do not generate any consumption benefits, workers entering that occupation will require compensation for the additional net-of-tax costs associated with that occupation. If, for example, $100 of WREs with no consumption benefits are required, the supply price of labour to that occupation will increase by $100 by comparison with similar occupations with no WRE requirements: with a tax rate of 30 per cent and deductibility of WREs, a wage increase of $100 will give a worker a net wage increase of $100 if this is matched by deductible WREs of $100; and after this amount is spent on WRE items, there is no change in the amount available for private consumption. If the supply of labour to the occupation were perfectly elastic, the gross wage would rise by $100 in this case. But in general, the outcome …show more content…
However, it is likely that abolition of WRE deductibility would shift the cost of these items from employee to employer. Shifting the Cost of WREs to Employers ‘Pure’ WRE items are simply productive inputs which happen to be supplied by employees rather than employers. For such inputs to be supplied by employees, the relevant items must be comparatively cheap, because an employee would otherwise be unlikely to be able to afford them. With WRE deductibility for employees, it is a matter of indifference in the long run (allowing for labour market adjustments) to both employer and employees who shoulders the cost. Suppose the assumptions of the earlier example hold (WREs of $100, with a 30 per cent employee tax rate) and, in addition, the tax rate on the employer’s profit is 40 per cent. If the cost of the WRE items is shifted from employee to employer, then the employer’s net profit is reduced by $60 per employee, which is the net cost of the employer’s increased expenditure on WRE items. However, holding employment constant, the gross wage will fall by $100, reflecting the elimination of the employee’s WRE cost, and this will increase net profit by $60. The overall impact is that the net positions of both employer and employee are unchanged. Why then do employees bear the cost as WREs of some productive inputs? One possible explanation is that use of the relevant inputs is difficult to control, and that the employer saves on monitoring costs by