TAX 101How to see through the tax fog to future reforms

Neil WarrenProfessor of Taxation

Australian School of BusinessUniversity of New South Wales

email: n.warren@unsw.edu.au

Parliamentary Library LectureAustralian Parliament House, Canberra , 14 September 2011

Question? What has been the most problematic area of public policy in the past two years?

TAXATION• Response to Garnaut:

– From Emission Trading Scheme Carbon Tax

• Response to the Henry Review:– From Resource Super Profits Tax (RSPT)

Minerals Resource Rent Tax (MRRT)

– No GST debate

• Response to States:– State Royalty increases and MRRT (eg WA and NSW Budgets)

– Disincentive for State policy reform GST Distribution Review.

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Why?

• Tax hurts!

• Tax is complex!

• Tax is easily misrepresented!

• Tax is easily misunderstood!

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The blame game• Media ‘reality’ news (7sec grab); social media (Twitter,

Facebook, blogs) – and tax is hard to communicate

• Special interests everything to gain and nothing to lose - so why be surprised at sectional interests response

• Government Impact of coalition building (eg minority governments)

• Government agencies Interested or disinterested players

• Academic research no future for academic economists specialising in public sector economics combined with declining public funds supporting academic research

• Independent research demise of the independent tax research centres both private and Government supported.

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What’s really wrong?• Past response of government:

‘Fire Fighting’ – ‘looking for an answer and not knowing the question’ $$$ makes everyone an expert and policy makers look for quick

answers/fixes (but forget the question) Information control results in loss of control

• Correct response of government: ‘Know the question and the answer will make sense’ Being informed facilitates communication and matching vested

interests and partisan policies Understanding and articulating why the need for change is key

to being persuasive in any debate.

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5P PATHWAY through the tax fog to future reform

Purpose

Parameters

Principles

Policy Design

Process

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PURPOSE– Why government intervention in the market?– ie Problems with:

• resource allocation to maximise economic benefits• distribution of economic benefits• economic stability; and • economic growth

PARAMETERS– What are the known constants?– Economic, social, demographic, geographic

and institutional factors.

PRINCIPLES (linked to

PURPOSE)

Adam Smith(1776)

Australian Treasury(1974, p3)

Asprey Report(1975, p11)

Draft White Paper(1985, p14)

Tax Reform: not a new tax a new tax system (1998, p14)

AFTS (2009) in Part 1 Overview, p17 (Box 2.1)

Equity Equity Fairness Equity Fairness Equity

Economy Economic Efficiency and Growth

Efficiency Efficiency Incentives Efficiency

Convenience Administration Simplicity Simplicity Simplicity Simplicity

Certainty Ability to meet revenue needs

Revenue security Sustainability

Interaction of tax with social welfare system

Consistency of treatment of economic activity

Policy Consistency

Others:

-Fiscal Flexibility

-Neutrality

Others:- Stabilisation

- Growth

Others:- Prevent tax avoidance and evasion

- Tax expenditures

- Federal-State issues

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Tax Mix Level 3: What Benefits Principle taxation (BPT) mix (beneficiaries pay as with user charges (public production/provision of private goods)

POLICY DESIGNThink what are the functions of government (and expenditure)?

Tax Mix Level 4: What tax mix by each level of government?

Tax Mix Level 5: What tax mix across levels of government?

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Example 1:

General Tax Design

Think Circular Flow for General Tax (GT) Bases

NOTE: Only people pay tax!

Businesses do not pay tax!

Personal Income (Y=C+NW)

Labour – Wages

Equity – Dividends

Lending – Interest

Land - Rent

Business Income

Consumption (C)

Household

Business Inputs

Net Worth (NW)

Wealth (or net worth)

Bequests

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EXAMPLE: Six approaches to taxing Mineral Rents:

1. flat fee; 2. specific or ad valorem royalty; 3. higher rate of proportional profits (CI) tax; 4. progressive profits (CI) tax; 5. Resource Rent Tax (PRRT/MRRT)]; and the6. Brown Tax (RSPT is a modification].

Company Income (return to equity capital) (CI)

Example 2:

Business TaxDesign

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BUT: Only people pay tax!

Businesses do not pay tax!

PROCESS based on NZ GPDP

14. Post Implementation Review

15. Identification of Remedial Issues

13. Implemetation of Legislation

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11. Select Committee Phase

10. Introduction of Bill

9. Ministerial and Cabinet Sign-off of Legislation*

8. Legislative Drafting (Phases 6-12)

Issues encountered

at later stages of the process, and

decisions taken to change policy, may

lead to reconsideration of

earlier phases

Consultative Committee may be required to explain the intent of their recommendations to Select Committee

EXTERNAL INPUTExternal input, as appropriate, through Green Paper (ideas) stage and/or through Whiite Paper (detail) stage by either:1. Secondment of

personnel from the private sector;

2. A permanent advisory panel;

3. Issues based Consultatative Committee;

4. Submissions on Consultative Documents

Reconciliation with other

Government objectives

2. Three Year Policy Strategy*

3. Medium Term Work Program*

4. Annual Work and Resource Plan

5. Detailed Policy Design*

6. Formal Detailed Consultation and Communication

7. Ministerial and Cabinet Sign-off of Policy*

Phases 5-11: Consideration of legal issues

in policy process

Phases 2-4 are linked with the

Budget process and have a high degree of

simultaneity

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1. Economics, Social and Environmental Strategy*

Output from Phases 1-2 widely

publicised by Government

through Budget documentation

12. Passage of Legislation

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PROCESS: Where have the Independent Tax Reviews gone?

Independent: Commonwealth Committee/Commission1920-1923 Royal Commission on Taxation (chaired by W. W. Kerr) examines several areas of tax as

a result of State concerns about Commonwealth taxes and recommends that the

Commonwealth raise income tax while leaving it to the States to raise indirect taxes.

1932-1934 Royal Commission on Taxation (chaired by D. G. Ferguson) again looks at uniformity of

State and Commonwealth taxes and recommends uniform income tax legislation with a

national collecting authority

1942 Committee on Uniform Taxation (chaired by Richard C. Mills) recommends that the

Commonwealth become the sole income taxing authority for the duration of the war.

1950-1955 The Commonwealth Committee on Taxation (chaired by E.S. Spooner and then by S.B.

Holder) makes around 50 reports on various aspects of tax reform. Most reports were

tabled and were published in the Parliamentary Papers over a number of years.

1955 The Commonwealth Committee on Rates of Depreciation (chaired by A.S. Hulme)

recommends extension of depreciation allowances to buildings used as income, patent

rights etc

1961 Commonwealth Committee on Taxation (Ligertwood Report): Reviews anomalies in the

income tax legislation, including some tax avoidance through arrangements such as

superannuation schemes.

1975 Committee of Inquiry into Inflation and Taxation (Mathews Committee),

1975 Commonwealth Taxation Review Committee. Full Report (Asprey Report)

1981 Australia, Committee of Inquiry into the Australian Financial System

(Campbell Report)

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Where have the Independent Tax Reviews gone?

Government: Treasury Secretariat1985 Reform of the Australian Tax System (Draft White Paper)

1998 Tax Reform: not a new tax, a new tax system (ANTS)

1999 Review of Business Taxation, A Tax System Redesigned (Ralph Review)

2000+ Board of Taxation (Treasurer directed reviews with Treasury Secretariat)

2008-09 Australia’s Future Tax System (Henry Review),

Other1985 National Tax Summit (and EPAC)

1991-92 Fightback!: LNP (and Access Economics)

1996 ACCI/ACOSS National Tax Summit

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Policy Development

Input 1: Submission and Consultations

Output 1: ISSUES PAPER: A CRITICAL REVIEW OF CURRENT SYSTEM

Output 2: GREEN PAPER: Range of Options

Input 2: Submissions/Communication/Consultation on GREEN PAPER (focused on options/pathways)

Output 3: WHITE PAPER: A recommended Option

Input 3: Submissions/Communication/Consultation on White Paper focused on implementation phase

Output 4: LEGISLATION AND IMPLEMENTATION REPORT

Input 4: Submissions to POST IMPLEMENTATION REVIEW

Output 5: POST IMPLEMENTATION REVIEW REPORT

Option 2 Internal Contestable (multi-owner) Review (eg GPDP)

Option 1 Internal (single-owner) Review

Option 3 Independent (External) ReviewThink PROCESS Framework

Think PARAMETERS Institutions, political, social, economic, geographical, demographic

5P PATHWAY THROUGH THE TAX FOG TO FUTURE REFORM

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Think PURPOSE Allocation, distribution, stabilization, growth

Think PRINCIPLES

Design Principles:· Economic (or allocative) efficiency (or neutrality)· Equity (fair and just allocation of social welfare)· Simplicity (and transparent and accountable and certain)· Sustainability ( and dynamic efficiency) · Policy consistency · Stability and growth

Think POLICY DESIGN What funding design?

KEYCOMMUNICATION

COMMUNICATION

COMMUNICATION

Preconditions to stepping onto the 5P PATHWAY

Need positive answers to ALL of the following:

• Is Purpose clear (ie why?)

• Are Parameters acknowledged? (ie known constants)

• Are Principles clear? (or assessment criteria is known)

• Are Policy design options clear? (ie mix issues understood)

• Is Process clear? (eg framework and development approach)

KEY: Government must accept there is a bigger risk from no tax policy research (or controlled research) than from some independent tax policy research (and fund accordingly as private sector is conflicted) (AFTS R134)

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What does this mean for the Tax Forum?

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Risk Looking for quick answers as to the pathway through the tax fog is not a good strategy

Opportunity To accept the value of a 5P PATHWAY based approach in the future – and that change takes time and communication is critical

Reward More informed and open tax debate gives less opportunity for rent seekers