TAX 101
How to see through the tax fog
to future reforms
Parliamentary Library Lecture
Australian Parliament House, Canberra , 14 September 2011
Neil Warren
Professor of Taxation
Australian School of Business
University of New South Wales
email: n.warren@unsw.edu.au
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.
2
Why?
• Tax hurts!
• Tax is complex!
• Tax is easily misrepresented!
• Tax is easily misunderstood!
3
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.
4
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.
5
5P PATHWAY through the tax fog to
future reform
Purpose
Parameters
Principles
Policy Design
Process
6
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.
7
PRINCIPLES
(linked to PURPOSE)
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)
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
Consistency of
treatment of
economic activity
Policy
Consistency
Adam Smith
(1776)
Interaction of tax
with social welfare
system
Others:
Others:
Others:
-Fiscal Flexibility - Stabilisation - Prevent tax
- Growth
avoidance and
-Neutrality
evasion
- Tax expenditures
- Federal-State
issues
8
AFTS (2009) in
Part 1
Overview, p17
(Box 2.1)
POLICY DESIGN
Think what are the
functions of government
(and expenditure)?
Tax Mix Level 3: What Benefits Principle taxation
(BPT) mix (beneficiaries pay as with user charges
(public production/provision of private goods)
Tax Mix Level 5:
What tax mix
across levels of
government?
9
Tax Mix Level 4: What
tax mix by each level
of government?
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
10
Example 2:
Business Tax
Design
Company Income (return to
equity capital) (CI)
BUT: Only people pay tax!
Businesses do not pay tax!
11
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 the
6. Brown Tax (RSPT is a modification].
12
Phases 2-4 are
linked with the
Budget
process and
have a high
degree of
simultaneity
Phases 5-11:
Consideration
of legal issues
in policy
process
15. Identification of
Remedial Issues
1. Economics, Social and
Environmental Strategy*
2. Three Year Policy
Strategy*
Reconciliation
with other
Government
objectives
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*
EXTERNAL INPUT
External 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
14. Post Implementation
Review
Consultative
Committee
may be
required to
explain the
intent of their
recommendati
ons to Select
Committee
Issues
encountered
at later stages of the
process, and
decisions taken to
change policy, may
lead to
reconsideration of
earlier phases
13. Implemetation of
Legislation
IMPLEMENTATION
AND REVIEW 13-15
Output from Phases
1-2 widely
publicised by
Government
through Budget
documentation
based on NZ GPDP
12. Passage of Legislation
11. Select Committee
Phase
10. Introduction of Bill
9. Ministerial and Cabinet
Sign-off of Legislation*
8. Legislative Drafting
(Phases 6-12)
LEGISLATIVE PHASES 8-12
OPERATIONAL
PHASES 5-7
TACTICAL
PHASES 3-4
STRATEGIC
PHASES 1-2
PROCESS
PROCESS:
Where have the Independent Tax Reviews gone?
Independent: Commonwealth Committee/Commission
1920-1923 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)
13
Where have the Independent Tax Reviews gone?
Government: Treasury Secretariat
1985 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),
Other
1985
National Tax Summit (and EPAC)
1991-92 Fightback!: LNP (and Access Economics)
1996
ACCI/ACOSS National Tax Summit
14
5P PATHWAY THROUGH THE TAX FOG TO FUTURE REFORM
Think PURPOSE
Allocation, distribution, stabilization, growth
KEY
Think PARAMETERS
Institutions, political, social, economic,
geographical, demographic
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?
Think PROCESS
Framework
Option 1 Internal
(single-owner)
Review
COMMUNICATION
COMMUNICATION
COMMUNICATION
Option 2 Internal
Contestable (multiowner) Review
(eg GPDP)
Policy
Development
Output 1: ISSUES PAPER:
A CRITICAL REVIEW OF
CURRENT SYSTEM
Output 3: WHITE PAPER:
A recommended Option
15
Input 3:
Submissions/
Communication/
Consultation on
White Paper focused
on implementation
phase
Input 1:
Submission
and
Consultations
Output 4:
LEGISLATION AND
IMPLEMENTATION
REPORT
Output 2: GREEN PAPER:
Range of Options
Input 4:
Submissions to
POST
IMPLEMENTATION
REVIEW
Option 3 Independent
(External) Review
Input 2: Submissions/
Communication/
Consultation on
GREEN PAPER
(focused on options/
pathways)
Output 5: POST
IMPLEMENTATION
REVIEW REPORT
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)
16
What does this mean for the
Tax Forum?
17
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