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TAX 101 How to see through the tax fog to future reforms Parliamentary Library 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. [email protected] edu. au

Question? What has been the most problematic area of public policy in the past 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! • Why? • Tax hurts! • Tax is complex! • Tax is easily misrepresented! • Tax is easily misunderstood! 3

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

5 P PATHWAY through the tax fog to future reform Purpose Parameters Principles Policy 5 P 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: • • 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) AFTS (2009) in Part 1 Tax Reform: not a Overview, PRINCIPLES (linked to PURPOSE) AFTS (2009) in Part 1 Tax Reform: not a Overview, p 17 new tax a new tax (Box 2. 1) system (1998, p 14) Australian Treasury (1974, p 3) Asprey Report (1975, p 11) Draft White Paper (1985, p 14) Equity Fairness Equity Economy Economic Efficiency and Growth Efficiency Incentives Efficiency Convenience Administration 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: -Fiscal Flexibility - Stabilisation - Prevent tax - Growth avoidance and -Neutrality evasion - Tax expenditures - Federal-State issues 8

POLICY DESIGN 9 POLICY DESIGN 9

Example 1: General Tax Design Think Circular Flow for General Tax (GT) Bases NOTE: 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 BUT: Only people pay tax! Businesses do not pay Example 2: Business Tax Design BUT: Only people pay tax! Businesses do not pay tax! 11

PROCESS 12 based on NZ GPDP PROCESS 12 based on NZ GPDP

PROCESS: Where have the Independent Tax Reviews gone? Independent: Commonwealth Committee/Commission 1920 -1923 Royal 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 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

5 P PATHWAY THROUGH THE TAX FOG TO FUTURE REFORM KEY COMMUNICATION 15 5 P PATHWAY THROUGH THE TAX FOG TO FUTURE REFORM KEY COMMUNICATION 15

Preconditions to stepping onto the 5 P PATHWAY Need positive answers to ALL of Preconditions to stepping onto the 5 P 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 R 134) 16

What does this mean for the Tax Forum? Risk Opportunity To accept the value What does this mean for the Tax Forum? Risk Opportunity To accept the value of a 5 P PATHWAY based approach in the future – and that change takes time and communication is critical Reward 17 Looking for quick answers as to the pathway through the tax fog is not a good strategy More informed and open tax debate gives less opportunity for rent seekers