tax 101 how to see through the tax fog to future reforms
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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: [email protected]. - PowerPoint PPT PresentationTRANSCRIPT
TAX 101How to see through the tax fog to future reforms
Neil WarrenProfessor of Taxation
Australian School of BusinessUniversity of New South Wales
email: [email protected]
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
IMP
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3-1
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8-1
2
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
OP
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AT
ION
AL
PH
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5-7
TA
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ICA
L P
HA
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-4S
TR
AT
EG
IC
PH
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1-2
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