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John Passant

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January 2009



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My interview Razor Sharp 18 February
Me interviewed by Sharon Firebrace on Razor Sharp on Tuesday 18 February. (0)

My interview Razor Sharp 11 February 2014
Me interviewed by Sharon Firebrace on Razor Sharp this morning. The Royal Commission, car industry and age of entitlement get a lot of the coverage. (0)

Razor Sharp 4 February 2014
Me on 4 February 2014 on Razor Sharp with Sharon Firebrace. (0)

Time for a House Un-Australian Activities Committee?
Tony Abbott thinks the Australian Broadcasting Corporation is Un-Australian. I am looking forward to his government setting up the House Un-Australian Activities Committee. (1)

Make Gina Rinehart work for her dole

Sick kids and paying upfront


Save Medicare

Demonstrate in defence of Medicare at Sydney Town Hall 1 pm Saturday 4 January (0)

Me on Razor Sharp this morning
Me interviewed by Sharon Firebrace this morning for Razor Sharp. It happens every Tuesday. (0)

I am not surprised
I think we are being unfair to this Abbott ‘no surprises’ Government. I am not surprised. (0)

Send Barnaby to Indonesia
It is a pity that Barnaby Joyce, a man of tact, diplomacy, nuance and subtlety, isn’t going to Indonesia to fix things up. I know I am disappointed that Barnaby is missing out on this great opportunity, and I am sure the Indonesians feel the same way. [Sarcasm alert.] (0)



The privatisation of tax law design in Australia

The Rudd Labor Government in Australia is privatising the design of tax law and policy to those who advise big business.

Australia, like many other countries, has been undergoing a prolonged period of tax reform to both its tax base and tax rates. This process began with the election of the Hawke Labor government in 1983 and continues to this day.

Major changes include base broadening, the introduction of a capital gains tax, a fringe benefits tax, a goods and services tax (or value added tax) and ongoing tax rate restructuring and cutting.

The underlying philosophy of the reforms appears to be some bastardized neo-liberal approach to the economy and the role of taxation in it. In other words it is about ongoing base broadening and moving, however slowly and tentatively, towards a Haig-Simons model where (crudely) income equals consumption plus the change in the value of assets so that all gains are income and taxed accordingly.

The adulterated component comes in because it is clear that a robust and comprehensive tax base along the lines of the Haig-Simons model or some variant will never be implemented in Australia. Too many depend on the disguised grants system in the tax system and the extremely concessional approach to capital gains to allow this to happen. Too many live off the complexity and confusion our current unprincipled tax system embodies.

The Rudd government has announced a root and branch review of Australia’s tax system under the leadership of the head of the Treasury, Ken Henry. Henry will report back to government in February 2009. Nothing so far indicates that this bastardized version of neo-liberalism is under challenge.

Indeed there is no mention of alternative tax bases as a serious option in the documentation released so far. For example there is only a passing reference to Haig-Simons in Treasury’s recently released discussion paper Architecture of Australia’s tax and transfer system.

The reform task is immense. The most recent Australian Treasury Tax Expenditure Statement estimates that some (note, some, not all) disguised grants through the tax system cost taxpayers around $60 billion a year. Half of this largesse goes to superannuants and superannuation funds, and is soon to surpass the amount the government spends on pensions for those over 65 with no other major income stream and few assets other than their own home. The Rudd government has forbidden the “root and branch” Henry tax review from looking at the taxation of superannuation.

For many years the tax policy and legislation function resided in the Australian Tax Office (ATO). The Treasury had ultimate responsibility for tax policy but was heavily influenced by the ATO. The drafting of tax law was the prerogative of the Office of Parliamentary Counsel (OPC), but again the ATO had immense power in determining the final product. The dominant role of the ATO was not surprising. Its expertise covered (and still covers) tax interpretation, and a concomitant of that was (and is) expertise in the development of tax policy and legislation. However, having the ATO develop policy and design laws it then administers, especially in the context of a perceived tax office culture of revenue protection, created problems for business and advisers.

As a consequence the conservative Howard government, six years ago, transferred the tax law design function from the ATO to the Treasury. The ATO would advise Treasury on administration matters and revenue and other costings. Peter Costello was Treasurer at the time. He said the reasons for the transfer were to “bring the accountability for tax policy and legislative design more directly under direct Ministerial control” and to “reinforce the need for whole of Government perspectives to be taken into account in tax law design processes”. The then Treasurer also said that there would be consultation on all substantive tax legislation initiatives, including early expert input into the development of tax policy and law.

Leaving aside the spin about ministerial accountability and whole of government approaches, in my opinion the real reason for the move was to hobble the ATO and its perceived revenue bias in tax law development. Taking the role out of the ATO was seen as a way of achieving this goal.

Six years on, and what judgements can we make about the success of the move, and of the wider consultative process? Is the new tax law any better since Treasury took on the tax law development function? Not really, if the recent Better Tax Design and Implementation Report is any guide.

Shortly after coming to office, the new Rudd Labor government commissioned a group of tax experts from advisory firms, the ATO, OPC and Treasury and other areas to examine options to reduce delays in developing tax laws, to improve quality through enhanced consultation, and to increase community input into the prioritization of tax law changes. The Tax Design Review Panel’s Report recommended more consultation at every stage of the tax design process. In the light of the then Treasurer’s comments six years ago about greater consultation, the question needs to be asked. What has been going on for the last six years?

Certainly my own experience leads me to conclude there has been an orgy of consultation with advisers and business in terms of development of tax law, and, from an ATO perspective, implementation of the new law.

The Report goes further and wants consultation to occur before policy is settled, in other words while it being developed. I think the Panel actually wants not just private sector consultation (of which the last six years provide ample examples) but private sector domination of the whole process of tax policy and tax law development.

How? Through tripartite teams (i.e. the Treasury, ATO and the private sector) that will develop tax policy and law from go to whoa. This means the private sector, which may be the object of the changed tax laws, will be involved from the very beginning; involved in policy development, law development and ATO implementation.

This menage a trois will be at the conception as well as the birth of new tax laws. In my opinion these tripartite groups will be the stalking horse for the private sector to dominate tax policy. Six years ago it was vale ATO, now it is goodbye Treasury.

The Report suffers from tunnel vision. It is not surprising that a Panel dominated by tax experts recommends there be major consultation with …tax experts. Why limit tax policy and tax law development consultation to a troika of tax experts from industry and the public service? Tax law changes impact directly or indirectly on all sectors of society.

The Rudd Labor government won the November 2007 election in Australia with rhetoric about working families. Where are they in the proposed tripartite tax consultation process? Why is the Australian Council of Trade Unions – the peak union group – not asked for its input? After all it represents about 2 million workers.

Unlike union officials, tax experts are unelected and are in the main bourgeois thinkers. Setting up a club of like thinkers reinforces the dominant, often unarticulated, Weltanschauung of the group.

The Panel’s recommendations are an attempt to still the voice of the ATO and Treasury. My view is that the government is using subterfuge and spin about consultation to effectively privatize the tax law and policy development function but nominally retain it within Treasury.

However, it is difficult to see how private sector tax experts can rise above the swamp of the sectional interests they swim in to bring a broader national perspective to the development of tax policy. My fear is that rent seekers will come to dominate tax policy and law design.

If American experience is any guide, this fear is well founded. As Barack Obama said in his nomination acceptance speech:

Change means a tax code that doesn’t reward the lobbyists who
wrote it, but the American workers and small businesses who deserve it.

There are other problems. The Panel recommended that tax measures should be prospective and introduced into Parliament within twelve months of announcement. For retrospective changes the time should be six months. This will prove unworkable.

It brings to mind the Taxation of Financial Arrangements (TOFA). The first TOFA announcement occurred some 17 years ago. Although two stages of the TOFA laws have passed parliament, a major section of TOFA has yet to become law. As the Treasurer in the Rudd Labor government, Wayne Swan, has said:

Stage 1 of TOFA, the debt/equity tax reform, was legislated in 2001. Stage 2, the foreign currency tax reform, was legislated in 2003.

So these two steps only took ten and twelve years from the date of the original TOFA announcement. It is not clear that this TOFA wine improved with age. The Treasurer went on to say:

The TOFA Stages 3 and 4 measures, which represent the final stages of the TOFA reforms, will introduce new tax rules for accruals/realisation, fair value, retranslation, reliance on financial reports and hedging. The legislation will apply for income years commencing on or after 1 July 2009.

Only 18 years after the original announcement will the final TOFA laws be implemented (assuming the Senate, which the Labor government does not control, passes the laws. They are yet to be re-introduced into Parliament).

But hang on. There is to be still more consultation. The Treasurer again states:

The TOFA Stages 3 and 4 measures are extensive and complex. A commencement date of 1 July 2009 will give taxpayers time to plan for the commencement of the measures and to raise issues in consultation with the Treasury. This period will allow appropriate adjustments to be made, including interactions with other parts of the tax law, prior to the commencement date.

If after 18 years of thinking, planning, discussion and consultation, Treasury, the ATO and private sector tax experts still cannot get TOFA completely right, imagine what a six or twelve-month introduction rule would have done for the quality of the legislation.

What about money? Tripartite groups at all stages of policy and law development, coupled with arbitrary six and twelve-month deadlines for the introduction of proposed tax laws into Parliament, will impose major resource burdens on the ATO, the Treasury and the OPC. Without extra government funding to address this, the Panel’s recommendations will amount to nothing. Why is paying a private sector tax expert $1,000 an hour more cost effective than using the tax experts in the ATO and Treasury at less than $100 per hour?

Legislative drafting backlogs occur through the OPC. They are inadequately funded and often have to prioritize non-tax work at the expense of tax bills. Imposing arbitrary time limits on them to draft complex tax laws, while not markedly increasing their resources, will result in rushed and poor quality legislation. What’s that old saying? Act in haste, repent at leisure.

Certainly there are problems with the current arrangements. In the main Treasury attracts high-quality economists whose love is economic policy. Rotating such people through the revenue group where they become tax law drafters is a sub-optimum outcome. Some of these Treasury economists regard a two-year rotation to Treasury Revenue Group as a “career limiting move”. Although diligent and conscientious, they find the tax law development role work unbefitting their status and expertise as economic policy experts.

When the then government transferred the tax law development function from the ATO to Treasury, a large number of tax officers went to Treasury. That pool of tax policy and tax law developers in Treasury with tax administration experience is dwindling fast. New people coming in have little or no tax administration or tax interpretation experience.

Given that those with a broad understanding of tax policy and law and administration expertise, coupled with an understanding of the broader national interest in tax, are to be found overwhelmingly in the ATO, perhaps it was a mistake to move the tax law function out of the Tax Office. After all, it is the ATO which has to administer the bad law that may result from not having it as the major player in tax policy and law.

Certainly the ATO has major concerns about the quality of the tax laws now being drafted and the administration problems and deadweight costs this will create for the ATO (not to mention the compliance costs on business) over the next decade. So the ATO has set up mini-policy and legislation groups like an “interactions team” to ostensibly help Treasury understand possible interactions between proposed tax law changes and currently existing laws. It is also exploring options for a greater rotation programme from the ATO to Treasury. These are stopgap measures.

My first option would be to move the tax policy and legislation function back to the ATO. However I acknowledge it is now politically impossible to do that. But to privatize it through a sleight of hand as this government appears to be doing is no solution either. Perhaps a fully funded independent tax law and policy commission which works closely with the Treasury, ATO and OPC and with enough money to second experts from those bodies, private enterprise and community bodies as needed is a solution.

But there is a wider problem in all of this. The Report’s recommendations, in searching for the holy grail of certainty and simplicity in tax law and policy, miss the obvious. The foundations of taxation in Australia are built on sand. Only fundamental changes to the tax base can address our tax problems.

A solution was at hand some time ago. Peter Costello noted in 2000 that, if implemented properly, the Tax Value Method or TVM “had the potential to underwrite the development of a stable, less ambiguous and more understandable tax system, and in particular, one more readily conducive to the manageable, ongoing development of the tax system into the future.”

Under the TVM, taxable income would have been calculated on the basis of cash flow plus changes to the tax value of assets instead of the income and deductions model. The government abandoned the TVM in the face of opposition. Who from? You guessed it – from those very tax experts or their descendants who are now being given the keys to the tax policy vault.

I started off by talking about neo-liberalism driving many of the tax reforms in Australia. However, this neo-liberal philosophy does not extend to adopting the ultimate economically dry tax proposal, i.e. the TVM. Business and advisers scuttled it because they presumably fear the rigour of a comprehensive tax base. They have retreated to the warmth and comfort of the teat of public largesse through the tax system and the fees that flow from advising on the often incomprehensible complexity of the system and its opaque wording.

It was Marx who famously wrote that “Hegel remarks somewhere that all great world-historic facts and personages appear, so to speak, twice. He forgot to add, the first time as tragedy, the second time as farce.” To turn Marx on his head, when it comes to tax policy and law development we in Australia are moving from farce to tragedy.

This article of mine first appeared in the November/December 2008 edition of the Asia Pacific Tax Bulletin.  It is reprinted with their permission.



Comment from Arjay
Time January 19, 2009 at 7:40 pm

No one can understand the tax act as it is!More complexity so the lawyers can find more loop holes for tax evasion so those who have too much anyway can make the rest of us pay more.

Kerry Packer once bragged about paying 1c in the $ and rightfully pointed out that Govt didn’t spend it too well,so why should he be donating any more than needs be?

Before we even look at tax,we need a complete overhaul of the Public Service.There is just too much waste,empire building and poor decision NSW Labor Govt.

Pingback from The Buzz » Blog Archive » The Privatisation of Tax Law Design in Australia
Time February 1, 2009 at 7:19 pm

[…] Peter Costello was Treasurer at the time. He said the reasons for the transfer were to “bring the accountability for tax policy and legislative design more directly under direct Ministerial control” and to “reinforce the need for whole …$anchor_text[$anchor_choice] […]

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