Tax and Politics: The Danger Zone Where Speed Can Be FatalPublished: March 01, 2011 in Knowledge@Australian School of Business
The Henry review of taxation raised expectations of a massive, rapid reform of Australia's entire tax system. But the process of re-evaluating taxation is far too complicated to be rushed, advises Judith Freedman, professor of Taxation Law at Oxford University. It takes time for ideas on new taxes and changes to filter through, be considered and publicly debated. And politicians need educating, not only about the dangers of hasty tax reform, but also about the process of taxation and how it works. Recent Australian examples clearly demonstrate this. While the suggested tax overhaul overseen by Australia's outgoing Treasury chief, Ken Henry, is widely considered to be a powerful review, it's what happened next – the cherrypicking of tax changes to serve the political and economic requirements of the government of the day – that reveals the real problems, Freedman tells Julian Lorkin of Knowledge@Australian School of Business.
An edited transcript of the interview follows.
Knowledge@Australian School of Business: Is there a way to approach tax policy that takes account of expert opinion and political realities, and that also provides for informed public debate?
Judith Freedman: The question is how one informs the public debate and then how one ensures that expertise is taken into account, but not given undue prominence. Because experts are also people who have value judgements. There is a real danger in thinking that experts have all the answers. No one has all the answers. If tax policy making was simple, we would already have the answers. No country in the world has a perfect tax system. Therefore, all those elements need to be integrated, essentially through the political process. We can't take politics out of tax.
Knowledge@Australian School of Business: How do you inform public opinion so that people can form a balanced view of a new tax policy that's coming in?
Judith Freedman: One of the recent problems in Australia has been that the Henry review process raised expectations. There was going to be a massive, very quick reform of the entire system. That isn't going to happen because reforming taxation is far too complicated for that. What really has to happen is ideas have to filter through – bubble to the surface. They have to be thought about carefully and they have to be debated. Of course, universities can help with that process and provide a forum for that discussion. The Australian School of Taxation and Business Law at the University of New South Wales has already been involved in holding two conferences on the Henry review and I'm sure will do much more to inform that public debate. Other organisations will do that too. But I think the main lesson is not to try to do everything in a hurry.
Knowledge@Australian School of Business: You're looking at the Australian situation from the outside in. In many other countries, people look at the Henry review and believe that looking at the whole tax system is a good thing, whereas in Australia the Henry review isn't regarded so positively. Do you think there's a case of people just thinking the grass is always greener and other people have the right ideas?
Judith Freedman: That's always what people think about areas that are difficult – and tax is a very difficult area. Every country thinks every other country is doing it better.
We certainly look at the Henry review from the UK and think that it's a powerful review; although it did leave out certain important elements, in particular GST (goods and services tax). It's clearly ridiculous to try to look at the tax system and not to be able to look at GST. But aside from that, there was some very good work done for the Henry review. The real problem is not with the review itself, but with the way it was then used – just picking out a few bits and pieces to serve the political and economic requirements of the government of the day.
Knowledge@Australian School of Business: Does this mean that political expediency is always going to get in the way of tax reform?
Judith Freedman: There are always going to be winners and losers with radical tax reform. Governments don't like winners and losers. It's much easier just to go for a few things. But in the end, the Australian government lost out. It wasn't politically expedient at all just to pick out one thing and take it out of context. With the mining profits tax the government picked on completely the wrong thing and public opinion defeated it. It's not really in the interests of the government to ignore that wider holistic view.
Knowledge@Australian School of Business: How do you actually get a coherent and practical tax system while you've still got those political expediencies?
Judith Freedman: You don't only have to only educate the public you have to educate the politicians. Politicians need better processes and better institutions than they seem to have at the moment to support them in thinking about tax. If they see that things go wrong if they simply follow their political views and use tax as a political football, then maybe they will learn that they have to take tax more seriously.
Knowledge@Australian School of Business: You've been on several UK government law reform committees, with a window seat on the possibilities and pitfalls for the tax law reform process. What can you see from the UK side? Is there anything the UK is doing that maybe Australian politicians ought to be considering?
Judith Freedman: I'm not sure that we have any answers to offer. We have some new institutions, in particular the Office of Tax Simplification that was set up with very good intentions last year by our new coalition government. I'm on a consultative committee of that office.
But I think there's a key problem with the whole idea of having an Office of Tax Simplification because simplification cannot be the sole driver of tax policymaking. It has to be much wider than that. The focus on simplification worries me. The fact that there is an independent office set up to look at tax issues is an advance. I'm hoping that it will develop and grow and become a valuable institution. To become really valuable, it has to be knitted in with the political process and become answerable to a parliamentary committee.
Knowledge@Australian School of Business: Does the process of simplified tax law worry you or is it the concept of trying to simplify something for the sake of it?
Judith Freedman: I just don't think you can start with simplification. You have to start with what are we trying to do? What are we trying to tax? Why are we trying to tax it? What do we want that tax to look like? Then, yes it would be very nice if that could be done in as simple a way as possible. But saying that what you're trying to do is design a simple tax without talking about what the tax is trying to achieve is like saying that you're trying to design a car and that all that matters is the car seats are red. The basic point is that the car has to get from A to B, and then you can look at the design.
Knowledge@Australian School of Business: Have you also been looking at the process of collecting the tax revenue? Australians are quite surprised when they go to the UK and find they don't have to fill in a tax return at all. It's all done automatically. On the other hand, people who come from the UK to Australia are quite surprised that they have to save their receipts to claim their tax back. They seem to be two totally different systems. Have you been looking at this?
Judith Freedman: The UK prides itself on its system of PAYE (pay-as-you-earn) for employees so that most employees don't have to fill in a tax return at all. That probably does make life easier for the bulk of taxpayers. But it also means they don't have a clue how much tax they're paying and it removes them from the political process somewhat. I'm not sure it's a good idea. It limits the way we can design our tax system.
You have to keep your tax receipts in Australia so you can claim deductions. It's all very simple in the UK. You just can't claim any deductions. That's simple, but it's not necessarily a good tax system because it may not be perceived as being fair. And simplicity and fairness are always the intention.
Knowledge@Australian School of Business: Then, can we say the UK has a simple tax system?
Judith Freedman: For employees, it does appear to be pretty simple. Simplicity is achieved by not allowing any deductions but that also causes a great deal of trouble because no one wants to be an employee. People try to devise contracts so that they are not employees, but are self-employed. So complexity then arises in another way.