A persistent theme at the Tax Forum was the call to create an independent tax reform commission. I am deeply wary of such processes which purport to take the politics out of an inherently political topic, for much the same reasons as I am not comfortable with proposals for a strong-form Parliamentary Budget Office (though I think the more limited model that the bipartisan Parliamentary committee advocated is eminently sensible).
You cannot take the politics out of tax. The question of how much is to be raised, the manner in which it will be raised, the balance between various revenue sources, and Governments’ allocation of revenue between expenditure items is intensely political. There is not some ‘right’ answer that an independent body of enlightened technocrats could stumble on, if only vested interests and politicians got out of the way.
When faced with a choice between equity, efficiency, and simplicity, governments can’t say “all of the above”. They have to choose between these ends. Their choice will inevitably be a compromise between competing interests and views, satisfying purists of no political persuasion and irritating tax accountants and lawyers who see the flaws of the legislation up close. This compromise between competing ends is a feature, not a bug.
Let’s take the issue of business tax. Before any Commission got to ‘evaluating reform blueprints’, they’d want to establish some facts about where we stand, both relative to our past and relative to other countries. What is the appropriate metric? Should we just compare statutory company income tax rates, or should we look at the effective rates once various loopholes, exemptions and deductions are taken into account? Instead of comparing rates, should we look at business tax a a proportion of GDP? Or should it be as a proportion of revenue? Should we include various other taxes if their legal incidence falls upon business? To what extent should we take into account the fact that the economic incidence of a tax is not necessarily the same as the legal incidence? If we are to take this into account, which of the array of studies should we lean upon to determine the distribution of this burden between capital and labour?
Once we’ve settled all of those questions, we still haven’t got far. We still need to decide which other countries we should compare ourselves to. Should we just look at the OECD? If so, should we weight OECD countries by population? Or perhaps we should only look at OECD countries that are similar to us in some way, either in terms of their social safety net, or their broad institutional structure, or the size of their economy? Maybe the OECD countries aren’t the right comparators at all; perhaps we should be looking at countries in our region, like Singapore or Hong Kong. How do we take account of the various non-tax regulations that affect business decisions in each country?
Each of these is an important question. I don’t think there is a ‘right’ answer to any of them. Perhaps you might suggest that a ‘reform commission’ would merely present ALL pertinent facts, essentially answering ‘yes’ to all the questions above. That would still leave the question of what is to be done, a question that ultimately should not and must not be delegated from our elected representatives. Maybe the Commission would merely model the economic and fiscal effects of various groups’ reform proposals. This could be useful, but I’m not sure it would ultimately be particularly helpful to governments (and they can, of course, already obtain such advice from Treasury and Finance). Governments would still need to choose between competing ends and between competing views.
I’m all for expanding the range of evidence that is available from trusted sources. I’m all for the idea of Government support for independent research, like the announcement that Wayne Swan made yesterday. I am just wary of the ideas that purport to take the politics out of politics.