What makes a resilient tax system?

Building a tax system that will stand the test of time.

Miranda Stewart

Economics and finance | Australia

10 September 2014

Creating a system that will stand the test of time.

Looking over the pages of our newspapers you could be forgiven for thinking our tax system is under outright attack. Every day you read about global tax evasion as capital flows offshore, or there are calls for a parliamentary inquiry into multinational tax planning, or we’re struggling with declining revenues from our major tax bases, or criticism of administrative and compliance costs for business and individuals.

Of course, while the tax system may be under attack it isn’t going away any time soon. So the question we need to ask is how to create a tax system that is less likely to get bogged down in divisive debate and more likely to generate the revenue that we need, and one that’s going to stand the test of time. In other words, how do we create a resilient tax system?

Resilience means the ability to rebound or recover quickly, to be robust and adaptable. For tax systems, resilience includes the ability for tax revenues to recover in the face of external shocks and to adapt to changing circumstances globally and locally that are changing the way we do things, such as new technologies or different employment, investment and savings patterns.

For a tax administrator, such as Commissioner Chris Jordan, resilience means that the Tax Office can adapt to new tax planning structures, provide clear up-front legal guidance, settle outcomes to disputes for timely collection and build cooperative approaches to audit backed by strong enforcement where needed. Concerns in the news about staff moves between the Tax Office and the private sector are misguided: such exchanges of expertise, within reason, are healthy and strengthen Tax Office capacity: we should do more of it.

Of more concern are drastic cuts in the Tax Office budget, while increasing demands are being made for results, so that the Commissioner is continually expected to do more with less. By world standards our Tax Office is very efficient, with an overall administrative cost of less than $1 for every $100 of net tax collected. But it’s not well known that the GST has a high administrative cost and there is a significant level of uncollected GST debt – a key reason is because the law, especially all the categories of tax exemption, is highly complex.
Recent studies also show that tax compliance costs are rising, especially for small businesses, while tax law struggles to adapt to new business approaches – like Bitcoin or other peer-to-peer systems.

More fundamentally, the reality is that Australia’s tax revenues as a proportion of GDP have not yet recovered from the global financial crisis. A lag is not surprising, and shows flexibility of the system, as business and investment losses are absorbed over time.

But there is a worrying longer-term trend. Tax revenues should grow with the economy, but federal government receipts are lower now as a proportion of GDP than they were in 1982 in spite of three decades of growth, and for much of the time in-between, except for a dip after the 1990s ‘recession we had to have’.

State tax receipts have declined as a percentage of GDP. While our Federal and state governments keep squabbling about how to share the GST, in its current form the GST cannot raise enough revenue to fill that gap, while the income tax needs substantial broadening.

Resilience also requires taxpayers to accept that the system is fair. Unless our big taxes are reformed, if tax collections are to recover this will be because the average tax being paid by low and median wage earners rise in real terms through bracket creep. Higher income earners are much less affected and benefit from tax concessions for superannuation, investment real estate, deductible expenses and tax planning techniques.

Today’s fiscal deficit is a sign that tax revenues are not keeping up with government spending on public goods. But it’s not clear that a cap on tax revenues that would limit the size of government is what the majority of Australians want.

For tax policymakers, resilience requires them to design and maintain stable tax laws while reforming and adapting them to meet new circumstances. But successful tax reform is not easy, and we have recent evidence of how tax reforms can fail. The current government has spent much of its first year focused on repealing two major taxes, one successful – the carbon tax, and one a failure – the mining resource rent tax – if judged on revenue grounds. The last government spent much of its two terms working to enact those taxes, which were both intended to fund some of those benefits and public goods.

These dramatic swings of policy direction suggest that as a nation, we are struggling to agree on how to establish a resilient tax system for the future. As we start a White Paper tax reform process it seems important to think about what we really do want, and how to ensure that tax reform is viable and stands the test of time and public opinion.

This piece was first published by The Canberra Times

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