Oz Blog News Commentary

Should we ‘depoliticise’ tax policy?

June 17, 2014 - 20:04 -- Admin

It’s compulsory that every big report on tax policy begins with more or less the same set of bland platitudes. Tax policy, we’re always told, should take into account a few foundational principles, like equity, efficiency, simplicity, and motherhood.

For example, the Henry review found that ‘equity’ is an important design principle for the tax system. They said:

The tax and transfer system should treat individuals with similar economic capacity in the same way, while those with greater capacity should bear a greater net burden… this burden should change more than in proportion to the change in capacity. That is, the overall system should be progressive.

Henry and co. also found that ‘efficiency’ is an important principle:

The tax and transfer system should raise and redistribute revenue at the least possible cost to economic efficiency and with minimal administration and compliance costs.

I doubt you will find many people who would disagree that these two principles, among others, should be taken into account when designing a tax system. But, of course, when we move beyond the realm of abstract principles and start to think about actually coming up with proposals for tax reform, we hit a problem. Which of these principles is the most important? Should we prioritise the progressivity of the tax system, or should we care more about maximising the efficiency of the system? On what basis should we choose between two policy proposals if one would increase equity at the cost of efficiency, and the other proposal would do the opposite?

It is difficult to think of policy choices that are more inherently political. Yet some people and organisations seem to believe that the tax policy debate is just irrelevant noise that can be sidestepped if only we design the right technocratic structure. The latest version of this comes from Ernst and Young (EY).

EY says that “tax reform is challenging because of the political, economic and social minefield through which any tax reform must tread.” They propose a solution – charging technocrats with the task of flying over the minefield. They say an Australian Tax Reform Commission should be established as an independent advisory body, assuming some of the roles of the federal Treasury but presumably without being answerable to the government of the day. You may have gathered that I don’t like this proposal. I think it would represent a diminution of the role of our elected representatives in weighing up the various principles that underpin tax policy.

Some might point to monetary policy – there we already devolve a important and controversial task to an independent institution outside the direction of the government of the day. But there is a fairly broad consensus about the framework under which the RBA operates – they aim to ensure inflation remains, on average, between 2 and 3%. Both sides of politics seem to agree that this is appropriate, as the target has been in place since 1993 (formalised in 1996).

Can you imagine a similar consensus between, say Wayne Swan and Mathias Cormann about the appropriate balance between personal income tax, consumption taxes and company tax? What about an agreement on the slope of the marginal tax rate curve for income tax?

It is implausible that you could find some grand consensus on these questions. I do not agree that there is some ‘correct’ way to balance equity and efficiency, some indisputably right answer to these questions that is just waiting out there for technocrats to discover, if only they were given license to leap over the ‘minefield’ of our tax policy debate.

This doesn’t mean that there’s no role for independent or expert advice on tax – of course there is. I think the Henry Review was a very valuable process, and now we have a new Tax and Transfer Policy Institute at ANU. The researchers at that institute, as with others, will presumably come up with some interesting and useful policy proposals. But tax policy is inherently political. The choices that are made in balancing the various principles cannot be made in a value-free way.