Thursday, October 06, 2011

Henry's great tax forum speech

'A visionary idea needs to become
so well accepted it seems banal'

Wednesday morning, checked against delivery:

"I sense there is a strong desire on the part of most participants
to take the debate to the next step. To take that next step,
we need better, and more widely shared, information.
Impressionistic, anecdotal, ideological, overly abstract or
theoretical propositions are not going to deliver what is
needed in this next phase.

In putting together our report on Australia’s Future Tax
System, Jeff Harmer, John Piggott, Heather Ridout, Greg Smith
and I stressed the importance of a better-informed public
debate. It is for this reason that we framed four specific
recommendations relating to monitoring and reporting on
the system. First, we recommended that the government
should, every five years, publish a Tax and Transfer Statement
that analyses and reports on the overall performance and
impact of the system, including estimates of efficiency costs
and distributional impacts. Second, we recommended that
all governments in this federation make freely available for
analysis and research data on existing taxes and transfers
including confidentialised tax unit records. Third, we
recommended that government support one or more
institutions to undertake independent policy research relevant
ot he Australian tax and transfer system. And fourth, we
recommended that tax expenditures and spending decisions
be treated symmetrically by government, both Commonwealth
and state, in budget decision-making. Implementation of these
recommendations, or some variant of them, would go a long way
to enhancing the quality of the debate on tax matters.

The awareness that we needed a better information base
also influenced our thinking about the level of specificity
of our recommendations. In many cases we stopped short
of articulating a precise recommendation, or of making
an especially challenging recommendation, because we
considered that a better public understanding of an issue, or
set of interrelated issues, was required. The Allowance for
Corporate Equity (ACE) proposal is but one example.

The understanding that new ideas take time for absorption
and influence was in part responsible for our emphasizing
that there was no imperative for government to seek to
legislate, immediately, a comprehensive tax reform package
to implement all of the report’s recommendations. We never
imagined this.

As we said in our report: ‘this Review has aimed to set the
strategic directions for the future architecture of the Australian
tax and transfer system. It has not produced a one-off tax policy
package, and it has not advanced the detailed design or timing
of measures. Indeed it is neither possible nor desirable to
make all of these changes too quickly.’

There are other, practical, reasons for taking such a measured
approach to the implementation of reforms, and we set out six
of these in our report.

We noted that there are critical links between tax and transfer
policies and the other, mainly regulatory and spending, policies
of government, and that the future implementation of many
tax and transfer policies depends upon developments in this
broader fabric of policy. That point will, I am sure, emerge
in the discussion this morning. We noted that the scope
of desirable reforms is so broad that it is simply inevitable
that some elements be implemented before others. We
noted that markets, businesses and households need time
to adjust to policy change, and that point was made eloquently
by several speakers yesterday. We noted that time-consuming
intergovernmental agreement, especially in respect of financial
implications, would be required to implement many of the
review’s recommendations. We noted that tax reform should
not be pursued independently of fiscal and macro-economic
circumstances: ‘policies that suit the long run…. may not
necessarily be best implemented in these atypical times’. And
we made the point that current policy settings have been
capitalised in asset prices, at least to some extent, and that any
policy change has to confront adjustment costs.

The point that reform should not be pursued in one ‘big bang’
package is worth reprising on an occasion such as this.

More important is the general point that good policy outcomes
are more likely where there has been high quality debate...

Good policy outcomes are much more difficult to secure where
visionary ideas, big challenges and creative approaches are
floated for the first time in the announcement of a policy
decision. A better outcome will usually be achieved when the
visionary idea is so well accepted that it seems banal; where
the challenges are so broadly accepted that everybody is
worried sick by them; and when approaches to dealing with
those challenges appear merely natural.

Still, it can be very hard, even for a seasoned policy adviser, to
know what is a new idea and what is well understood, what is
unexceptional. Consider, for example, the discussion we had
yesterday about the incidence of the company income tax in
Australia. The question of the incidence of the company
income tax has exercised the minds of public finance
academics since 1960, if not a good deal earlier. But in the case
of a relatively small, open economy like ours, there is simply no
debate in the academic community, there is a strong consensus
among tax academics that the incidence of the tax falls
predominantly on labour. Indeed in an academic conference that
proposition would be considered so obvious that it would
excite no interest at all. Yet, remarkably, we had no such
consensus yesterday. Or consider the difference between so-
called ‘normal profit’ and its alternative, ‘super normal profit’.
A tax on the former should be expected to affect the pattern of
real economic activity, while a tax on the latter should not.
Our review took for granted that this point was well
understood. The authors of the Mirrlees Report in the UK
appear to have made the same judgement; the distinction
between normal returns and above-normal returns is
fundamental to several of their more important
recommendations. But I have to say, in retrospect, in the
Australian setting, rather less should have been taken for

There should be no expectation either that public debate will
focus on the more important things. In the almost two years
since the release of our tax report, up until yesterday, I can’t
recall any serious public discussion of the need to reform the
worst of the taxes levied in this federation of ours: royalties,
insurance taxes, motor vehicle taxes and conveyancing stamp
duties. While yesterday’s discussion among informed policy
makers and informed policy analysts was very encouraging,
in the absence of an informed public debate, it is very unlikely
that the preconditions for successful reforms in these areas

Yet the case for reform in these areas is getting stronger as each
day passes, particularly given the impediment that these
pose to Australia’s structural adjustment in response to
extraordinary external developments. Facing a different, though
no less challenging, set of structural adjustment imperatives in
the UK economy, the authors of the Mirrlees Report have also
argued strongly for the removal of similar transactions taxes.

Even when the preconditions for good policy outcomes have
been established, implementation will still prove difficult. We
shouldn’t kid ourselves on this point. Tax reform, like any other
genuine reform, is hard - especially when an articulate vested
interest can argue that it will be made worse-off. It is an
unfortunate fact of life that public commentary – and, let’s be
frank, I am thinking particularly of our media here – finds it
impossible to distinguish the national interest from vested
interest. That’s a fact of life. But it’s always been thus.

So what should we do? We should do what we are doing. We
should talk, we should listen, we should discuss, we should
argue; in short, we should debate. Not because there can be
any reasonable expectation that, at the end of the day, we will
all agree on everything. We won’t. Our interests are not common.
But that doesn’t mean we can’t find common ground.

We should debate these matters so that the public at large has
a better understanding of where each of us is coming from;
so that serious commentators are better placed to record
the substance of discussions instead of being captivated by
their form; and so that our politicians – the people who have
volunteered to take decisions in the national interest – have a
realistic understanding of where the national interest lies. This
is not a small point. Effective democratic government depends
upon it.

Reflecting on the enormous economic reform program
undertaken in Australia from 1983, there can be a temptation
to think that it was universally supported; that there was no
vested interest in opposition to it. That temptation should
be resisted. It’s simply not true. The truth is that there was no
element of the reform program that wasn’t opposed by somebody;
no element that wasn’t opposed by some powerful vested interest.
And, by the way - apart from our truely absurd luxury car tax - I
can’t recall any tax policy reform initiative of the past 28 years that
enjoyed bipartisan political support. There must have been others,
of course. But the significant measures that participants of
this forum would identify as serious reforms were all hotly
contested in political debate. A more accurate assessment
of the history of tax reform in Australia is that successive
governments have exploited windows of opportunity, against
persistently adversarial political opposition. The fact that they
have had some success owes a great deal to their courage and
tenacity. But, no matter how courageous or tenacious, even the
best of them would not have attempted serious reform without
being able to build on the groundwork of a reasonably well-
informed public debate.

In this forum, we are starting to put in place the groundwork
for the next several phases of serious tax reform.

A final point. In thinking about tax and transfer system
requirements for the Australia of the future, it certainly makes
sense to identify a set of high-level objectives against which
various proposals might be assessed. This is the approach the
review panel took. But we should not fall into the trap of thinking
that absolutely every element of the system has to ‘tick all the
boxes’ against those various objectives.

For example, I heard a number of times yesterday that
all taxes, every tax, should be fair, should be equitable. That
proposition makes no sense. Instead, as other speakers noted,
the fairness of a tax and transfer system should be assessed in
respect of the incidence of the system as a whole. More importantly,
there is a very strong argument for insisting, as the review panel did,
that equity objectives be pursued only through the personal
income tax and transfer system – taking full account, obviously,
of the incidence of the various other components of the tax
system, but not affecting their design. I know that many of you will find
that proposition too confronting. But, as we go through today’s
discussion, I would ask that you keep it in mind. Because if we could
secure agreement on this proposition we would have a very
powerful motivator for addressing tax system complexity. The
implications for the Australian tax system would be profound."

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