the tax reform man cometh

  • Date:01 Nov 2005
  • Type:CompanyDirectorMagazine

The tax reform man cometh

Tax reform is back on the political agenda thanks to Malcolm Turnbull. While he says that all he wants is a considerate debate his very visible public persona makes him the issue as much as the context of what he proposes. John Arbouw interviews the Member for Wentworth

Malcolm Turnbull says he is doing it because of a commitment to public service. His enemies say he just wants the power that may eventually see him become Prime Minister.
   The public hasn’t made its mind up,
but wonders why a successful businessman would want
to be a politician.
And, as the Member for Wentworth is discovering, the backbench in a Coalition government can be both a blessing and a curse. Yes, he is far freer to float issues such as his plan to reform the personal tax regime and advocate sustainable cities but the downside is that whatever he says Malcolm finds himself in the middle of political speculation of where he fits between John Howard and Peter Costello.
But controversy has followed Turnbull throughout his career as faithfully as his dogs that he takes for regular walks around the Sydney suburb of Rose Bay. (The dogs have their own “dog blog” on his website)
Even entering the political arena was not without controversy. After all, this was Turnbull’s third attempt to gain a seat and it was won only after a bitter preselection battle which saw various Liberal party factions in the Eastern Suburbs at each other’s throats. 
As a lawyer he defended Peter Wright in the 1988 Spycatcher Trial. The trial was about the right of the ex-spy to write about his former life. In 1983-85 he was Kerry Packer’s general counsel. As a journalist for The Bulletin he once had to send a story he had written on Michael Kirby (now Justice Kirby of the High Court) to him to check for accuracy (it was approved). As an entrepreneur and company director, he was chairman of Ozemail, which he sold for a tidy profit. As a merchant banker, he was chairman and managing director of Goldman Sachs Australia. Turnbull was also chair of the Australian Republican Movement from 1993-2000.

Man in the middle
With the release of his paper on reforming the personal tax regime earlier this year, the issue of tax reform has suddenly taken centre stage on a number of levels - and Malcolm is, of course, in the middle.
   “Look, I don’t think public life should be for the fainthearted. The only justification that makes any sense for becoming a politician is commitment to public service and a commitment to using whatever abilities you have to ensure Australia is a prosperous and secure country,” Turnbull said.
   “In regards to tax reform, it is my view that we should have a tax system that is as efficient and as equitable as can be devised. Everyone has the same general goal. I really wanted to make two points.
“One is to make a case for further tax reform particularly focussed on personal tax. At the same time I wanted to give an indication of what the fiscal, budgetary and distributional outcomes would be. I thought it would be useful to create a ready reckoner. I didn’t create 270 different tax models.”
But whether he is advocating giving everyone in Australia their own e-mail address for life or for the government to “consider a new overarching framework for sustainability governance”, Turnbull has the uncanny knack of stirring the political pot.
“I believe that politics is a team sport and it would not be helpful for me to produce Malcolm Turnbull’s tax plan and set that up as an alternative to Peter Costello. What I set out to do was to create a ready reckoner that shows the consequences of a whole lot of changes and the combination of changes to both thresholds and rates. This is in terms of what it would cost in lost revenue without taking into account labour market responses.
“Then I also wanted to look at who bears the burden. At the moment the income tax burden is shared in a very progressive way insofar as the top 20 percent pay nearly two-thirds of all personal income tax. If you make changes, how do you effect the relative contributions of the income groups?
“The idea was to find the tools so that all of us could have a more informed debate.”
And debate, is certainly what has resulted. Peter Costello was reported as saying that Turnbull’s plan to slash the top rate would not be “modest” but cost up to $14 billion more than forecast by Turnbull’s modelling.
Then it was revealed that Treasury had also done some modelling prior to the Budget and looked at the 30 percent personal tax and even a flat tax scenario. According to newspaper reports, the Treasury view of the 30 percent top rate would cost the budget more than $16 billion a year by 2008-09 and that a flat-tax alternative was cheaper.
Whether Turnbull has been an agent for change or not, it isn’t only personal tax reform that is now on the agenda. The ATO has announced changes to the way it will deal with business and the BCA is now calling for further business tax reform.
“What was happening, and I observed this earlier in the year when we were having a debate abut tax reform was that people were saying we should have a 30 percent top rate or a $12,000 threshold but no one really had an idea of the cost or the impact.
“We didn’t have the data that the Tax Office does but we decided to work from a model developed by ANU. It was really an academic piece of work to inform and promote debate and further tax reform. It was also meant to demonstrate that fairly significant reform was affordable.
“You have a budget surplus on the one hand and the opportunity to broaden the base at the other. There is a world-wide movement towards a simpler more efficient tax system.”
The widespread belief that tax reform on any level is doomed because the tax industry and some sections of the accounting profession are reluctant to change is not shared by Turnbull. He points to papers from the CPA that also advocates moving to a simpler system.
“The accountants as a group are certainly advocating tax reform. As well, there are two schools of thought. There is the incremental tax reform that has been the pattern since the Tax Act came into being. Every week, it seems there is another amendment to the tax laws.
“The other approach is that if you are going to simplify and, thereby render more efficient your tax system, you are going to have to broaden the base and that then enables you to lower the rates.”
Whenever tax is discussed however it is always in the context of the politics of envy and who wins or who loses. No one disputes the need for reform but it is a matter of handling the politics.
“Yes, the problem in changing the system is the politics. It is not politically difficult to fund tax cuts and that is exactly what Peter Costello did in the last budget. But there is a difference between tax cutting and tax reform.
“There is also little doubt that high tax rates promote avoidance. If you have a tax rate of zero you will have zero revenue. If you have a tax rate of 100 percent you will also have zero revenue because no one will do any work.
“What is more contestable is where the sweet spot is. There is clearly a point where the deadweight cost of tax becomes so high that increasing taxes becomes counter-productive.
“If people ask what can the government do to raise revenue, the best way is to promote economic growth.
“The reason we have strong revenues is not because Peter Costello has been jacking up tax rates but because the economy has been growing strongly.
“We have to focus on creating a more efficient tax system and vertical equity is most important so that the burden is borne by those best able to bear it. Equally you need horizontal equity so that people similarly situated are making the same contributions.”
Turnbull says his tax reform arguments are not based solely or wholly on the top marginal rate.
“Yes, I think it is too high but the truth is that bulk of the people who pay the marginal rate are wage and salary earners on high incomes. The reality is that the really wealthy people are able to structure their businesses completely legally in such a way that they pay a lower rate.
“Ideally you would have your top business rate and your personal rate at or near the same level. Fundamental tax reform is financially affordable but is it politically feasible is the real question.
“If you just use the surplus without broadening the base, the politics are fairly straightforward. But the minute you start broadening the base and Treasury are the only people who can do this, you have got to do a careful analysis of winners and losers.”
If politics is a team sport did Turnbull talk to the captain and the vice-captain before going public with his tax reform plan?
“My views on tax reform are very well known and I have been making these points for years. I don’t get my public statements vetted by anybody. One of the virtues of being a backbencher is that you have a certain amount of freedom.
“Most people consider this as a useful exercise for backbenchers to engage in the policy debate and take advantage of the freedom. I don’t have a problem with Liberal backbenchers criticising government policy. We are a free party. But I haven’t done this.
“Everyone agrees that reform is needed and it is simply a case of how you get there. I am by nature very collaborative and collegiate and while I have operated as a sole practitioner, a barrister and a businessman, I am a great believer in the virtue of having an open discussion and floating ideas.
“But you have to accept, and I do, that you might kick off a debate with your idea but with the intent that you end up with a better idea as a result of the discussion.”

Business tax reform
Is business tax reform also on the Turnbull agenda?
“I don’t claim to be an expert on business tax. I try to concentrate on things I have done my homework on. However, it is important to understand that every tax carries with it a deadweight cost.
“You have got to ask yourself every time, what are you trying to achieve. Is this the most efficient way to get the dollars in?
“Can we raise this money with a lower compliance costs? Can we raise it in a way that will have a lesser impact on economic activity?
“We must test every single tax constantly along those propositions. You can’t fall for the mistake of set and forget. The reality is that the world is changing constantly. You cannot assume that the brilliant business plan of last year will work this year or even next month. This doesn’t go just to tax but also regulation. What are we actually achieving out of the explosion of corporate regulation and are we prepared to go back and look at everything in the light of experience.
   “It is worth looking at regulation and to say what is it that we have actually achieved and could we achieved our goal with a lighter touch.
   “I think one of the problems is that governments can listen to big business too much and to small and medium-sized businesses not enough.
   “If you are the CEO of a bank you can be concerned about compliance but the reality is that you have three floors of people handling that for you. Compliance for big business has just become a line item expense.

Big small businesses
“But if you are running a business with 100 or more people compliance becomes a real cost of doing business. People forget that small business isn’t just the corner grocery store.
“This is the business world where I came from. I have worked with some very good companies and I have been a director of some very good companies but most of my experience has been in the medium-sized business area with 100 or more employees.
“The voice of this sector doesn’t always cut through the fog.”
The fog of tax reform continues to swirl through the corridors of Parliament House and through the business community. But as John Ralph (see September issue of Company Director) discovered in his work in reforming the business tax system in the late 1990s, shifting an entrenched tax system that has become an industry in its own right is very difficult.
But a budget surplus, a strong economy and apparent support from the ALP may just provide the necessary wind of change to blow away the fog that impedes real tax reform rather than more changes at the margin.
It is also interesting that there appears to be some movement among various members of Parliament to revive the Republic debate.
Malcolm Turnbull may not be on the playing field but he can afford a smile from his position on the bench.