Pearls and Irritations

If we look at the tax reforms of the past we can observe a few clear problems that are accumulating from design compromises.

1. We replaced narrow indirect taxes with a broader GST, but the GST base is narrower than consumption and the trend over the past 15 years is for a relative decline in GST revenues. This has been partly offset for the States by higher mining royalty revenues, but these are now weakening.
2. Other indirect taxes imposed on narrow bases have declined even more dramatically than the GST. These are structural weaknesses that will not be overcome by future economic changes.
3. The reformed personal tax scale was not indexed and has undergone a series of changes based both on bracket creep and on ad hoc politically based changes. Forward estimates are based on an assumed increase in average personal income tax burdens.
4. The income base is a complex compromise between a wide range of competing principles – for example between the comprehensive income and expenditure tax principles, the realisation and accrual principles, the asymmetric treatment of gains and losses, different concepts of source and residence, and different approaches to entities and income assignment. Progressivity is also pursued in a highly imperfect and incomplete way.
5. Secondary tax layers – that is additional taxes and charges imposed on top of the broadly based taxes such as payroll taxes and stamp duties – continue to be relied upon but without clear rationales or efficient design principles.

So here we are again. Once again we confront the problems of a compromised tax system and seek to achieve reforms that will at least for a further time set us on a more robust and effective path. We confront another change leadership task which would set us on a substantially new course, rather than one that takes us along an old and well-worn path. Can we do it?

In 2013 I set out my thoughts on change leadership for public policy in a chapter of the CEDA study called Setting Public Policy. For this I compared what I thought were the key ingredients with those of John Kotter in his work on organisational change.

Let me revisit the 5 main steps towards leading public policy change which I then suggested based on a part of Kotter’s model, and make some observations on where we stand today with the tax reform debate.

It is within that framework that the main political economy issues affecting tax reform can be seen to arise.

Change Leadership tasks

1. Establishing a sense of urgency
   1. The version of this most common in public service circles is that a crisis is need to deliver change. The issue is whether there really is a basis for any actual or perceived sense of urgency
   2. Unfortunately, it is difficult to create a sense of crisis after 24 years of continuous economic growth. Crying wolf is also a problem, and there has been a cost of the overstatement of crisis that we experienced surrounding Australia’s levels of debt and deficit. We now probably have a more economically wary electorate than ever.
   3. So rebuilding a sense of urgency is now a great challenge for government. It needs to be based on a clear and consistent message about how, and specifically in what ways, the economy’s trajectory is now taking us away from critical goals.
   4. I think we have started on that task – but there is quite a way to go. The coming MYEFO and the other promised government initiatives in tax, the federation and perhaps innovation and cities provides a chance to reboot the required messaging. But at the moment, if anything, we have a problem of “over narration” where many stories have been begun but have not been finished nor have they been brought together in a coherent way. There is even a risk of adding more layers to the narrative confusion, with agendas like innovation or cities, before we get to sort out what has already been launched.
2. Forming a powerful coalition
   1. The Prime Minister appears to be acutely aware of this element. He has taken immediate initiatives in calling in the classical trio – business, unions and welfare – for discussion of goals. The states are also being engaged.
   2. But the coalition required on tax reform is not yet formed. The coalition is one of many leaders agreeing on the imperative of reform but they are following many agendas and directions rather than forming a coalition sharing the same understanding.
3. Developing a change vision
   1. Right now I do not know where we are going with tax reform or the federation. There are very mixed signals. I do not expect the answers – that is actually premature. But the principles – not at a high level but at a concrete level should be starting to form by now. There is little sign yet that this is happening or even that the Government seeks to do this before it commits to actual policies. Hopefully 2016 will change that.
4. Communicating the change vision
   1. The government now appears to be better placed on this than before, and there is a strong sense of hope in the community that we are now facing in the right direction at least. Of course, a change vision is not the same as a political vision. It is a much more demanding thing. The key is to get beyond slogans and beyond the sort of superficial rubbish that in recent years has been commissioned from a group of issue managers, advertisers and political advisers that have repeatedly failed to cut through to the community. They have not been incompetent in playing attack or defence politics – but they have been incompetent in communicating a change vision when clearly there is some community appetite for genuine solutions. This has been a palpable advisory failure on both sides of politics.
   2. When it comes to taking a substantially new path the communication rules of oppositional politics do not work. More is being asked of the public and so the understandable public demand is for a lot more meaning and substance in the communication offering. This understanding seems to have been missing in recent years.
5. Empowering others to act
   1. One of the reasons for opening government to wider participation and engagement during reform processes is that many change programs actually unfold over a period of years and these implementation years require a lot of heavy lifting by those affected by change.
   2. When the Government charts its course, it should be ready to facilitate the empowerment of others to act, whether that be tax professionals, state governments, the ATO or potentially a host of others.

Into 2016

2016 is nearly upon us. It could well be a momentous year. The many processes that have been launched could come to a head. Some sort of coherent framework hopefully can be articulated in which it all comes together.

Part of that will be a renewed understanding of the fiscal strategy, and the probably very poor economic underpinnings of that. I suspect that it won’t change much but hopefully the implications of what is there can be better explained to people – including for example implications of forward estimates that are based on a large restoration of tax share of GDP.

All the signs are that this could be a year of global cyclical weakness. That is certainly a widespread market and IMF view. There won’t be much room for policy error, and there may be a need for considerable short term agility.

This puts a premium in my view on ensuring that the key institutions in Australia are fully focused on their jobs and are sustained to deliver them. There has been inadequate attention to this in recent years, and that has been part of the problem holding back reform capability.

2016 will also bring an electoral mandate for the next three years at the Commonwealth level. I am not certain about the actual significance of mandates in Australian politics, but hopefully there will be a basis for reform at least as strong as that sought by the Hawke Governments in the 1980s and the Howard Government in 1998.

Greg Smith was a member of the Henry Future Tax Review Panel. He has also been head of the Treasury Tax Policy and Financial Institutions Division and of Treasury Budget and Revenue Groups. He was substantially involved with John Howard in the implementation of the GST. The above are extracts from a speech he delivered to The Melbourne Institute last week.

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