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BINH TRAN-NAM[*]
The 1998 Australian Federal election was fought in a large part on the alternative tax reform packages proposed by the Coalition Government and the Labor Opposition Party. In its GST-based tax reform package the Howard Government recognised the complexity of the current Australian tax system and devoted an entire chapter to simplification of tax administration. [6] A major tax simplification proposal is to replace five existing payment and reporting systems (PAYE, Prescribed Payments System (PPS), Reportable Payments System (RPS), provisional tax and company instalments) with a single pay as you go (PAYG) system. The Coalition Government then claims that its tax reform package ‘will deliver higher economic growth and more jobs for Australia as a result of ... lower tax compliance costs’. [7]
As the Howard Government was returned to office with a comfortable majority, it seems opportune to explore, at least qualitatively, the tax simplification impact of its tax reform proposal. But before so doing, it is necessary to develop a comprehensive and rigorous conceptual framework for examining tax simplification. The present paper has a two-fold purpose. First, it attempts to explore in depth the concept of tax simplicity and tax operating costs. Second, it aims to provide a preliminary assessment of the tax simplification impact of the Federal Government using the framework developed.
The organisation of the remainder of this paper is as follows. Section 2 presents a brief overview of recent developments of tax simplification in Australia. Section 3 examines the meaning and criterion of tax simplicity. The paper makes a distinction between the concepts of ‘legal’ simplicity and ‘effective’ simplicity, which may or may not be consistent. Thus, legal simplification does not necessarily imply a reduction in tax operating costs and vice versa. It is proposed that the tax operating costs as a percentage of GDP is conceptually a more satisfactory indicator of tax simplicity than the more conventional ratio of tax operating costs over tax revenue. In Section 4, a comprehensive definition and measurement of operating costs is presented. It is suggested that, in view of the recent trend toward tax base broadening, tax operating costs should be considered jointly with dead weight losses in discussing the efficiency aspects of any tax reforms. Section 5 then assesses the tax simplification impact of the Australian Federal Government’s tax reform package and rejects the claim that GST-based tax reform will lower tax compliance costs in Australia. Finally, some concluding remarks are given in the final section.
The 1980s witnessed substantial tax reforms in many developed nations around the world. These reforms, which trace their roots to the pro-market policy of Thatcherism and Reaganism, have a number of features in common: lower tax rates, base broadening, and more neutral and uniform tax structures. In Australia, following the National Tax Summit in July 1985, there have been substantial direct tax reforms, which include income tax base broadening and self assessment. [8] Although sales tax has been simplified, three separate attempts to introduce a broad-based consumption tax in 1978, 1985 and 1993 have all failed. [9]
Tax reforms in Australia have, until recently, concentrated on the equity and efficiency aspects of tax policy. However, since the late 1980s, there has been growing public awareness of and concern for the operating costs of the tax system in Australia. This growth of interest (by the academic community, the business sector, the professional bodies and the government) has mirrored similar activities overseas. There are two related strands in the literature:
Prior to 1985 there existed no quantitative estimates of the tax compliance costs in Australia. In the late 1980s and early 1990s, major surveys on individual income tax, company income tax, employment-related taxes and Wholesale Sales Tax (WST) were carried out by a group of university academics in Western Australia led by Dr Jeff Pope. Their studies, commissioned in part by the Australian Tax Research Foundation, found that Australian federal tax compliance costs are very high, accounting for more than 12 per cent of relevant tax revenue in 1990–91. [10] Subsequently, the Australian Taxation Office (ATO) commissioned a project consisting of in-depth case studies of tax compliance costs to small firms, undertaken by Wallschutzky and Gibson at the University of Newcastle. Using the diary entry and interview approach, they concluded that ‘... the tax compliance issue has been grossly exaggerated. For the small businesses interviewed it was not a first order problem’. [11]
In the tax policy literature, the growing complexity of the Australian tax system, especially the income tax, has been recognised by academic tax lawyers. [12] At the same time, various Australian professional organisations have made a number of calls for tax simplification. [13] In particular, the Taxation Institute of Australia proposed a withholding tax mechanism for property income as a means of simplifying compliance. Prior to the Federal election in 1996 the Australian Chamber of Commerce and Industry (ACCI) undertook a mail survey of its members to assess the policy change sought by the business community. This national survey of Australian employers attracted more than 2,500 respondents. Among the 57 issues listed in the questionnaire, the three most important ones were frequency and complexity of changes to federal tax laws and rules, costs of compliance with the tax system and Fringe Benefits Tax. [14] However, the report on the results of the survey does not indicate how representative is the sample of respondents and how serious is the non-response bias. Thus it is not possible to determine whether the generalisation of the sample results is valid or not.
For its part, the Australian Federal Government has taken a number of initiatives to simplify the tax laws and to reduce compliance costs. The Beddall Report by the House of Representatives’ Standing Committee on Industry, Science and Technology made a number of specific recommendations for tax simplification, some of which were implemented (for example, quarterly payments of WST and group tax). [15] However, the first major step was the appointment by the then Federal Treasurer Paul Keating of a Tax Simplification Task Force involving the Treasury and the ATO in February1990. (The Task Force submitted a report to the Treasurer but the report was never publicly released and only some specific recommendations were acted upon. The self assessment legislation was an outgrowth of this project.) Since then there have been repetitions of the government’s commitment to modernising tax laws and greater use of plain English. [16]
More recently, the Joint Committee of Public Accounts (JCPA) of the Australian Parliament (now the Joint Committee of Public Accounts and Audit) conducted a wide-ranging inquiry into the ATO. In its report released in November 1993, the JCPA recommended that:
The Government establish a broadly based task force to redraft the Income Tax Assessment Act 1936 [recommendation 22, paragraph 5.38];
and
All future tax legislation be supported by a Taxation Impact Statement which details the impact on taxpayers of the legislation, including the total compliance cost and the extent to which simplification objectives have been achieved [recommendation 26, paragraph 5.67]. 17 In response to Recommendation 22, the Tax Law Improvement Project (TLIP) was established by the Federal Government in December 1993. The mandate of the TLIP team was to ‘simplify’ the income tax law by rewriting and restructuring the 1936 Act with the ultimate aims of reducing compliance costs and improving compliance. As a result of the TLIP, a considerable body of rewritten laws commenced operation in the 1997–98 financial year. It is contained in the Income Tax Assessment Act 1997, which was intended to replace the 1936 Act. However, the Government’s tax reform package announced the end of TLIP and the 1997 Act will itself disappear ultimately into the integrated tax code. [18]
The tax simplification initiative is complemented by projects sponsored by the ATO to examine the compliance costs of the federal tax system in Australia. The study by Wallschutzky and Gibson mentioned previously was a typical example of such projects. In response to Recommendation 26 of the JCPA the Revenue Analysis Branch of the ATO commissioned a research team from the Australian Taxation Studies Program (ATAX) at the University of New South Wales to conduct a national study of tax compliance costs. The ATAX team was initially sponsored by the ATO to report upon incremental compliance costs of taxes collected by the ATO, and in particular to identify the variables that cause such costs to change as a result of legislative amendments. The full results of the incremental cost study, based on three large-scale mail surveys, were made public in Australia in 1997. [19]
Subsequently the ATAX team was asked by the ATO to estimate the magnitude and incidence of total compliance costs of the Australian federal tax system in the 1994–95 financial year, and to compare those costs with those encountered in the OECD countries. The ATAX team’s main findings tend to support earlier results by Pope that the compliance costs in Australia represent a significant fraction of relevant tax revenue. [20] More recently, the ATO has again commissioned the ATAX team to conduct an annual updating of total tax compliance costs in Australia.
Although the quantification of tax operating costs and tax law improvement are obviously related, there exists no unifying framework that links these two branches of the literature. This will be addressed in the next section of the paper.
Tax simplification is commonly understood as making the tax system simpler. Thus, the meaning of tax simplification rests on what is meant by tax simplicity or its mirror image, tax complexity. Despite its widespread use, ‘tax simplicity’ is not a concept that can be easily defined, measured or agreed upon. Nevertheless, there seems to be two broad agreements regarding tax simplicity. First, tax simplicity is basically a comparative concept. It is more meaningful to state that a proportional income tax schedule A is simpler than a progressive income tax schedule B, rather than saying that the proportional income tax schedule A is simple. Secondly and obviously, the comparison must involve all taxes contained in the two alternatives. In the Australian context, it is meaningful to compare the GST versus all the taxes it is supposed to replace, not just the WST.
To understand the meaning of tax simplicity further, it is essential to distinguish between ‘legal’ simplicity and ‘effective’ simplicity. Before discussing each of these concepts in detail, it may be helpful to draw an analogy from the tax literature. The difference between legal simplicity and effective simplicity is analogous to that between income tax progression and tax progressivity. Tax progression refers to the progressiveness of the income tax schedule alone whereas tax progressivity measures the overall progressiveness that results from the interaction of the income tax schedule and a particular distribution of income.
Legal simplicity (complexity) refers to the ease (difficulty) with which a particular tax law can be read and understood. This concept has been referred to as ‘simplicity of rules’ by the former Australian Commissioner of Taxation, Trevor Boucher. [21] According to this definition, a tax A is simpler than a tax B if tax A is easier to comprehend than tax B. This definition raises two immediate questions:
These issues will be considered later in this sub-section. Defined in this manner, legal simplicity is clearly of primary concern to tax professionals who are mostly accountants. The degree of complexity of a tax law depends on two things:
The use of language includes such aspects as plain English, active voice, grammar, logical structure, etc. The content of the tax law encompasses such elements as the tax base, discretions, uncertainties, exemptions, special concessions, allowable deductions, rebates and multiple tax rates.
In most cases, it is the content of the tax law that represents the most important source of its complexity. For example, the ITAA 1936 runs into some 7 000 pages with many tax base rules. Rewriting the Act in clearer language and more coherent structure, as done by the TLIP, would only achieve a minor impact on legal simplification. A preliminary evaluation of the TLIP has confirmed that the 1997 Act has only achieved a limited simplification impact. [22] The comprehensibility of a tax law can be measured either ordinally or cardinally. An ordinal measurement of legal simplicity involves mere ranking of any two tax laws, without saying how much one tax law is simpler (more complex) than the other. Thus, any ranking which is complete and transitive [23] provides a satisfactory ordinal measurement of legal simplicity. A cardinal measurement of comprehensibility associates each tax law (or sections of the tax law) with a unique score. The magnitudes of these scores tell how much a tax law is simpler (more complex) than the other. An example of a cardinal measurement of legal simplicity (in the language sense) is the Flesch Readability Index. [24] For example, if certain sections of the ITAA 1936 have a score of 35 and the same sections of the ITAA 1997 a score of 40, then it may be said that the English of these sections have been simplified by 12.5 per cent. However, there exists no numerical measure of legal simplicity in the content sense.
Unfortunately, both ordinal and cardinal measurements of legal simplicity provide very limited guidance to practical tax policy. This is because of the aggregation problem, which arises because readers of a tax law are diverse people including tax lawmakers, tax administrators, tax academics, taxpayers, tax advisers and judges. These people differ significantly in terms of motivation, level of interest, education and work experience. Ordinal measurement is useless if people rank inconsistently among themselves. Even if people rank consistently, an ordinal measurement fails to say how much a tax law is simpler (more complex) than another one. For a cardinal measurement, it is not at all clear how to aggregate individual scores into a social score. Should all people have the same weight, or should tax advisers be given greater weights than taxpayers? Even if the weighting problems can be resolved, such an aggregate score does not capture the simplicity (complexity) of the content of the tax law.
To sum up, despite its common usage and acceptance, legal simplicity is in fact a complicated concept to define and measure. It is necessary to search for a more operational concept of tax simplicity.
Instead of characterising simplicity in terms of comprehensibility, an alternative is to define simplicity (complexity) as the ease (difficulty) with which the correct tax liability can be determined. A more formal definition along this line, offered by Surrey and Brannon, is that ‘simplicity is the characteristic of a tax which makes the tax determinable for each taxpayer from a few readily ascertainable facts’. [25] Thus, effective or economic simplicity can be measured in terms of the effort (ie, value of resources) expended by the society in raising some amount of tax revenue. A tax A is said to be effectively simpler than a tax B if the operating costs of the tax A are lower than those incurred in raising the same amount of revenue by the tax B.
Three things deserve mention. First, it is important to note that the ascertainment of tax liability involves not only taxpayers but also tax administrators, tax law makers and judges. Thus the concept of effective simplicity here is consistent with but broader than ‘compliance simplicity’ and ‘transactional simplicity’, discussed by Boucher, [26] which are concerned solely with taxpayers (compliance and transactional simplicity in Boucher’s paper are concerned with computational and planning costs of tax compliance, respectively). Second, aggregation presents no problem to effective simplicity. Once the values of resources are expressed in some common monetary unit, it is straightforward enough to compute the overall operating costs by adding up the various components.
Third and finally, the measurement of effective simplicity encompasses legal simplicity. The determinants of effective simplicity of a particular tax include:
It should be apparent by now that legal simplicity is related to but distinct from effective simplicity, and the two concepts may or may not be consistent. Two hypothetical examples will illustrate this.
Example 1: Consider two revenue-equivalent individual income tax regimes. Under the first regime, all individuals with positive income are taxed at the same rate with few work-related deductions. Under the second, tax liabilities follow a progressive schedule with many deductions, rebates and tax concessions. The first regime is thus both legally and effectively simpler than the second regime. In this case, legal simplicity and effective simplicity are consistent.
Example 2: Consider two revenue-equivalent retail sales tax (RST) regimes written with the same degree of verbiage. Under the first regime, tax is imposed on a small number of goods at multiple rates whereas under the second, all goods are taxed at a single, lower rate. The second RST regime is legally simpler than the first but the first RST regime is effectively simpler because it involves a far smaller number of taxpayers than the second regime. In this case, legal simplicity and effective simplicity are inconsistent.
In general, for any pair of revenue-equivalent tax alternatives A and B imposed on the same tax base, there are four conceivable possibilities:
As a result, legal simplification is not always equivalent to a reduction in operating costs of the tax system.
To summarise, it is invalid to equate legal simplicity with effective simplicity, and legal simplification with a reduction in tax operating costs. These two aspects of tax simplification must be studied separately bearing in mind that effective simplicity is a much more practical concept than legal simplicity.
Having examined the concept of tax simplicity in detail, it is now appropriate to turn attention to the tax simplicity criterion of good tax policy. As stated previously, the modern criterion of tax simplicity seeks to minimise the operating costs incurred in raising a given level of tax revenue. Translating into symbols, the tax simplicity criterion seeks to minimise O/T where O and T are the tax operating costs and tax revenue, respectively. Tax simplification is then said to take place when this ratio falls as a result of tax changes.
The unit-free ratio O/T (where O stands for estimated tax compliance costs) has been widely reported in empirical studies of tax compliance costs and is frequently used as a basis for comparing the compliance simplicity across countries. [27] As pointed out by Sandford, 28 this sort of comparison is fraught with difficulties and is more likely to mislead rather than inform. This paper goes further by arguing that the ratio O/T is conceptually an unsatisfactory indicator of tax simplicity.
To illustrate, consider the UK’s VAT experience reported by Sandford:
In 1977–78, as well as a zero rate, the UK had a standard rate of VAT of eight per cent and a higher rate of 12d and the standard rate raised to 15 per cent. The effect, once the change was fully implemented, was to reduce the cost/yield ratio by almost a half from just over 2 per cent to just over one per cent. 29
According to the conventional measure of tax simplicity, raising the tax rate alone brings about tax simplification. This does not make sense and the need to find an alternative measure is apparent.
Since tax revenue is equal to the tax base multiplied by the tax rate, dividing O by T adjusts for the effect of the tax base (number of taxpayers and business cycle). To adjust for the overall tax rate, it is necessary to multiply O/T by the overall tax rate T/Y where Y is total output or GDP. This yields O/Y, which seems to be a more appropriate index than O/T.
For more meaningful international comparisons of tax simplicity, it is also necessary to adjust for the size distribution of taxpayers, the general level of tax avoidance and evasion in the economy and government’s commitment to combat these. It is, however, extremely difficult to disentangle the effects of these factors on the proposed O/Y ratio. It is therefore proposed to measure tax simplicity (complexity) of a tax system by a multi-dimensional indicator consisting of:
The term ‘tax operating costs’ is conventionally defined as the sum of tax administrative and compliance costs. This paper argues for a more comprehensive approach to the costs of operating a tax system. It also considers the timing issue in defining and measuring tax operating costs. Before so doing, it may be worthwhile to review some broad conceptual issues.
In the tax literature, it is a common practice to associate the administrative and compliance costs with public sector and private sector costs, respectively. [30] It is felt that it is more useful to view tax operating costs from the societal perspective as the compliance costs, for example, consist of both the private sector and public sector costs. An example is the cash-flow advantage, which arises when taxpayers have the use of tax revenues for a period before they must be remitted to tax authorities. [31] The cash-flow benefits enjoyed by taxpayers may be thought of as interest-free loans to taxpayers and thus viewed as costs to tax authorities. This means that cash-flow benefits to taxpayers represent a transfer within the economy, which do not reduce the compliance costs to the economy, only to taxpayers (assuming taxpayers and tax authorities have the same interest rate).
There are other benefits to taxpayers that vanish at the societal level. These include:
The operation of the tax system generates not only costs but also benefits to the economy as a whole. Some of these benefits include
The tax system of any country changes constantly and continuously. An existing tax may be amended or abolished, and a new one introduced. There are five identifiable activities in the operation of a tax system:
(i) Tax Policy Design and Planning
In Australia, the tax policy division of the Federal Treasury is normally responsible for the design and planning of tax policy, including the preparation of a new tax or the amendment/abolition of an existing tax. The Treasury may seek advice from other government departments and the ATO whose activities or whose clients may be affected by the proposed tax changes. In addition, the private sector may also try to influence the government’s tax policy through academic writings, submissions, proposals and lobbying activities.
(ii) Tax Law Drafting and Enactment
The Office of Parliamentary Counsel is responsible for the drafting of necessary tax legislation with the assistance of the ATO. Both Houses of the Commonwealth Parliament spend much time and resources in debating, amending and turning tax proposals into statute law or legislation.
(iii) Administering the Tax System
The ATO administers the tax system by interpreting the law (via determinations and rulings), collecting taxes, assessing and auditing tax returns, enforcing compliance, recovering tax debts, refunding tax overpayments, forecasting tax revenue and resolving tax objections. [32] Many aspects of the ATO’s operations are scrutinised by the Australian National Audit Office.
(iv) Compliance with the Tax Structure
Not only taxpayers (individuals and firms) but also non-profit institutions and the budget sector of the federal, state and local governments have to expend resources in meeting the requirements laid upon them by the tax system.
(v) Tax Dispute Resolution
There are various mechanisms for resolving tax disputes in Australia. Apart from the ATO (before the dispute is taken further) and the Administrative Appeals Tribunal (AAT), the Federal Court and ultimately the High Court have jurisdiction to finalise substantive tax disputes. Although State courts do not have jurisdiction to hear substantive tax disputes, they have jurisdiction in tax debt recovery disputes. In addition, the Ombudsman and, to a much lesser extent, the Privacy Commissioner get involved in examining the way the ATO has treated particular taxpayers.
In principle, all the resources expended in carrying out the above activities should be counted toward the operating costs of the tax system. The conventional practice of defining the tax operating costs as the sum of administrative and compliance costs ignores legal aspects of the operation of a tax system. In taking such a narrow view, one assumes the legal framework of the tax system as given. This simplifies the analysis but is conceptually incomplete.
Proponents of the narrow view of the operating costs of the tax system may argue that the opportunity costs associated with tax policy planning, tax drafting and enactment and tax dispute resolution are either:
It is well known that the various components of the operating costs of a tax system are transferable. For example:
Both tax operating costs and GDP are flow variables defined in terms of dollars per unit of time. This raises the issue of an appropriate time unit of analysis. The choice of a time unit in empirical studies is invariably a year. This choice is dictated by the availability of data and the nature of the tax system, but is not conceptually sound. Since the tax system operates over many time periods, the use of the ratio O/Y for any particular year may be misleading. A hypothetical example will confirm this.
Consider, for example, two alternative revenue-equivalent tax systems, A and B. If the ratio O/Y under A is lower than that under B for all periods under consideration, it can be said unambiguously that the tax system A is simpler than the tax system B. However, suppose the ratio O/Y under A is greater than that for B in the first year of operation, but if the direction of inequality is reversed in the 3rd year of operation. Which tax system is simpler?
There is a second and related timing issue. It is well known in the tax literature that operating costs of the tax system can be divided into commencement and recurrent costs. For example, the costs of tax policy planning and design of a new tax are mostly one off whereas compliance costs of the tax have both set-up and recurrent elements. It is problematic to deal with commencement costs using the static, one-year ratio. A possible solution is to spread commencement costs over the lifetime of the tax according to some accounting formulas.
An even better alternative is to make use of the present value concept in costbenefit analysis and define the aggregate tax operating costs and aggregate GDP over the lifetime of the tax as:
O = O0 + O1/(1+r) + O2/(1+r) 2 + ... + On/(1+r) n and
Y = Y0 + Y1/(1+r) + Y2/(1+r) 2 + ... + Yn/(1+r) n ,
respectively, where r is the social rate of time preference (analogous to market interest rate), the subscript refers to the time period and n is the number of time periods during which the tax system operates. In principle, all the commencement costs of a tax can be captured by the term O0. For any two alternative tax systems A and B with the same lifetime, one may say that A is simpler than B if O/Y under A is smaller than O/Y under B.
This paper recognises that the suggested approach is theoretically satisfactory but practically impossible to implement, largely due to lack of suitable data. Nevertheless, it is important to start with the correct measure and try to approximate it as more and more data becomes available.
The division of the social costs of taxation into efficiency, administrative and compliance costs may give the impression that these cost categories are mutually exclusive or unrelated. In reality the borderline between efficiency and compliance costs is often blurry. For example, a UK Open University Business School report claims that nearly 18 per cent of companies surveyed in Britain are deliberately avoiding sales to stay below the £50,000 threshold for VAT. [33] Such a change in behaviour is an efficiency cost but it is not induced by a change in relative prices, but by a perception of high compliance costs. This is neither a pure efficiency nor compliance cost, but represents a hybrid of these costs.
As mentioned previously, tax base broadening has been an important feature of recent tax reforms around the world. This popularity is based on the notions that:
This paper has previously argued that tax base broadening will increase the number of taxpayers and tax administrators involved, and therefore the tax operating costs. Thus, there is considerable potential for tension between economic efficiency and effective simplicity. As efficiency gains may be cancelled out by increases in operating costs, it is essential to consider efficiency gains and simplification of tax reforms simultaneously.
The private sector has often blamed tax authorities for tax complexity or high operating costs of the tax system. This conveniently ignores two facts. First, the tax system needs to become more complex and specific in order to cope with a rapidly changing business world whose structures and transactions have become so diverse and complicated. Secondly, the complexity of a tax system is a two-way, interactive process. Any given tax structure can be as simple or as complex as taxpayers want it to be. As long as taxpayers are utility or profit maximisers, they will search for ways to minimise their tax liabilities (provided that the benefits exceed the costs) and, in so doing, make the tax system more complex than otherwise necessary.
To elaborate, note that compliance costs are sometimes divided into computational (unavoidable or involuntary) and tax planning (avoidable or voluntary) costs. This distinction, first made by Johnston, [35] has caused a controversy which has not yet been (and possibly will never be) fully resolved in the tax compliance literature. Many tax lawyers and policy makers continue to insist that only computational costs constitute legitimate measures of tax compliance costs. Irrespective of the validity or practicability of this particular view, tax planning or tax minimisation is wasteful from the societal viewpoint. This is because the benefits of tax planning to taxpayers will be matched by a reduction of the same magnitude in government tax revenue. Thus, the social costs of tax compliance will increase by the same amount as the costs of tax planning (assuming that if taxpayers do not engage in tax planning, professional tax advisers can still find employment elsewhere).
Before evaluating the simplification impact of the Australian Federal Government’s tax reform proposal, it is useful to examine briefly the current level of tax operating costs in Australia. It is also important to stress from the outset that the discussion must necessarily involve the State tax system as the proposed GST will replace a number of State taxes.
There is a paucity of empirical evidence of the operating costs of the Australian tax system. Little is known about the costs of operating State taxes. The costs of collecting some State taxes are obtainable from previous studies or current State budget papers. [36] A national study by Pope, Fayle and Chen estimated the compliance costs of payroll tax, the most important State tax, at 3.6 per cent of total payroll tax revenue for all States. [37] With regard to Federal taxes, there exist more estimates, but these numerical estimates are available only for some components of operating costs and not widely accepted. This sub-section briefly reviews the evidence relating to the operating costs of the Australian federal tax system. At present, there exists no estimate of the costs of tax policy planning, tax drafting and enactment, and tax dispute resolution at the federal level. The following statistics provide a glimpse of tax-related legal activities in Australia during 1997:
The ATO administers income tax (including the taxation of capital gains), Fringe Benefits Tax, WST, Superannuation Guarantee Charge, Petroleum Resource Rent Tax, some other minor taxes and charges, the PAYE system, the provisional tax regime, the Prescribed Payments System and the Reportable Payments System. Customs and excise duties are collected by the Australian Customs Service (ACS), now located within the Federal Department of Justice and Customs. The main sources of information on the administrative costs of the ATO and ACS are the financial statements contained in their annual reports. Although the tax revenue collected from customs and excise duties is very significant, amounting to almost $22 billion in 1997–98, [39] it is clear that the operation of the ACS goes well beyond simply collecting revenue. Since it is very difficult to separate the tax- and non-tax-related components of the ACS’ expenses, it is appropriate to focus on the ATO.
The ATO’s costs of tax collection are broken down by tax types (income tax, WST and other taxes/charges) and by expense items (salaries, general expenses and accommodation). A feature of the ATO’s financial statements is that the costs of collecting non-tax revenue such as child support maintenance payments, HECS and the Training Guarantee Fund, are excluded from the calculation. In 1994–95, the ATO’s administrative costs amounted to just over $996 million, representing 1.12 per cent of the tax revenue collected ($88 584 million) or 0.22 per cent of GDP ($455 616 million). [40] This level of relative costs is broadly comparable with overseas experience. [41]
The most comprehensive and up-to-date estimates for the compliance costs of the tax system administered by the ATO are available from the ATAX research referred to in Section 2. This study is unique in its attempt to capture the compliance costs of the ‘whole’ federal tax system in one study relating to one fiscal year. Note, however, that the ATAX research covered all private taxpayers (individuals and firms) but excluded non-profit organisations and the budget sector of the federal, state and local governments. In 1994–95, the compliance costs of the federal tax system were estimated at about $10 417 million, representing 11.75 per cent of the tax revenue collected by the ATO or 1.36 per cent of the GDP. [42]
The results of the ATAX study lend support to the earlier finding by Pope that the compliance costs relative to tax revenue in Australia are much higher than similar figures obtained for the UK and US. [43] Since the overall tax burden in Australia tends to be lower than that in the UK, but higher than that in the US, [44] expressing tax compliance costs as a percentage of GDP improves Australia’s position relative to the UK, but worsens Australia’s position relative to the US. Although international comparisons can be problematic, there is nonetheless a broad recognition that Australian tax compliance costs are high by international standards. There may be a number of factors that cause the compliance costs of the Australian tax system to be relatively high, including legal complexity, self assessment, the size distribution of taxpayers and the extent to which taxpayers engage in tax planning.
The key feature of the Coalition Government’s tax reform package with significant implications for tax operating costs is the introduction of a GST and the abolition of the WST and nine State taxes. This replacement is supposed to be revenue neutral. [45] Other important proposals regarding business taxation include:
There are also some discussions regarding personal income taxation (for example, abolition of work-related expenses and non-lodgment of tax returns) but these are unlikely to be implemented, at least in the near future.
(i) Legal Simplification Impact of the GST vis-a-vis the WST
With its broad base, few exemptions and single rate, the GST is often described or perceived as a simpler tax than the WST. As the GST legislation has not been finalised, it is difficult to determine whether the GST will be legally simpler or more complex than the WST. In terms of sheer size, the six GST Bills, introduced by the Government on 2 December 1998, [47] are quite massive, containing hundreds of pages of legislation. Clearly the same rules could have been written in a much more concise manner, but the same can also be said about WST. In short, both the WST and GST are quite complex when all the rules are spelt out.
The businesses that will have to register under a GST can be divided into two groups: those who are now required to collect WST on behalf of the ATO, and those who are not. For those businesses who are not collecting WST, the imposition of a GST clearly creates an additional legal burden. It seems more meaningful to determine how WST remitters will fare under a GST. The evidence so far suggests that the GST to those taxpayers is likely to be more complex than the WST, particularly in the first few years following the introduction of a GST. The proposed GST is usually compared with the current version of the WST. Over the years a tax can become legally more complex as a result of successful lobbying efforts by special interest groups. When originally introduced in 1930, WST was imposed at a uniformly low rate of 2.5 per cent on a broad base of goods. Thus, the original WST was, in many ways, legally simpler than the currently proposed GST.
(ii) Effective Simplification Impact of the GST
The GST is definitely not a simple tax in the operating cost sense. This is mainly because:
Before examining the strengths and weaknesses of the GST relative to those taxes it is replacing, it is necessary to restate that the present paper is based on the societal point of view. Thus, cash flow benefits, tax deductibility benefits and the compensation package for GST start-up costs of small and medium businesses are excluded from the discussion as these are transfer payments from the government to businesses (and thus vanishing at the societal level).
OPERATING BENEFITS OF THE GST
Managerial Benefits The GST will certainly demand more stringent record keeping from taxpayers and this will produce managerial benefits to them. This kind of benefit is difficult to quantify and only a qualitative assessment is possible. Since large firms tend to have stricter record keeping than smaller ones in the pre-GST situation, more rigorous financial recording will generate relatively more managerial information to small firms. It seems plausible to speculate that small businesses value this sort of information more lowly than big businesses so that the aggregate value of GSTinduced managerial benefits to taxpayers may not be too significant.
Improved Measurement of GDP In principle, the massive amount of GST data received by the ATO will help the Australian Bureau of Statistics to improve its measurement of national output, particularly the GDP by the production (value added) approach. In practice, it is difficult to put a money value to this kind of benefit.
OPERATING COSTS OF THE GST
Tax Policy Design and Planning Australian society has devoted a substantial amount of time and energy in discussing, debating, opposing and promoting the GST, particularly in the lead up to the federal elections in 1993 and 1998. This involves many sectors of the Australian economy, including the government and opposition parties (both at federal and state levels), business and welfare organisations, labour unions, tax experts and academics, and the media. In particular, the Federal Treasury has expended considerable resources to study the impact of the GST on different sectors of the economy under various scenarios. Although the costs of GST policy design and planning are basically once off, some elements may be of a recurrent nature. The recurrent elements include, for example:
Tax Law Drafting and Enactment Following the re-election of the Howard Government, the Office of Parliamentary Counsel aided by The Treasury and the ATO drafted the six massive legislative packages of GST Bills. The Bills are going to be examined in detail by a special Senate inquiry and the debate on the GST legislation will begin in April 1999. Since the GST Bills are likely to be amended by the Senate, further debate will take place in the House of Representatives. These activities involve considerable resource costs to the economy and, while the legal-political costs of introducing the GST are once off, the costs of amending the GST in the future will be recurrent.
Tax Administration The net change in the administration costs arising from the tax reform package is difficult to quantify because little is known about the administration costs of the State tax system. It has been estimated by senior ATO officers that the replacement of the WST by the GST will result in a net increase of about 3000 to 3500 ATO employees, depending on whether food is fully taxed or input taxed, respectively. This net increase represents almost 18–21 per cent of the ATO’s total staff number which averaged about 16400 during 1997–98. [48] It seems reasonable to assume that the net increase in ATO employees will exceed the reduction in the number of State Treasury employees, resulting from smaller State tax bases.
In its Regulation Impact Statement (RIS) accompanying the main GST Bill, the government estimates that the GST administration costs by the ATO will be (in 1999–2000 prices) $340 million, $351 million and $301 million for 1999–2000, 2000–01 and 2001–02, respectively. [49] (These estimates are based on the assumption that the GST Bills are passed by the Senate without major amendments. If food is eventually exempted, for example, the administration costs will rise substantially). The costs of administering the GST appear to be far greater than the administrative savings resulting from the abolition of the WST and the state taxes.
Tax Compliance Costs The GST is a more expensive tax to comply with than the taxes it will be replacing. This is because GST involves more taxpayers and requires greater record keeping effort as well as reasonably high start-up costs. There are at present about 75 000 registered WST taxpayers [50] and it has been estimated by the government that there will be 1.4 million registered GST taxpayers as at GST implementation date on 1 July 2000, rising to 1.6 million by 2001–02. [51] The government’s estimates do not seem to take into account a large number of non-profit and educational institutions, and public sector bodies that will also be affected by the GST.
The set-up costs of the GST, including the costs of registering the business, learning about GST legislation, printing new stationery, purchasing new equipment such as cash registers or computers, acquisition of tax software, etc, will be reasonably high. To reduce the compliance costs of the GST, the government plans to promote greater use of electronic connections between the ATO and businesses. According to the ATAX Business Survey, only 27.9 per cent of taxpayers in 1994–95 used computers for tax purposes in their businesses. [52] Thus, businesses may incur considerable start-up computer costs to take advantage of the government’s initiative.
The government estimates that the recurrent compliance costs of the GST would be $1195 per year per registered firm or $1 910 million for 1.6 million registered firms in 2001–02. [53] This seems very low in view of ATAX’s estimate of $737 million for the compliance costs of the WST in 1994–95. [54] Since the record keeping requirements under GST are higher than under WST, registered WST taxpayers would incur at least the same compliance costs under the GST regime. Assuming conservatively that 75000 registered WST taxpayers incur the same compliance costs under the GST regime, it means the recurrent GST compliance costs per remaining registered firm are about $770 per year. This seems to be on the low side, as it is equivalent to only 40 hours of an account clerk’s time per year. Given that the government’s estimate of the reduction in compliance costs due to the abolition of State taxes is $220 million, [55] even if the government’s estimates are accepted as reliable, then the net increase in compliance costs in 2001–02 will be $843 million (= $m 1 910 (GST) – $m 737 (WST) – $m 330 (State taxes)). This net amount is significant, representing more than 8 per cent increase of the ATAX estimate of total compliance costs ($10 417 million) for all taxpayers. In its own calculation, the government takes into account the cash flow and tax deductibility benefits to arrive at a lower figure of $210 million in the GST compliance costs. As argued throughout this paper, such an approach is invalid from a public finance viewpoint because tax deductibility and cash flow benefits are transfer payments from the government to taxpayers.
Tax Dispute Resolution The introduction of a GST in Australia will certainly generate more tax dispute resolution than the taxes to be abolished, not least because the GST is new and untried but also because it involves a wide range of goods and services, and an immense number of taxpayers. The costs of tax dispute resolution will be of a recurrent nature.
(iii) Simplification Impact of ABN and PAYG ABN and PAYG are usually considered to generate beneficial simplification impact on the operating costs of the tax system. However, their benefits should not be overestimated or taken for granted. First, several business taxpayers may operate under the umbrella of the same business entity. For example, a mediumsized business entity may consist of one or more registered companies, a family trust, a superannuation fund and perhaps even a few partnerships. If each of these business taxpayers is given an ABN, the simplification benefits of the ABN will not be too large. Second, GST is to be remitted to the ATO either monthly or quarterly depending on business size, and this is similar to the arrangements under the WST. Remitting taxes to the ATO quarterly under the PAYG system may increase the paperwork burden to a large number of taxpayers who pay their taxes less frequently under the existing system. These include, for example, lump-sum provisional taxpayers (who pay their taxes once a year), large companies (twice a year) and small companies (once a year).
(iv) Operating-Efficiency Costs, Tax Avoidance and Tax Evasion As a result of (perceived or actual) high compliance costs, some small businesses may deliberately try to reduce their sales to stay out of the GST system. [56] This problem may be more serious in Australia than in the UK as tax compliance costs in Australia are perceived to be higher. In addition, since many service items can be provided either through the cash economy or through household production, the introduction of a GST may result in some services being moved into the informal sector. This may give rise to significant tax avoidance and tax evasion, but the limited international evidence to date has been inconclusive. [57]
(v) GST-Induced Growth in GDP In order to calculate the operating costs/GDP ratio, it is also necessary to examine briefly the efficiency gains under the GST. Many economists believe the economywide output effect of the GST will be negligible or even negative. One reason is that, since the formal sector is likely to be more efficient than the informal sector, the substitution of some services into informal activity may lead to resource wastage. Piggott and Whalley have constructed a model of the Canadian economy which indicates that the base broadening from the move to a GST in Canada in 1991 was in fact efficiency worsening. [58] In the Australian context, estimates of the efficiency gains of the GST in the long run range from 1.8 per cent of GDP [59] In any case, it appears that the GST-induced growth in GDP does not match the corresponding growth in tax operating cots.
In summary, although tax simplification is long overdue, it has again been overlooked in Australia. Overall, the simplification impact of the Federal Government’s tax reform package is likely to be negative. The available evidence does not support the government’s pre-election claims that its tax reform plan will ‘... collect revenue in a fairer, simpler and more open way’ [61] and ‘...deliver higher economic growth and more jobs for Australia as a result of ... lower tax compliance costs ...’. [62] In fact, it is most likely that the tax operating costs/GDP ratio will rise under the new tax regime.
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URL: http://www.austlii.edu.au/au/journals/SydLawRw/1999/20.html