Should Australia have a tax Amnesty?

there was a policy discussion seminar given 2 weeks days ago, headed by A/Prof Benno Torgler, on the issue of whether Australia should have a tax amnesty (see here). For those, like myself, who know virtually nothing about this area, its handy to realise that tax amnesties have been happening for a long time. Apparently, the famous Rosetta stone that was the key for linguists to understanding the Egyptian hieroglyphs, talks about an ancient Egyptian tax amnesty. US states frequently have such amnesties, and the last one in Australia was in 1988. Their basic structure is to forgive miscreants for not paying tax in the past as long as they pay the taxes they should have paid and promise to behave in the future. Benno Torgler argued these things are mainly used by tax authorities who want to make a quick return. The long-run cost is that too many amnesties undermine the willingness of others to pay tax as it alerts the population to the existence of a sizeable minority who gets away with not paying taxes.
Mark Doolan argued against a tax amnesty because it would undermine the tax morale in Australia, yield very little revenue judging by the last one in 1988 (about 20 million AUS), and and would be a reward for previous bad behaviour. Mark instead argued that it might be better to give an amnesty to fraudulent accountants who would thereby reveal to the tax authorities the ways in which their clients had been evading tax. Its a novel idea I’ve not heard before.
Joseph Jeisman on the other hand argued that now would be a good time to have another tax amnesty because of the opportunity it would bring of improving the tax system (since it yields some information about current loopholes) and because of the large amount of money (2% of GDP) that is currently estimated as being untaxed and that could be gained. Joseph argued that a ‘once in a generation’ tax amnesty was best-practise in the US and that the costs in terms of future loss of tax morale would be small if Australia would simultaneously increase the punishment for future tax evasion.
As an outsider it seemed to me inevitable that Australia is going to have a tax amnesty again in the future (who can resist quick money?). Its an open question whether we should have a separate amnesty for fraudulent tax accountants.

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Patrick
Patrick
14 years ago

You might be confusing evasion and minimisation. Exploiting loopholes tends to be minimisation; evasion is not exploiting loopholes in the law but loopholes in the information gathering process.

And the vast majority of minimisation is conducted by honest accountants on behalf of large corporates, not the fraudulent ones on behalf of high net worth individuals – but you might prefer to catch the smaller (more blameworthy) fish.

paul frijters
paul frijters
14 years ago

Patrick,
you’re quite right that minimisation is likely to be a much bigger problem than evasion. There’s no point in an amnesty for minimisation though because its not illegal so there’s nothing to give an amnesty about. How would you try to get the minimisers to tell you the tricks of their trade?

Patrick
Patrick
14 years ago

My apologies, then, it seemed to me that you might have been intending that outcome. I would be extremely surprised if 2% of GDP could be netted by any such operation (about 6% of our total tax take?!).

Otherwise, the amnesty for fraudulent tax accountants sounds like a good idea – in fact why not just that amnesty (and no amnesty for the taxpayers at all) – since then you have a negligeable cost.

Brendan Halfweeg
14 years ago

Why is legitimately minimising your tax debt a problem Paul?

If tax lawyers are behaving legally, why would they reveal trade secrets?

Brendan Halfweeg
14 years ago

Paul, if you mean that it is a problem of the transaction costs and inefficiencies in the economy, I agree. But if you mean that tax minimisation is immoral, then I disagree.

The fact that the tax code is so complicated as to provide loopholes and to increase the transaction costs of taxation is a significant productivity failure and more than enough evidence that taxation rates and methods of collection should have as little transaction cost as possible so as to remove the incentive for minimisation and the methods to minimise. Tax rebates, tax churning in the form of middle class welfare, high effective marginal rates of taxation for people entering the workforce from welfare are huge “unseen” costs of the tax system as it stands. The benefits to be gained from reform of the tax and welfare systems outweigh any “windfall” from one-off amnesties.

Brendan Halfweeg
14 years ago

Paul, so its all about the vibe of the tax law, is it? That is utter nonsense. Good legislation should minimise the transaction costs of the implementation of the law, both the state’s expenditure and the citizen’s cost of compliance with it.

Simplify the tax code, eliminate the rebates and other churning, the middle class welfare etc, and you end up with a system where tax lawyers are looking for other lines of work because there will both be less incentive (lower rates) and less unintended loop-holes (simpler legislation and procedure). You won’t need to witch hunt tax accountants and lawyers, because they won’t exist.

You are seeing only the symptoms of bad government and seeking to punish the citizens for reacting to poor governance, not reforming the government to eliminate the incentives and appeal to (most) people’s good nature.

The test of bad law is the number of otherwise law abiding citizens who seek (or who would seek if they were in the same position) to get around it. The current tax legislation is bad law.

It is pointless asking people whether if they were on a higher tax bracket whether they would minimise the tax debt, better to look at the proportion of people who ARE in a higher tax bracket and analyse how many are minimising their taxation. People will always say that others who “don’t pay their way” (despite them still paying more absolute tax) are behaving in bad faith, but higher income earners are simply people with different incentives because of their income. I’d profer that when good fortune or hard work puts people from historically lower incomes into higher ones, their rate of tax minimisation increases, and that those people justify it through platitudes like “I actually worked hard for MY money”, as if that was a new concept.

Paul Frijters
Paul Frijters
14 years ago

Brendan,

“Simplify the tax code, eliminate the rebates and other churning, the middle class welfare etc, and you end up with a system where tax lawyers are looking for other lines of work because there will both be less incentive (lower rates) and less unintended loop-holes (simpler legislation and procedure). You wont need to witch hunt tax accountants and lawyers, because they wont exist.”

you make it sound so easy. If only we’d make you king, Australia would have no more troubles of any kind or have to worry about how to make the best of a complicated situation. Really….

Brendan Halfweeg
14 years ago

Paul,

What is your problems with devising a tax code and welfare system that’s aim is to minimises transaction costs and eliminates some of the common inefficiencies such as the tax minimisation industry?

The smart guys over at the LDP have come up with a fairly simple tax code called 30/30, it looks at what motivates people and proposes a two tiered tax system whereby individuals below an income of $30,000 receive a negative income tax of 30% for each dollar they don’t earn below $30,000 (ie. a guaranteed minimum income of $9,000, non means tested with minimal bureaucracy). An income of $30,000 attracts no taxation, then for ever dollar above $30,000 they pay a 30% tax. For every dollar they earn at any income level, they face the same effective tax rate of 30c in the $1.

With the tax rate normalized with company tax rate, there is less motivation to corporatise income to avoid personal income tax because they would face the same tax rate anyway, but face additional costs to run their personal income as corporate income.

The beauty of such a system is that eliminates the hoards of state workers employed to enforce and administer the tax and welfare system. Your interaction with the state is kept to the minimum, no lining up to justify your dole cheque, no tax audits for making a mistake on your tax return, no tax return at all. It gives people more respect if they fall on hard times, but doesn’t punish them for improving their lot. Where the state minimum income fails, voluntary charity would begin. The state is a machine that does not discriminate, is deaf to special interests and blind to individual failings, and minimises the need to interact with it, freeing the individual to pursue their own goals and aspirations.

You see tax minimisation as a problem, I see the current tax system as the problem and normal, otherwise law abiding, individuals reactions to it perfectly rational. There is nothing immoral about wanting to maximise your income. The state has made it complicated, and humans have acted rationally to the complicated system the state has created.

Patrick
Patrick
14 years ago

Brendan, that is only scratching the surface. Personal income tax is not so hard to fix – unfortunately, and as a consequence, it is not so broken either.

The problems you are talking about are real, and some commenters here such as n gruen, dd, andrew leigh, peter white, andrew norton and backroom girl are experts on them. Unfortunately, their consensus (and the OECD’s, and everyone else’s, see Fred Argy’s whinge in the next post) is that Australia already deals with these issues about as well as any sophisticated country.

Also unfortunately for the quality of debate, they are not the problem Paul is talking about, and your (or rather the LDP’s) solution does nothing to address Paul’s problem. Something like Tax Value Method might, for example, but 30/30 income taxation does not.

Because it does nothing to address problems such as: what is income? when is it derived? by whom?

Those questions were hard enough 100 years ago. Applied to the almost infinitely variable range of modern commercial interaction, they are very hard indeed. One way to resolve them would be tax value method, but we haven’t the spirit for that in Australia and inevitably it would just create it’s own issues – but it would be more biased (word used technically, and relatively, not ideologically) in favour of the tax authorities than the present system is (which is what Paul seems to want).

Another way is to try and modify the tax law to cope with new types of arrangement. Unfortunately, as the current Commissioner reminded us in one of his first speeches, complexity is just the price we pay for fairness.

Finally, in relation to amnestys in general, as stated above, I think Paul’s idea about an amnesty for fraudulent accountants is attractive, but won’t gather a huge amount of revenue. I think most revenue is ‘lost’ through loopholes that no-one is likely to ‘fess up to exploiting because it was legal anyway, so they don’t have much to gain.

PS: many large companies are much more worried about their image than is commonly realised, and simply will not accept overly aggressive tax planning. It is the mid-caps and privates that are aggresive, generally speaking.

Wayne
14 years ago

Paul, why is legitimately minimising your tax debt a problem?

If tax lawyers are behaving legally, why would they reveal trade secrets?

Wayne, Editor
Gary Carvolth Voice of the Common Man
http://www.garycarvolth.com

paul frijters
paul frijters
14 years ago

Wayne,
lets put it like this: suppose you’ve written an imperfect piece of tax legislation intending to get everyone to pay 30% income tax. Someone discovers a tax loophole that allows 10% of the tax payers to pay 0% income tax. There are 2 responses:
1. The original legislation should have been perfect, everyone using the tax loophole is in the clear and the tax authorities have no business trying to fix the loopholes or trying to figure out where they are but should just accept blame for not being perfectly right at the start.
2. To recognise that taxation is a cat-and-mouse game where legislation is never perfect and hence there is such a thing as unwanted tax minimisation which needs to be corrected. The difficult question is how to get someone to tell you the loopholes and how to close them down most effectively.

I take the second point of view, as I suspect most of the tax authorities do.

Brendan Halfweeg
14 years ago

Reading a little on the TVM proposal, it does nothing to eliminate the high effective marginal tax rates faced by people moving from welfare to work, not does it deal with the problems associated with a progressive taxation system which give motivation to higher income earners to arrange their personal income as if it was corporate income. It also does nothing to lower the administration costs of welfare, the dead weight costs of welfare officers.

If progressive income tax is a good idea for individuals (it is not, in my opinion), why is their no move to inflict a progressive corporate tax on industry? Companies, afterall, are merely groups of individual people pooling their resources to earn income. Why are companies allowed to get away with a flat tax considerably lower than the top marginal rate of personal income tax? Progressive income tax punish individuals for earning high incomes, but not groups of individuals, how is that fair or equatable?

I’m not arguing for a progressive tax on corporations, but against the discrimination against individuals compared to groups of individuals. This discrimination prompts people to organise their affairs in ways as if to appear as corporations in order to attract a flat corporate tax rates and distribute their personal income amongst family members.

Tax fraud is one thing, for that I agree that the state should pursue offenders, but no more or no less than they pursue other fraudsters. I am in sympathy with tax minimisation because I politically believe in a smaller state and disagree vehemently with many of the government programmes it is spent on. If tax minimisation undermines the state’s ability to expand their influence over my and others lives, then I would encourage everyone to push the limits of the law. A little bit of civil disobedience is no bad thing.

Patrick
Patrick
14 years ago

Paul, the only problem is that exploiting the loopholes is generally legal, so there isn’t any real incentive to respond to an amnesty. Aggressive tax planners are certainly not seeking moral absolution from the ATO. So whilst in principle your position (as perhaps overly narrowly defined in your last comment) is necessarily correct, it is almost irrelevant to your original discussion about amnesties (I am not even sure it is relevant to the ideological debate you have entered into with Brendan – since he could easily advocate the government trying to make the tax law work as it well as it could and taxpayers trying to minimise their tax all the same – as I basically do).

Brendan, the problem with a progressive corporate income tax is that we already have a progressive income tax on corporate profits – the personal income tax.

It isn’t that easy to spend corporate money on your personal account – so the overwhelming bulk of it comes out of the corporations and is taxed in the hands of individuals, with a credit for the tax already paid. The biggest issue is perhaps the ability to split that income, which individuals are not allowed to do. But practically speaking, that too is less easily done than said.

TVM is certainly not a complete solution – first not a complete solution to the problem it seeks to address, secondly not a complete solution to your problem of incentives (which it does not seek to address). But I said as much above – what it would do is simplify the legislation slightly create a system ‘more biased (word used technically, and note relatively, not ideologically) in favour of the tax authorities than the present system is (which is what Paul seems to want)’ since there is a presumption that a gain in net wealth is income unless otherwise provided for. We are in a similar place in terms of results, today, but we take a slightly bumpier road (to use the TVM supporters’ analogy) to get there.

Fwiw, I am in favour of substantial further tax cuts, and in favour of a larger EITC (we do already have one, since the effective base threshold is $11k). But I would be loathe to abandon the transfer system – we already have one of the world’s most efficient, which is already something. Of course we should keep seeking to improve it. But any ideological beliefs I may have are strongly outweighed by my practical belief that the transfer system and its attendant inefficencies are a relatively cheap vehicle for social cohesion. In fact I would transfer more to specific sections of the community (migrants and poorer children in particular, albeit in services not in cash).

Practically speaking, I have literally waited eagerly since I was about 16 for the colonisation of space worlds to liberate political theory from practical realities. Anyone who still believes in socialism can fly off with several thousand or more like-minded soon-to-be-cannibals and try it on asteroid 40, or planet Ergton, or artificial planetoid what-have-you. Ditto for everything else, including every shade of liberal.

Until then, I will favour progressive, but gradual, reduction of the transfer system and government expenses. I will equally favour aiming for quality and efficiency in government services as much as in anything else, and taxation included, since whilst ‘loopholes’ save money (for taxpayers) they cost a lot to exploit and tend to be inequitable. I would rather save taxpayers the money by cutting taxes explicitly.

Brendan Halfweeg
14 years ago

Patrick,

I’m glad you advocate tax cuts, but I can’t get excited by your support of the welfare system and for increased welfare for “most favoured” recipients.

It may be admirable that we have an efficient wealth distribution system, it at least means that the hand brake on wealth creation touches us lightly (although I’m not convinced that it is that efficient). But, the welfare system itself is a disincentive to individuals at the lower end of the socio-economic scale from unleashing their potential. We are encouraging welfare recipients to look towards the state for support rather than themselves. I don’t like living in a society where so many people look first to the state for solutions to their problems.

I simply do not believe that any welfare system can prevent creating disincentives, and the fact that it is efficient at doing this is a crime, as it enables people to think that the state is doing a reasonable job, without actually achieving any of the goals it set for itself.

For instance, the witholding method of paying income tax is abysmal in my opinion, it is much easier psychologically to pay 30% of your income monthly, the net pay blinds people to their tax bill. But to ask people to pay once a year their full income tax would shock many into demanding more accountability of the state.

An efficient working bureaucracy blinds people to the state’s inability to solve their problems. We’ve lost the sense that we used to do things for ourselves, we can’t imagine that anyone other than the state performed certain roles, be it health, education or charity.

Patrick
Patrick
14 years ago

Brendan

re efficiency, it is all relative – but you should be convinced. Not even leftists deny that.

re discentives, I agree in principle. I really do agree that markets should determine incentives, and not governments, and that it is terribly important. That said, what really matters, from the gov perspective, is less the individual moral consequences (although perhaps it should) than the national consequences. Nationally, an economy with no welfare might well be in many ways more efficient (ie in a similar manner to how unemployment is lower, for longer, when it is easy to sack people). But two arguments make it difficult.

One, we are a rich country. Even if our GDP grows slightly more slowly and we support significant ‘deadweight’ through the transfer system, it is a price we can afford to pay, even if it is only for an illusion. If it does in fact increase GDP (as some welfare presumably does, particularly welfare targeted at improving the likelihood of would be young criminals choosing something else to do with their life, or welfare targeted at educating those who might otherwise not be educated), then that is a bonus.

Two, we are a rich country, and with riches comes softness. We are largely a nation of Cinnas, and not of Cassius. So even though the absence of welfare would probably lead to shorter periods of marginally more intense hardship for a small minority and more (but still short) periods of relatively intense hardship for a fair number, the sum (of hardship) would probably be much less (like the unemployment example). But we aren’t willing to take that step because, fat and sleek, we are risk-averse.

So it seems that the best we can do is seek constant incremental gains, and hope for space colonisation.

Finally, your point about the psychological impact of tax is certainly correct at the immediate level (it is indeed easier for most), and may well be correct at a higher level (although eg the author of this post would dispute it).

But I think that is outweighed by the fact that many people would probably simply experience greater hardship, and any resulting political pressure would simply result in PAYG/PAYE rather than less tax.