At the beginning of the 1980s John Head ran a conference on tax reform at Monash University1, Fresh from the Bottom of the Harbour era we sought to articulate a vision for a new tax system, a Camelot rising from the ashes of the 1970s carriage. The operational outcome of that romantic vision was more solid than any of us dared to expect back in those dark days just after the Australian tax avoidance Dunkirk. Before the 1980s round of reform Australia lagged 30-40 years behind the USA. That gap has largely been closed and, arguably in some areas, we have moved ahead of the USA. But I have formally, and with due gravity, to report to you that Camelot is still proving illusive.
At that conference, as the token lawyer amongst a haggle of economists, I pushed an alternative model of tax reform. The model was built on a single unifying theme. The theme was that technical and institutional issues dominate the real world dynamic of the Australian Tax System and that our strategic stance should be constructed accordingly. It drew on the well known aphorism of Kay and King (2). The ways in which actual tax systems differ from shining ideals is often of far greater economic significance than the way various ideal systems differ from each other. Ultimately, it is the minutiae of deductions and enforcement and the timing of income which dominate the outcomes of our tax system. Because not insignificant amounts of cold hard cash are involved, the shrewd and the powerful will probe the limits of our tax legislation, and the tax base is no stronger than its weakest link. Any strategist who concentrates on the big picture to the exclusion of what is happening on the ground is doomed to win a series of victories, possibly victories widely applauded by the gathered multitudes, but victories which will nevertheless prove to be pyrrhic. The measure of a politician's commitment to micro-economic effectiveness, to fairness in the Tax System and to enduring tax reform is not to be measured by grandstanding on sweeping substantive measures. It is to be measured by the resources committed to the hard graft of unspectacular battles, the mental toughness to stand up to the rhetoric of the paper shufflers and the practical outcomes of the tax system on the ground.
What I want to do in this paper is to revisit these fundamental arguments with the benefit of a decade of hindsight. Unfortunately, as my practical examples will demonstrate, it is still necessary to reassert basic propositions. In this decade, having cracked the nut of the blatant, mass produced, paper tax avoidance scheme, we have been required to address the tougher issues and look at the strategies for long term maintenance and renovation of the Tax System. The issues currently pre-occupying tax reformers in Australia are Modernization and Simplification and the ability of complex audits to penetrate the continuing tax avoidance schemes of the big players (typically going under the euphemisms of "tax based financing" or "international corporate structuring"). What these current tax reform projects have in common is that they take institutional issues seriously.
Modernization is an attempt to bring the Australian Tax System up to date with proper computer equipment and a large range of correlative shifts in institutional settings. In the case of so-called "Simplification" (I prefer to use the terms "coherence" and "efficiency"), the job is to fixate on transaction costs and the brutal imperatives of a mass decision-making tax system. A preliminary report has gone to me Govern It will doubtless involve an attempt to move to with-holding taxes, to wash out a lot of the fine tuning which cannot be cost justified, to improve the effectiveness of communication and the techniques for effective delegation in the mass decision-making process.
Extensive anti-avoidance provisions, covering off-shore tax haven schemes (the Controlled Corporations measures) have just been released in "final'' legislative form. …