For some time now investors and the public in general have been drip fed details of what might or might not be included in grand sounding “Australia’s Future Tax System Review”. Now that the report has been handed over to Wayne Swan and the Government it might be tempting for us to think that we will see sweeping changes to Australia’s tax system, but I am here to tell you that little will happen and here’s why.
You can tell straight away when a bureaucratic paper generation exercise is in full swing by simply looking at the homepage of the tax system review where you will find the review described in the following terms:
“The Review took a ‘root and branch’ approach and examined Australian and State government taxes, and interactions with the transfer system in order to make recommendations to position Australia to deal with the demographic, social, economic and environmental challenges that lie ahead.”
Really? How is this possible when the GST was excluded from the review? So before the review even started, one significant part of the tax system was left out and as I explained in Ken Henry and his tax review: should we be worried? this is because no matter how evil Kevin Rudd said the GST was when he was in Opposition, the fact is that the Government needs the money it raises.
This means the review and the recommendations that result from it, will be based on a flawed process. Because you cannot undertake a system wide review without looking at the entire system!
Maybe the GST needed to be adjusted in order “to position Australia to deal with the demographic, social, economic and environmental challenges that lie ahead”? Perhaps the Government were scared that Ken would suggest raising it?
But if this isn’t bad enough, it gets worse, because not only will the review of the taxation system not be based on the entire system, the recommendations that may finally be implemented will not be done in a system like manner and thus there will be unintended consequences.
To illustrate my point let me tell you a little story about when I was a young, wet behind the ears, electronic systems technician.
Back in the mid 1980’s I had just completed 2.5 years full time training in the navy as an electronics technician and was posted to my first ship, the destroyer escort – HMAS Derwent. (DE 49)
I was responsible on the ship for the operation and maintenance of a missile guidance system. Since I had completed around three months training on the system I figured I knew just about everything there was to know about it and was ready to take on the world as they say.
But before being let loose, my Chief (i.e. Chief Petty Officer) and a very wise senior dockyard technician thought they should give me some further on-the-job training. “Egads” I thought, how dare they suggest I need further training, but I was hardly in a position to disagree and hence the training started.
The Chief and “Docky” then started placing some faults on the system and observed (with coffee in hand) as I tried to identify the cause and then rectify the problem. But day after day I struggled to even narrow the fault down into an area, let alone be in a position to isolate it. What was I doing wrong?! Would I ever solve any of the faults they were setting on the system?!
Eventually after watching me squirm for weeks my tormentors decided to give me some practical tips of how to fault-find electronic systems, and I realised some years later, that these also tips were also useful when looking at non-technical systems as well.
The first thing they told me was I needed to step back more and take in the big picture view. Rather than leaping onto the fact that some part of the system appeared not be be working properly, or that there was an alarm going off, I needed to take note of what was working just as much and of what wasn’t working.
I needed to learn that I had to take time and make sure I had all the information I needed and not just the most obvious. (and resist the urge to leap in first and worry about what I had missed later)
Secondly I had to be aware that as soon as I started tweaking things or making changes that there was a danger I could make the situation worse, if I did not have a clear idea of what the problem was first.
Finally I gained an appreciation that I needed to be patient and think things through even at times when the pressure was on to do something quickly. I finally came to understand that doing something when you are not clear in your mind about what you are trying to fix, can be worse than doing nothing at all. (this is not an easy lesson to take-in especially since they placed faults on the system ten minutes before weekend leave!)
Now you might think to yourself that the above system fault-finding tips appear like just plain common sense, and well, they are. But I was was a young lad and still had much to learn – but can the Government use the same excuse?
How could the Government expect the review panel to take in the big picture taxation system view for example when item 5 of the terms of reference states:
“The review will reflect the government’s policy not to increase the rate or broaden the base of the goods and services tax (GST); preserve tax-free superannuation payments for the over 60s; and the announced aspirational personal income tax goals”
So before the tax system review starts, the fault-finding team headed by Ken Henry need to cover one eye and ignore how some areas of the tax system are performing. Goodness me, my Chief would have clipped me across the ears for doing that!
But this is hardly Ken Henry’s fault, he got Rudd and I had my Chief, so poor old Ken is off to a bad start.
This leads Ken and his team into making their second error because they are now trying to fix a system without actually taking all aspects of the system into account. This means that their recommendations or “tweaks” may in fact make things worse.
The next problem with the tax review is the timeline. The review should have been delayed and the team given time to take into account the impact of the global financial crisis. Now is not the time to being making recommendations or suggesting changes, now is the time to sit back and see what has changed since the review was started.
Do some review areas need to be looked at again to take into account the impact of the GFC? In my opinion the answer is a big “Yes”.
Finally the biggest problem with the taxation review is that the changes or recommendation it has come up with are as a result of a less than system wide review. However these changes may in effect, be applied to the whole taxation system.
So thinking back to my technician days this would mean I would have ignored problems in other areas of the system, but still gone ahead and tried to implement changes and hoped this fixed things. That approach certainly would have earned me another clip across the ears from my Chief. (and a few choice words as well!)
But for Ken Henry and his team there is one final obstacle that will result in their review achieving little and that obstacle is the Government.
Because the Government will generally implement changes that are mainly good for them, and not necessarily what are good for the system as a whole.
This means that the Ken Henry taxation review has been basically:
– A review of the entire tax system except for some of the most important bits.
– A review that started before the global financial crisis hit and has been finished before the full impact of this crisis on the Australian economy is understood.
– An exercise that has resulted in recommendations being made even-though the big picture view was not taken into account and without full consideration of life after the GFC.
The best we can hope for as a consequence of this taxation review and the Governments meddling is that the few changes that will be made won’t cause us many problems. But my feeling is that we should brace ourselves for the review to turn into a revenue raising exercise. (the Government debt will need to be paid down somehow)
By the way, where did the Emissions Trading Scheme (ETS) fit into all of this extensive “roots and branches” taxation system review you may ask? Well my friends, that was just another part of the system that was missed!
Luckily for Rudd, Swan and Henry my former Chief is not supervising them, otherwise they would have very sore ears!