Dispatches From the Moderate Left

Tuesday, November 29, 2005

Costello's Tax Stunt

Federal Treasurer Peter Costello came out swinging last week with a plan to repeal almost 30% of the Income Tax Assessment Act (I'm going to do what the Age article did and call it the Tax Act). I was speaking to a senior tax law practicioner the other day and she confirmed what I had suspected - this is an unworkable stunt which Costello is using to try and divert attention from Malcolm Turnbull's tax reform proposals.

Costello's position is that the Tax Act is complicated because it's long (995 sections, about 2100 pages). That's not correct. The tax act is complicated because it's an exceptionally complicated Act which is never specific enough to prevent uncertainty arising. This uncertainty generates litigation and hundreds of thousands of pages of case law. Cutting down the size of the Act itself is a good headline grabbing way of making it simpler, but it's actually likely to make it more complicated. Deleting sections affect the status of case law which relied on those sections and means that new case law has to be generated to cover the gaps which are made by removing the legislative provisions.

The government last tried to simplify the Tax Act in 1997. At that time there was a 1936 Act and about a dozen other Acts and a big project was embarked on to consolidate it all. However the project was abandoned because it was essentially deemed impossible and would result in uncertainty, confusion and unnecessary complication. And so the 1936 Act is still on the books, along with the sort-of finished 1997 Act which I linked earlier.

This is, of course, an absolute mess and any member of the general public who tried to figure out some complicated financial arrangement on their own isn't going to get far. But the lawyers, accountants and financial planners who deal with this stuff have figured out how to work with it. The status quo is complicated, but not impossibly so. Deleting a chunk of the legislation isn't going to make Tax Law any more accessible to the general population, but seems likely to make it more complicated for the people who actually navigate it to do so. I suspect that these people will make enough noise that Costello will quietly abandon this plan before doing anything about it.

16 Comments:

  • Are you supposed to be working?

    By Anonymous Chelsea, at 3:34 PM  

  • what sort of a comment is that?

    some people are organised enough to work and blog, you know...
    if you dislike his post's contents then just say so

    By Blogger John Lee, at 3:56 AM  

  • Hehehe John, that's my wife and she knows I've just started a new job.

    I was writing at lunch time so it was ok :)

    By Blogger Jeremy, at 8:02 AM  

  • *reddens*
    my apologies

    I wrote that at 4am, at which hour I'm a tad high-strung. I also get irritated by trollish comments, which often take forms like that

    By Blogger John Lee, at 2:39 PM  

  • At the risk of being murdered by several members of the PIS, I should ask; would we have these tax law problems if we used a civil law system?

    By Blogger Jim Woodcock, at 8:07 AM  

  • At the risk of being murdered by several members of the PIS, I should ask; would we have these tax law problems if we used a civil law system?

    What's the relevant difference?

    By Blogger Jeremy, at 10:50 AM  

  • Apparently, civil law countries can have briefer legal codes (presumably because of the lesser importance of precedent).

    But, I’m not a law student, so I’m just speculating.

    By Blogger Jim Woodcock, at 1:24 PM  

  • Apparently, civil law countries can have briefer legal codes (presumably because of the lesser importance of precedent).

    I'm no civil law student, but I'm fairly sure that the lack of precedent means that the civil codes are vastly longer and more detailed. I may be wrong.

    By Blogger Jeremy, at 4:20 PM  

  • I'll second Jeremy there

    longer code = more certainty, less flexibility

    By Blogger John Lee, at 10:15 PM  

  • Firstly, Jeremy, you implied that the tax code has to be long, not because we all necessarily want a lot of "if" and "but" statements, side clauses, etc. but because if it wasn't, we would see an even larger mountain of case law. Now, if precedents were less legally important, the size of the legal code could be reduced without seeing a corresponding increase in the case law.

    Secondly, I doubt that a longer code leads to greater certainty. Longer codes are far more likely to contain self-contradictions, or partial self-contradictions, as well as potential tax-savings hidden in sub-clauses that most people obviously won't find (making it essentially a two-tiered system).

    By Blogger Jim Woodcock, at 9:05 AM  

  • Firstly, Jeremy, you implied that the tax code has to be long, not because we all necessarily want a lot of "if" and "but" statements, side clauses, etc. but because if it wasn't, we would see an even larger mountain of case law.

    If that was my implication, I apologise. We want either a lot of case law or a lot of legislation or else we end up with a whole lot of uncertainty and/or abuse of the law. Complexity is not a bad thing, the absence of complexity (ie application of general rules of broad application) is what allows people to abuse the laws. All the extra clauses you refer to are usually enacted to stop a particular abuse of the general rules and without either them or case law the situation would probably be worse and would definately be more uncertain than it is now.

    I wasn't saying a long tax code was a bad thing. It's a complicated area and it isn't so complicated that professional advice of reasonable certainty can't be given (in most areas). Where things are too uncertain, more specific legislation not less is the solution

    By Blogger Jeremy, at 9:50 AM  

  • So you're saying that Costello's plan would probably be a bad idea even if the tax code could be shrunk without subsequently increasing the about of relevant case law?

    By Blogger Jim Woodcock, at 10:48 AM  

  • Probably.

    The lawyer I was speaking to gave an example of one section which was removed in the 1997 clean up which seemed useless at the time but would have directly answered the question at hand. There weren't any other provisions on it and the outcome was thus too uncertain for the client to go ahead and a potential economic opportunity was lost. There wasn't an increase of case law here, but the previous "cleanup" certainly exacted a cost

    By Blogger Jeremy, at 1:10 PM  

  • A lot of complexity is because we want to have exemptions, deductions, differential rates, refunds, etc etc etc, which are almost always because of political, not economic, reasons.

    If I could have my way I would advocate the gradual elimination of all deductions (bar charitable contributions), with the aim of getting rid of them within a decade.

    For the record, in FY2005 I reduced my tax by a quarter with deductions, so I would be one of the people most disadvantaged by such a simplification. I think it's important to make tax law simpler for everyone to understand. After all, don't forget the tax act was originally a mere 80 pages long! We can do it!

    By Blogger Splat Guy, at 7:34 PM  

  • (Incidentally, John Lee's red-faced moment made me burst out laughing!)

    By Blogger Splat Guy, at 7:37 PM  

  • @Splat
    I'm genuinely curious, did you read my tax reform proposal from a while back? I proposed exactly that :) I completely agree with you, even on the charitable thing (which I didn't cover in that post). Definatly a good idea, imo.

    Some of the other complexity comes from other types of tax rorts (cayman island etc.) but this would eliminate vast swathes of complexity. Conservatives often advocate a flat tax for it's simplification properties. THe gains from that would be trivial compared to the gains from eliminating deductions.

    Oh, and that misunderstanding made me laugh too. I considered editing it to save John the embarassment, but sorry John, I'm going to leave it there to entertain future readers, it was quite a good misunderstanding :)

    By Blogger Jeremy, at 8:06 PM  

Post a Comment

<< Home


 

Listed on BlogShares