Tax Policy Future Shock: Arrivederci good tax design?

Neil WarrenAustralian School of Taxation (Atax)

Faculty of LawUniversity of NSW, Sydney 2052

email: n.warren@unsw.edu.au

THE CHALLENGE• “If anything in life is constant, it is change” –

Welcome to tax!• Review and renew – and tax is no exception• This paper looks:

– Back and asks, what were the challenges over the past decade; and

– Forward and asks what will be the challenges of the future

– How will these new challenges impact on future tax reforms?

– What will all this do for good tax design?

CHALLENGES PASTWhen Issue

- 10 YEARS •Internet•Limits to PIT

-5 YEARS Threats to PIT ⇒Tax havens; SVC

0 YEARS •Environment ⇒ Excise, EMTS, congestion, Road user charges •Limits to GST/VAT

+10 YEARS NETWORKS!!

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FUTURE CHALLENGES

• Networks– Cultural (social)– Technology base

• Challenge– Loss of 3rd party reporting

(eg banks/ employers/ service providers..)

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NETWORKS - CULTURAL• International • Intra-national• Threats

– Basic tax concepts• residency; pricing; PE

– Data integrity• Loss of 3rd party reporting

– non-observed economy (and tax gap)

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NETWORKS - CULTURAL

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• e-World– cheap and easy access to:

global trade opportunitiesglobal workplace and shoppingglobal investment and banking

– improved information flow ⇒ improved economic efficiency

– disintermediation ⇒ increased competition with minimal barriers to trade

• Virtual world – SecondLife.com; EntropiaUniverse.com/ MissBimbo.com etc

NETWORKS - TECHNOLOGICAL

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THE CHALLENGE!• to economies ⇒ tax competition, tax gap, informal

networks• to individuals ⇒ global labour market and investment

opportunities• to business ⇒ informal networks; global market

opportunities• to governments, it is

– a major threat to tax revenue collecting agencies– beyond their physical control– but a potentially major boost to domestic economies

through increased trade.• to tax administrators

– Information flows ⇒ multilateralism– Concepts ⇒ residency; sales or royalties; pricing; PE

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…to tax design?FEDERAL

– Personal Income Tax – vulnerable, sensitive– Company income tax – network vulnerable– GST – fraud exposure

STATES– Payroll Tax – marginal exposure– Property based taxes – possible saviour– financial taxes – already lost…– gambling taxes – highly exposed– Service taxes (eg Insurance) - exposed

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..so what if we admit defeat ? A TAX-WHAT-YOU-CAN SYSTEM

• Income, consumption and wealth taxes would all need to be rethought

• Residence based taxes – rather than source based

• Tax tangibles – not intangibles• Schedular income taxes• Multiple rate GST with rates determined by

country of residence (eg EU model)• Data flow taxes?

or the less desperate alternative!• Income taxes

– PIT: ⇒ rate reduction; flat tax regimes; dual income taxes; reduced capital taxation

– Corp Income tax: from imputation to classical– Administrative changes ⇒ trend towards withholding taxes,

pre-population; information exchange • Consumption Taxes

– Origins principle VAT; reverse charge rule• Why?

– Increased tax competition between jurisdictions– Increased incentives for investment, risk taking,

entrepreneurship and for work– Increased demands on government for expenditure.⇒ …so still a focus away from equity to economic efficiency

and simplicity

ARRIVEDERCI GOOD TAX DESIGN• Potential changes will

⇒Do little to improve equity⇒Could improve simplicity⇒Will improve efficiency⇒Will favour owners of mobile resources

whether they are skilled labour or capital• Tax administrators task will be much

harder, so…

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Where to now?International cooperation

Multilateral tax treaties with tough enforcement and information sharing

Global Tax File Numbers (and GTO)

Acceptance of one size does not fit all!

……