My last day of a three-month stint at the National Capital Planning Authority a pleasant young man from Personnel came to give me a summary of my final payout.
The young man said he was sorry the statement was so late, but it had taken a long time to work out, especially the tax. The tax calculation had taken one and a half pages.
I asked whether he had a program to do it for him.
“A bloke I know in Finance has got one on Excel, and I’m going to get it from him,” he replied.
This was pretty wry stuff, I thought. The tax laws are so distorted that it takes hours for a small organisation to work out what should be a simple pay-out after a three-month stint, unless, of course, one is blessed with a program produced by someone in the Department of Finance. What about the storekeeper in Gilgandra hiring a casual over the holidays?
Fortunately, the problem is recognised, even if it will take a long time to fix. Earlier this month the Treasurer announced a committee to rewrite the Income Tax Assessment Act, which now runs to 5000 pages.
Essentially, the mess came about through the dominance in the High Court in the 1970s and early 80s of the legal-literalists, led by the then Chief Justice Sir Garfield Barwick.
This school rejected the questions: “What is the intention of the legislature?” and “What mischief is the legislature trying to remedy?” These had no place when interpreting the revenue-law, they thought. Rather, it was the duty of the legislature to state precisely what transactions it intended to tax, and conversely it was the right of any citizen to arrange his or her affairs to minimise taxation accordingly.
As fast as the legislature could define the transactions, the lawyers and accountants wriggled their way through with artifice after artifice. Business had long demanded precision. Broad provisions, it argued, were open to arbitrary interpretation and business could not plan. They got what they wanted, and still complained, saying the precision was causing complexity and extra compliance costs.
The quest for precision, however, was always self-defeating. The plethora of definitions has brought us further still from clarity.
Now we are now two chief justices down the track and the present Chief Justice, Sir Anthony Mason, has said he prefers simplicity and brevity over the futile search for certainty through complexity. This has given the cue to the legislature, which now thinks it can simplify the law.
The committee might well take its starting point Adam Smith’s four general cannons of taxation, written in the late 18th century. Smith wrote that tax: 1. Should be based on the individual’s capacity to pay. 2. Should be fixed according to principles which are certain and not arbitrary. 3. Should be levied in a time and manner convenient to the taxpayer. 4. Should give the maximum return in relation to the cost of levying it.
This is a good starting point because the elegance of four principles show how fundamentally contradictory any tax regime is likely to be. The more certain you make the tax provisions the more complex they become and the more costly to administer. Similarly, the greater the effort to base the regime on capacity to pay, the more it will cost to administer. A flat tax is easier to administer than a progressive one. More fundamentally, human nature is such that some will disguise their capacity to pay so well that only an arbitrary tax assessment will get a fair revenue.
In tax law, the pain of simplicity is arbitrariness; the pain of certainty is complexity. You cannot have both simplicity and certainty.
Thus the problem is being attacked the wrong way. Surely, it is better to classify the humans rather than classify the financial transactions which are to be taxed. We should have a dual tax system. Each taxpayer would elect one or other system to be taxed by.
One would be short and simple. It would be written in English and state the broad principles and tax rates. But it would give very wide arbitrary discretions to the Tax Commissioner to catch any artful ones who misclassify themselves. The other would be the 5000-page precise regime. It would be written in the language of Black Letter Law, understandable only to lawyers.
The disingenuous screams of some in the business community who have oxymoronically demanded both certainty and simplicity should then be silenced. The choice would be theirs.