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>Listener: 4 April, 2009.

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>Keywords: Regulation & Taxation;

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>At a recent conference sponsored by the Centre for Accounting, Governance and Taxation Research, the first two expert speakers each had 25 years’ experience in taxation reform, one in Australia, the other New Zealand. But if they haven’t got it right after a combined 50 years, something seems desperately wrong.

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>The other conference papers demonstrated what was wrong: not one of them was devoted to the distributional effect of taxation. Who would be better off, who would be worse off and whether the changes would be fair are questions any politician asked to implement the various reform proposals promoted at the conference would want to know. But no one addressed such points.

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>The main economic issue was whether changing the taxation system could improve economic efficiency. What the conference goers had forgotten was that efficiency makes sense only if the losers are compensated by the winners. The usual idea – often honoured in the breach – is that when efficiency is improved, some lose out, but their losses are offset by a tax system that transfers some of the winners’ gains to the losers. If the efficiency gain is from the tax system itself, the argument is going around in circles.

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>Whether tax levels affect overall efficiency has been a bitterly contested argument. The conference consensus seemed to be that they do not (or if they do, the effect is too small to measure). A minority argued otherwise, but the conference did not take them seriously.

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>Neither, as I said earlier, did it take fairness seriously. To give but one example: would favourable tax treatment for foreign investors increase a country’s domestic production (its GDP)? Apparently, the empirical evidence says “no”. But suppose it said “yes”.

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>A politician would say: “I am not really interested in the gross domestic product, but in the gross national product (GNP); I am interested not in what is produced in New Zealand, as this includes foreign profits generated here, but in what New Zealanders produce, which excludes those foreign profits. What does your research say about GNP? Won’t giving concessions to foreigners be at our expense? Could they possibly get more than the increase in GDP and cause the GNP to fall? What does your research say about that?”

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>To which the researchers would have to say “d’oh!” No wonder politicians don’t take tax reformers seriously – unless it is in the interests of their constituents.

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>One reason distributional issues are not discussed is that the most strident advocates of tax reform use the veneer of “efficiency” to hide the reality that they want to skew the income distribution in favour of themselves, their class or those who pay them. I find their dishonesty obscene.

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>It would be honest to say such and such a group deserved to be better off (a proposition that may be true and ought to be thought about), so we should change the tax system to do this. At least the general public would know where the advocates stood, and ask who would be worse off. Obscuring a redistributional argument in the confused cloak of efficiency is deceitful.

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>Some tax reform advocates have an even bigger agenda. For instance, some want to have a smaller government and to privatise health, education and retirement provisions and a whole lot more. Their deceit is to advocate lower taxes (especially for themselves and their clients) while failing to mention that the price of this will be the need to reduce public spending (which will have redistributional effects).

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>I discussed the paradox of failed reformers with one of the long-time tax experts sitting on yet another reform committee. He smiled wearily, for of course he knew the arguments. He explained the challenge nowadays was to deal with new issues that were not a problem a quarter of a century ago – such as electronic commerce and globalised businesses.

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>I can sympathise with that. All administrative structures have to adapt continually for new technologies, new opportunities and new threats to their effectiveness. That was what the conference was about. It was interesting from that perspective. But I do wish it had paid a little attention to fairness.

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