Written evidence submitted by Christopher
J Wales
Submission by Christopher J Wales, Senior Managing
Director, FTI Consulting and former member of the Council of Economic
Advisers at HM Treasury
EXECUTIVE SUMMARY
This note welcomes the Committee's initiative and
the recent reports of the Mirrlees Review team and the OECD on
taxation policy. Taxation policy outcomes can be significantly
influenced, not just by principles and objectives, but by the
structures, processes and governance arrangements that surround
the policy process itself. The author is currently engaged on
a multi-country study that examines, on a comparative basis, the
way in tax policy is made and the influence that the process exerts
on policy outcomes. The initial findings of that work are reported
here.
1. INTRODUCTION
1.1 I welcome the inquiry launched by the Treasury
Committee into the fundamental principles of tax policy. As the
Announcement notes, the inquiry follows closely on from the publication
of the Mirrlees Review and the OECD report on Tax Policy Reform
and Economic Growth. Each of these publications makes a significant
contribution to the discussion of policy substance. They provide
a reminder that good tax policy requires a complex marrying together
of political, economic and legal considerations and give some
sense of the depth of thinking and analysis that is required to
develop effective policy. They also add valuable evidence of the
influence exerted on policy outcomes by the way in which tax policy
is made.
2. THE ROLE
OF TAXATION
POLICY
2.1 The growth trajectory of the UK economy has
been significantly affected as a result of the international financial
crisis. Monetary policy was used successfully by the Government
and the Bank of England during and immediately after the crisis
to protect both individuals and businesses. However I believe
that there is now scope and indeed a need for taxation policy
to be used more fully to put the UK economy back on a path of
sustainable growth.
2.2 Taxation is primarily a method of raising
money to fund government expenditure but it can have a profound
effect on behaviour. The imposition, variation, reduction or elimination
of taxes, whether of a general or specific nature can and does
have consequences for economic activity: consumption, investment,
saving, job creation etc. I believe that, in principle, the broad
thrust of taxation policy should be towards neutrality but I accept
that, where a taxation instrument is likely to be the most effective
in dealing with a particular market failure, an exception to this
general rule should be made.
2.3 Governments can, of course, choose to use
the tax system to influence behaviour or not but in either case,
effective tax policy requires the consequences of both action
and inaction in the tax policy sphere to be properly understood.
3. THE PROBLEM
WITH PRINCIPLES
3.1 This note starts from the premise that there
are, in fact, relatively few absolutes in terms of principles
that should underpin the tax system; and that it is easy to confuse
principles with features. For example, the Government might have
an objective of creating a tax environment in which business can
prosper and in doing so, might set a target of imposing a lower
effective rate of tax on businesses operating in the UK than those
in the rest of the EU. Thus competitiveness might become a goal
for policy-makers and ultimately a feature of the UK business
taxation but this does not make it a principle underpinning the
tax system.
3.2 Fairness might be a good principle to underpin
the system but what does it mean? It is a loose concept, to which
we all might subscribe, but capable of many different interpretations.
3.3 We can, of course, give more precision to
the principle of fairness. We can develop and use the more precise
concepts of horizontal equity and vertical equity that have been
widely explored in the relevant literature. We can broaden its
scope to include the newer concept of intergenerational fairness.
But essentially, even these concepts are only guides to the outer
limits of where policy should go rather than active principles
with which to drive the development of policy.
3.4 The UK tax system, as it stands today, reflects
the economic, social and legal history of our country. If legislators
were to start afresh, it would be constructed somewhat differently.
Society changes and the economy changes. Even principles and their
relative importance can change.
3.5 Largely because of its origins and history,
the tax system today is riddled with instances where principles
are in conflict. Anyone seeking to derive the principles that
underpin the system today from the legislation would struggle
to establish any principle from what we have on the statute book
that is not contradicted somewhere in another piece of legislation.
3.6 The Committee's inquiry is potential deeply
philosophical. There is a place for that; but the Announcement
suggests that the Committee is more interested in the active translation
of philosophy into policy than in the passive pursuit of philosophical
principles for its own sake; and that is where the substance of
this submission will focus.
3.7 I take the view that it is ultimately for
the government of the day to determine the principles that should
underpin tax policy, on the basis of a mandate, properly sought
and given by the people through the election process. The principles
may vary because both the wishes of the people and the economic
circumstances may vary.
4. THE INFLUENCE
OF POLICY
PROCESS ON
POLICY OUTCOMES
4.1 I do not intend, in this short note, to comment
in detail on all the questions posed by the Committee in relation
to this inquiry but I should like to comment in some detail on
the way in which tax policy outcomes might be influenced by changes
in the policy-making process itself. Good process cannot guarantee
good outcomes but it can make their achievement more likely.
4.2 I am currently engaged with others in a major
project to examine, on a comparative basis, the structures, processes
and governance arrangements for tax policy-making in a number
of countries and the influence that the process has on policy
outcomes. I should like to draw the attention of the Committee
to the ongoing work on this issue and to highlight the early findings
of the project that may be relevant to its inquiry, even though
these are tentative at this stage.
4.3 The project is being carried out under the
auspices of the Oxford University Centre for Business Taxation
(OUCBT) and will provide the basis for a report for a ministerial-level
meeting of the OECD.
4.4 The scope of the project is to examine:
— the
functioning of the Executive in relation to the development of
tax policy, including the institutional framework within Government
through which tax policy is developed;
— the
influence and role of external institutions, both formal and informal;
— the
role of the Legislature in scrutinizing tax policy proposals emanating
from the Executive and the rights of the Legislature to initiate
tax law changes; and
— the
process through which taxpayer consent is sought for changes in
tax law, including the nature and extent of any consultation with
the public or with business on tax policy proposals.
4.5 The work is being carried out mainly through
face-to-face interviews with ministers, advisers, high-level officials
and policy experts, other commentators, business groups and financial
journalists.
4.6 The study should enable good practice to
be identified in each of the four areas identified above and an
initial assessment to be made of the relative significance of
its contribution to good policy outcomes.
4.7 The "good practice" approach should
allow Governments of both developed and developing countries to
benchmark their own structures, processes and governance arrangements.
It is hoped that this will, in turn, make the achievement of better
policy outcomes more likely.
4.8 There is still a considerable amount of work
to be done but the meetings and discussions that have taken place
so far have allowed some tentative initial conclusions to be drawn.
5. THE UK TAX
POLICY-MAKING
PROCESS
5.1 It may be helpful to the Committee to provide
some early thoughts from the project in each of the specific areas
of work.
The role of internal institutions
Concentration of power
5.2 The policy making process in the UK is highly
centralised. Analysis is concentrated in the hands of the Treasury
and the Chancellor's departments and all of the main decision-making
process takes place within the Treasury itself. There is little
involvement by other government departments although the role
of BIS has, I understand, become more significant in relation
to business taxation issues in recent years. Some degree of concentration
is evident in the tax policy-making process in other countries
but the UK is at the extreme edge among the countries examined
to date.
5.3 The involvement of a wider group of Cabinet
ministers in government decisions about taxation policy appears
to be better established in continental Europe than in the UK.
Similarly, the involvement of the Prime Minister's office in decisions
on tax policy appears to be more common elsewhere.
Politically-appointed advisers and officials
5.4 Taxation is a highly technical area and ministers
are rarely tax policy experts. Practice differs from country to
country in relation to the appointment and use of politically-appointed
ministerial advisers with specialist knowledge of taxation. In
Germany, ministers do not have advisers per se within the department
but the appointment of some senior tax policy officials is effectively
in the gift of the Finance Minister. In France, by contrast, the
Finance Minister and the Prime Minister will typically each employ
advisers with a specialist tax background. The appointment of
some senior officials may be considered to reflect the politics
of the day. In the UK, the practice has varied over time, with
mixed results.
Departmental structures and a system-wide approach
5.5 The Mirrlees Review suggests that, to be
most effective, taxation policy needs to be addressed on a system-wide
level. This does not negate the need for detailed work on individual
taxes but the whole-system review should provide a framework within
which that work is carried out.
5.6 Within the UK Treasury, taxation issues tend
not to be addressed at a whole system level. This could be seen
as a reflection of the departmental structure, which is organised
more by themes and by individual taxes; or alternatively, the
departmental structure could be seen as a reflection of an approach
that puts emphasis on individual taxes and groups of taxes rather
than the coherence of the system as a whole. It is difficult to
be certain which is correct. The situation is nevertheless better
than it was 10 years ago, in the sense that senior responsibilities
are now organised across a range of taxes but there is little
to encourage a true system-wide approach and an absence of senior
economists with whole system responsibility. This may be considered
to lead to the more piecemeal approach to tax reform in the UK.
5.7 More broadly-based reform has also been held
back on a number of occasions by perceived difficulties in modelling
the revenue outcomes of complex change. Fundamental tax reform
will remain challenging unless outcomes can be understood and
modelled with confidence.
The role of external institutions
Influence on policy development
5.8 External institutions appear to figure relatively
little in the tax policy-making process in any of the countries
we have examined to date. It is, of course, always a matter of
debate as to whether policy is influenced by one institution or
another and influence over policy may be exerted in a number of
different ways. For example, although the idea for a tax change
may initially come from one source that has the ear of the minister,
it may be another institution whose analysis is particularly influential
in shaping the development of a proposal.
5.9 In the UK, there are a number of institutions
that actively seek to influence policy thinking. Some of these
are think-tanks, with a point of view that reflects a broad political
positioning. Others are more academic in their approach. In their
respective areas of expertise, among the latter group, the Institute
for Fiscal Studies and the OUCBT appear to exert some influence
through the analysis that they provide.
5.10 The UK is regarded by other countries as
particularly well supported by external institutions but it may
be questionable how far the influence goes. In principle, governments
can benefit significantly from strong external institutions in
this area as in others. But a key issue in the taxation area is
availability of data to those external institutions. There are
issues around taxpayer confidentiality, but the value of external
contributions can only be fully realised if a way is found to
overcome the concerns. There has been some recent progress in
this area and it is to be welcomed.
5.11 Also important to the strengthening of external
contributions to the policy process would be to allow much wider
publication of aggregate numbers. Researchers outside government
often struggle to develop even broad estimates of the costs or
revenue yield of potential tax changes and this can inhibit the
development of ideas and the process of sensible debate around
the tax system.
Post implementation reviews
5.12 One of the ways in which external institutions
could be brought closer to the policy-making process and their
formal role strengthened would be for the government to use them
to carry out independent post-implementation reviews of significant
changes in tax policy.
5.13 Independent reviews of this nature have
not been widely used either in the UK or indeed in many countries.
This is perhaps surprising because a proper process of review
to establish whether a particular tax reform has met its objective
can potential provide invaluable information to policy-makers,
particularly on behavioural responses. But they are potentially
challenging for both political leaders and civil servants. They
can highlight outcomes from tax changes that are different in
practice from those sought or claimed at the time of their introduction.
It would nevertheless impose a good discipline on the tax policy-making
process if the general practice was that the legislation that
introduced substantial new measures contained a requirement for
an independent post-implementation review. For certain changes,
this could be coupled with a sunset clause for the measure in
question.
The role of the legislature
There are features of the UK parliamentary system
that tend to weaken the role of Parliament in the tax policy-making
process.
Access to expert support
5.14 Members of Parliament in the UK and, in
particular, members of the Standing Committee dealing with the
Finance Bill have, by international standards, relatively limited
access either to government officials or to other experts who
might assist them in scrutinising proposals made by Treasury ministers.
It is relatively common for other parliaments to call as witnesses,
senior government officials and groups of experts who can respectively
explain and opine on legislative proposals.
5.15 There is no professionally qualified group
of officials whose role is entirely to support committee members
on taxation issues. Such support is not widespread in Europe but
it exists, for example, in the United States.
Powers of initiation
5.16 Powers of initiation on taxation issues
do exist in theory in many parliaments but, as in the UK, there
are few examples among the countries that we have investigated,
where such powers are widely used. The US is the most obvious
exception.
The role of the second chamber
5.17 Constitutional traditions similar to those
around the House of Lords and its role in relation to taxation
matters are not widely found elsewhere. The absence of an effective
second chamber review or policy initiation process is a relative
weakness of the UK model as it stands today.
Taxpayer consent and consultation
5.18 In most democracies, tax policy is set by
the few for the many and serious policy debate is held among the
few. The many are not equipped by the education system to participate
effectively. Public debate through the media is frequently led
by misinformation of one sort or another, whether intentionally
or not.
5.19 Consultation on business taxes
5.20 There is much admiration in some countries
for the way that consultation on business tax issues has become
established in the UK, particularly over the last 10-15 years.
There is, for example, a strong feeling in France that their tax-making
process and with it, tax policy outcomes, could be enhanced significantly
by greater involvement from the business community.
5.21 However, the UK is not unique in involving
outside parties in consultation on tax reform. The Scandinavian
countries have well-established practices of examining legislative
proposals long before they are brought into law, some of them
more broadly-based than our own. Other countries such as Luxembourg,
have encouraged the discussion of proposals among tri-partite
committees of government, employers and unions.
5.22 In the UK, individual businesses and trade
and employers organisations are regular contributors to tax policy
debate and their involvement in the process has had positive benefits.
It has benefitted policy-makers by providing an opportunity to
understand more directly than was previously the case, the impact
of particular proposals on both a conceptual and a detailed level.
It has also strengthened the contributing organisations by giving
them a focus that goes beyond their direct work with the statute
as it stands and it has given them a greater understanding of
the issues and constraints on tax policy. Most important of all,
it has contributed to better policy outcomes.
5.23 There is an argument that organised labour
could also be encouraged more formally to participate in the tax
policy-making process in the UK. This would potentially have similar
benefits. As noted above, it is an established feature of some
other democracies.
Democracy and tax policy
5.24 By contrast to the business taxation area,
broader issues of taxation generally appear to be discussed more
widely and openly in many countries than they are in the UK. There
is elsewhere a greater spirit of openness about taxation policy
issues in the run-up to national elections than has often been
the case in the UK in recent years.
5.25 For democracy to function effectively in
the UK, it would be helpful if the level of debate could be raised.
A number of factors influence the current situation, including
the education system, the media and the approach to political
debate itself. It would be beneficial if there was a better understanding
of the link between taxes and government spending. Governments
of all persuasions have failed adequately to explain that, in
the long term, everything that the government spends is the proceeds
of taxation. It is a simple mechanism that allows government to
pay for the goods and services that we accept, democratically,
should be provided collectively through government rather than
individually.
5.26 One of the issues that affects the taxation
debate in the UK is that it tends to be somewhat remote. Taxation
is essentially a national issue in the UK, whereas the decentralising
of tax-raising powers makes it at least partially an issue for
local or regional government as well in many other countries.
The UK is highly unusual in its concentration of taxation rights
at the national level. This weakens choice for citizens and may
be a factor in participation levels in local government elections.
It is an issue that needs to be addressed.
5.27 A fuller and more open debate with the electorate
on taxation policy issues can potentially pave the way for modernising
policy reforms that will be of broad benefit to the economy.
January 2011
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