We should earn from the US to fix tax abuses
There is a very simple reason why the politicians on both sides of the parliament are reluctant to tackle the abuse of power taking place in the Australian Taxation Office.
Both ALP and Coalition treasurers traditionally start their early budget preparation by asking the tax commissioner whether he can raise a certain sum which will help them to cover at least part of their spending plans.
Every time the commissioner comes back and says “no problem”, but the politicians never ask how it’s going to be done and he doesn’t tell them. Leaving aside rate changes, the extra money is often raised by brutal and unfair methods and the results are sickening.
One of the ATO’s secrets is how much money is raised from small and medium-sized enterprises by fines and high interest rates. It looks like these exorbitant fines and interest penalties make up about half the $25bn or so owed by Australian small and medium-sized businesses.
Even more than his predecessors, Treasurer Josh Frydenberg needs that money and so is tempted to put to one side the brutal and unfair collection methods that must be used, as illustrated in yesterday’s commentary.
But it’s a one-way ticket to eventual community revolt. Some 20 years ago the Americans faced exactly the same problem and realised Band-Aid solutions do not work. So, under Bill Clinton, they came up with a solution that worked and generated great US prosperity.
Clinton introduced the English justice system into the US tax system and the onus is now on their tax raising body, the Internal Revenue Service (IRS) to prove that the tax is owed. By contrast our ATO makes a tax claim and the taxpayer has to disprove it, akin to the French system where the person is guilty and must prove innocence.
When it comes to penalties, unlike Australia, the US now has clear rules to stop the IRS milking small business via unfair penalties and interest, Australian-style. And the IRS must settle a case and not extend it for years to exhaust the taxpayer, again as happens in Australia.
Thanks to whistleblower Richard Boyle, the work of the Inspector General of Taxation and the small business ombudsman, we know how the ATO operates in destroying businesses by garnisheeing income.
In the US, garnisheeing income can be carried out, but there is a clear set of rules, including plenty of advance notice to the taxpayer that the IRS is preparing to take garnisheeing action. There is a Taxpayer Bill of Rights supported by a code and there is a body set up to ensure those rights and code are implemented. The appeal system is simple and swift.
Any Australian politician who suggests that Australia’s unfair tax practices must stop is told by Treasury: “How else do we find the money? Turn a blind eye.”
The Bill Clinton solution was ingenious and it worked brilliantly, not only maintaining US revenue but slashing the costs of tax collection. As Australia has found, abusing taxing powers is actually costly to administer.
In the US they give whistleblowers up to 30 per cent of the extra tax raised as a result of the information on how the employer is rorting the system.
Accordingly, in the US, if a tax avoider’s staff informs the IRS and, say, $1m in tax is collected, then the whistleblower will receive up to $300,000. The IRS directly raises about $US14 billion a year via whistleblowers but the bigger gains are in compliance.
Would-be tax avoiders no longer think the risk is worthwhile. In Australia avoiders trust that close staff will not “dob them in”. And usually the staff don’t, because of the consequences, so the tax avoider takes the risk. In the US, with staff incentivised to “dob employers in”, avoiding tax is simply not worth the risk.
In 1997, before the Clinton measures, the IRS had one staff member for every 2720 Americans.
Twenty-two years later in 2019 the IRS has one staff member for every 4150 Americans, with a better collection rate. In Australia, because of our high community abuse rate and bad systems, we require an administrative tax person for every 1321 Australians — three times the US level. By way of illustration, just imagine the costs involved in processing the 500,000 pages of information the ATO is requiring from our top 500 companies.
The current government’s work on speeding up small enterprise payments and ending unfair contracts has been outstanding. But they look like falling over on tax.
It may require an opposition party (either ALP or Coalition) to prepare a plan to stop tax abuse because in opposition they don’t have the Treasury/ATO vested interest partnership stopping them doing the right thing by the nation.
Footnote: I am indebted to Ken Phillips of Self-Employed Australia for the US information. He spent a long time in the US studying the American system.