Tax Law Design and Drafting, Volume 1

Victor Thuronyi

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1996
• eBook ISBN: 9781557755872

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1
Tax Legislative Process

Richard K. Gordon and Victor Thuronyi

I do not have any doubt that when we proceed to shift the taxes around so that one set of taxpayers pays a lot more taxes and somebody else pays a lot less taxes, the people who benefit from it do not remember it very long. They tend to feel that it should have been that way all the time, and the people who are paying the additional taxes resent it very bitterly.

—Sen. Russell Long

I. Institutionalizing the Tax Reform Process

A. In General

An enormous amount has been written on the ideal structure of tax laws or on specific technical problems in their design. Far less attention has been paid, both in the academic literature and in technical assistance, to the process of designing and drafting tax legislation in developing and transition countries.¹ In most member countries of the Organization for Economic Cooperation and Development (OECD), the tax legislative process has developed into a complex ritual whereby different groups compete to pass through the legislature their vision of an appropriate tax policy. A major tax bill in a country like the United States involves the input of thousands of professional lobbyists, policy analysts, lawyers, accountants, economists, and even ordinary citizens. By contrast, the tax legislative process is much simpler in most developing and transition countries, and has not had the opportunity to become established in many of these countries. Far fewer people are involved. This has advantages and disadvantages. A smaller group of well-qualified people can often do a better job in shaping a relatively coherent law. On the other hand, the lack of institutionalized experience with tax legislation means that the process often does not move forward smoothly, does not involve adequate consultation,² and often does not involve people with the necessary expertise at relevant stages of the process. Bureaucrats responsible for tax policy and their foreign advisors often see tax policy issues as a series of fires that need to be put out rather than as an ongoing long-term effort. The thesis of this chapter is that substantial improvements in tax legislation can result if those responsible for tax reform focus on process as much as on substance. The process by which tax legislation is developed can be of key importance in determining its quality, effectiveness, and acceptability.

This chapter offers recommendations for establishing a well-functioning tax legislative process. These recommendations are in the nature of an ideal, and they will not all be attainable in most countries. Those responsible will have to establish priorities and tailor the details of the process to the institutions of the particular country. We would like to make it clear, therefore, that the discussion below is not intended to propose a model to be rigidly applied in all circumstances. The personalities of specific individuals involved can also make an important difference, particularly when relatively few people are involved in tax policy formulation and drafting. Generalizations are therefore difficult to make, but some basic issues common to most countries can be identified.

Management of the tax legislative process involves both internal bureaucratic organization and procedure and domestic politics as well as, for many countries, relations with foreign technical assistance advisors. Given our personal experience and ongoing role as foreign advisors, we devote particular attention in this chapter to how foreign advisors might fit into the process.³

B. Identifying the Problems to Be Addressed by Legislation and Establishing the Pace of Reform

Problems in existing legislation can arise from different sources: new tax policy choices, changes in the economy, improved techniques of tax avoidance, and earlier bad choices in policy, drafting, and administration. To ensure that the tax laws are able to respond to each of these problems, the finance ministry should undertake a continuous review of tax laws.⁴ A single review committee, drawing on a single person from each area of substantive tax expertise, could coordinate the process.

Such a review committee should maintain close contacts with the relevant parliamentary committees. It should be chaired by a senior member of the ministry, perhaps a deputy minister. Once a problem area is identified as requiring more detailed review, a working group should be formed to develop a response.

Because tax laws tend to be numerous and complicated, it would be impossible to subject them to complete review at all times. It should be the duty of the review committee to work closely with the tax administration, which is likely to be a primary source for notification of problems, and with research staff. In addition, it is important for the review committee to pay close attention to the private sector. Private sector professional associations may be an excellent source of information regarding problems.

Foreign advisors can also serve an important function in identifying problems. To the extent of their expertise in comparative law, they are often able to note difficulties that have arisen with similar rules in other jurisdictions.

The establishment of a review process should include an effort to keep the tax laws as stable as possible by minimizing the frequency of change. Frequent changes in tax legislation upset the expectations of investors and make it difficult for taxpayers to understand and comply with the laws. A careful consideration of proposed reforms can minimize the extent of changes needed by way of technical corrections and by way of budgetary compensation for hastily enacted, overly generous provisions.

C. Research Support

For tax policy working groups to function adequately, they need effective research support. Three important research areas are (1) estimating revenue, (2) surveys of current practice, and (3) comparative law.

1. Estimating Revenue

Overall estimates of revenue must of course be made as part of the budget process, which is beyond the scope of this discussion. But revenue estimates of particular provisions (or proposed provisions) can also be critical in the tax policy process. Revenue estimates can be an important weapon in opposing special tax concessions. By showing the cost of the concession, the revenue estimate brings home the extent to which taxes on others must be raised in order to pay for the concession. Unfortunately, estimating revenues is an extraordinarily difficult task. The data required include macroeconomic projections, a detailed understanding of the effects of a tax rule, and data on what private sector firms will be affected, including size and number. In many developing and transition countries, these data may be difficult to come by, and the actual numbers obtained may not be very accurate. Nevertheless, it may be possible to come up with serviceable estimates. Sophisticated models for estimating revenues are now available for a number of jurisdictions, and private accountancy firms have designed tax calculator models for developing and transition countries.

2. Surveys of Current Practice

Experience with applying current law can suggest what tax reforms may be needed. One way of obtaining information about this experience is through surveys. They can be taken of those affected by a particular law, and can provide important information for those determining tax policy. Such surveys can be taken through interviews, written questionnaires, or sampling of tax returns. They can also involve reports from local or regional tax offices on their experience with administering the law. The ability of a research department to carry out surveys of current practice may be one of the most important of all research skills. Such survey capability not only allows those formulating tax policy to be aware of the issues and problems they are likely to confront, but also allows them to do so without relying too much on individual taxpayers in the private sector. Too much reliance on individual taxpayers for information can result in at the very least the appearance of impropriety or excessive influence by a few. To avoid this, surveys are typically anonymous.

3. Comparative Law

Much can be learned from studying the experience of other jurisdictions with their tax laws. Comparative studies can suggest positive directions for change, and can help avoid potential problems. Examining the laws of other jurisdictions can also help show how their rules might interact with proposed rules in one’s own jurisdiction to affect transnational business and trade. Comparative legal analysis is one area in which foreign technical assistance advisors with the requisite experience can be of considerable value.

II. Interdisciplinary Nature of Taxation

As with many other areas of law, taxation must be approached in an interdisciplinary manner. Given the specialization of academic disciplines, this may create a problem in terms of who is involved in the process. It is unlikely that any one expert will be competent to advise on all aspects, and managers of the process should be aware of this. To design a package of tax reform proposals, a variety of areas of knowledge must typically be brought to bear. Economists should analyze the economic effects of different policy alternatives, as well as their revenue effects. Tax law experts should develop the detailed design of proposed rules, based on knowledge of the details of tax rules of different countries. Tax lawyers with drafting experience should work on the actual legislative language. Lawyers should also ensure the integration of proposed rules with the rest of the legal system (commercial law, constitution, etc.). Accountants should advise on the compatibility of proposed tax rules with accounting rules and practices. Experienced tax administrators should evaluate the administrative problems arising from proposed rules and suggest alternatives based on relevant experience (again, with comparative knowledge of practice of different countries where relevant).

Tax rules must seek to implement sound economic theory. They must, however, also be drafted in response to the realities of law, business practice, and bureaucracies, and the social and political settings in which these realities exist. This requires people from many disciplines to work together to craft rules that reflect the knowledge and experience of those disciplines. Local and foreign experts need to be able to work together as a team.

While it may not always be possible to mount such a full collaborative effort, steps can be taken to ensure that consultations among different experts are as extensive as possible. For example, a group consisting of at least one economist, one lawyer, and one public administrator could be identified and made jointly responsible for the final outcome of a legislative reform project. Careful follow-up at each stage should be required, from policy evaluation through drafting to implementation. And, wherever possible, careful consultations should be made with those people (from both public and private sectors where feasible) who are most familiar with the particular circumstances found in the jurisdiction.

The problem of lack of coordination in the tax policy process is not peculiar to developing countries. For example, in a comparison of the tax policy process in Australia, Canada, and New Zealand, Professor Brian Arnold argues that the three major components of tax policy formulation (policy development, technical analysis, and statutory drafting) should be performed by a single agency.⁵ In Australia, problems arose because these functions were divided among three different units. The Tax Policy Division of the Treasury, consisting of about 30 individuals, mostly economists, is responsible for developing tax policy ideas. The Legislative Services Group of the Australian tax administration (about 60 professionals, mostly lawyers or accountants) is responsible for translating into legislation the tax policy proposals developed by the Treasury. The actual drafting is, however, done independently by about three full-time tax law drafters in the Office of Parliamentary Counsel. Arnold suggested that these three groups should be combined into one agency, similar to the practice in Canada, where the Tax Policy and Legislation Branch of the Department of Finance, with personnel consisting of economists, accountants, and lawyers, is responsible for all aspects of tax policy development, including the embodiment of policy in legislative language.⁶

III. Communication and Collaboration in the Tax Reform Process

A. Reform Considered by Working Groups Composed of Ministry Macroeconomists, Tax Policy Experts, Lawyers, and Administrators

Different groups are usually involved in the design and implementation of tax policy. In many ministries of finance these are divided into bureaucratic groups by discipline, including macroeconomists, tax policy experts, lawyers, and administrators, each with their own perspective and expertise. If all are not consulted on an ongoing basis, and instead a law is developed in a sequential manner, serious problems may arise.

Such a sequential process can result in general policies that cannot be easily translated into detailed rules, detailed rules that cannot be easily drafted, and statutes that cannot be easily enforced. In a world full of legal and institutional constraints, when basic policy is adopted, legal and administrative problems must be taken into consideration. Provisions, when drafted, should reflect what the policymakers really wanted to accomplish. The drafting process requires additional policy choices to be made, and to be worked out with tax policy specialists. Finally, provisions must, when administered, reflect both the policy choices made and the provisions as drafted. In other words, the administration must be able to implement the system as designed. Where a new law will result in substantial changes in administrative practice, it is particularly important to involve in the drafting process individuals with responsibility for administering the law. There must be a mutual understanding of precisely how the new rules will be applied. Otherwise, there is a real danger that those applying the new law will ignore it or misunderstand it.

On the one hand, there is a danger in studying a tax reform project to death. On the other hand, one can easily underestimate the complexity of the undertaking. In many countries, adequate staffing and expertise are simply not brought to bear in drafting legislation. Sometimes this is the result of bureaucratic infighting or individual sensibilities, and it is not always possible to remedy the human foibles that get in the way of a good coordinated effort. But where these can be overcome, the country stands to gain a great deal from an effective piece of legislation drafted by a coordinated team. This is not to say that a committee approach is the most appropriate at all stages. Sometimes it is better for a small group, or a single person, to take on a problem, produce draft statutory language, and bring it back for consideration by a larger group.

Technical assistance advisors from each field can play an important role in advising the working group. Such advisors who have experience in other countries with regard both to particular tax laws and to the process of developing tax legislation can, at each step, provide comparative information of great utility. Advisors with comparative experience in tax administration can also be of considerable assistance at all stages of the working group’s consideration of tax reform.

B. Consultation with Other Government Experts

While macroeconomists, tax policy specialists, lawyers, and administrators should be directly involved in designing and implementing tax policy, other government experts should also be consulted. This may include individuals within the ministry of finance as well as from other ministries. For example, units concerned with company law, accounting standards, and regulation of the financial sector will often have contributions to make to the development of tax legislation and should be kept involved. In some instances, the importance of these topics will require that experts be full members of the ongoing working group. In other cases, only an ongoing process of consultation will be required.

C. Consideration of Related Tax Issues by Different Working Groups

Problems can arise when related rules are developed by different groups. Depending on the size of the bureaucracy, tax policy responsibility may be divided among several divisions. It is essential for those involved in designing different aspects of a single tax, or of related tax rules, to consult with each other. It is not uncommon, for example, for a division that develops an individual income tax law to fail to communicate with another division working on a corporate income tax law; or persons responsible for accounting rules under the value-added tax (VAT) may not consult with those responsible for accounting rules under the income tax.

Because the interrelations among various tax laws are important, most particularly among the different parts of a single tax such as the income tax, no one group should be working in isolation from another. In most cases, this will mean that the chairs of each working group should consult with each other on a regular basis and that papers should be circulated among working groups.

D. Consultations with Parliament

Often, those involved in tax policy and implementation in the executive branch do not coordinate effectively with the legislative branch. This can cause serious problems; parliament is unlikely to respond well if its views are not adequately taken into consideration during the preparation of the bill. The method and degree of coordination will differ from country to country, depending on the traditions of openness between the government and the legislature, the legislative process, and the constitution. Within local institutional constraints, the finance ministry should consult with appropriate members of parliament, including members of the parliamentary committees charged with consideration of tax legislation, and with parliamentary staff. It is often preferable for the chair of the ministry working group to consult directly with the committee chairs, and perhaps with a number of key committee members. It may be appropriate for one or more chairs, or other committee members or committee staff, to b...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Summary of Contents
• Content Page
• Preface
• Acknowledgments
• Introduction
• Chapter 1. Tax Legislative Process
• Chapter 2. Legal Framework for Taxation
• Chapter 3. Drafting Tax Legislation
• Chapter 4. Law of Tax Administration and Procedure
• Chapter 5. Regulation of Tax Professionals
• Chapter 6. Value-Added Tax
• Chapter 7. VAT Treatment of Immovable Property
• Chapter 8. Excises
• Chapter 9. Tax on Land and Buildings
• Chapter 10. Taxation of Wealth
• Chapter 11. Social Security Taxation
• Chapter 12. Presumptive Taxation
• Chapter 13. Adjusting Taxes for Inflation
• Table of Tax Laws Cited
• Biographical Sketches
• Footnotes