Public Sector Informant: PwC scandal exposes flaw in expertise shaping Australia's tax system

Although punishing these individuals and their organisations is necessary - as are attempts to reduce the conflicts of interests and enmeshment of consultants in government - the scandal is symptomatic of more fundamental lack of diversity in the disciplinary expertise of those making decisions for the future of our tax system.

Australia has been seen as a leader in introducing reforms for a more responsible approach to tax for almost a decade, with the focus put mainly on soft regulation through increased transparency.

Behind these changes, we find the Australian Board of Taxation, which is a non-statutory body that provides the government with advice on tax matters.

The body is overseen by a board and advisory board heavily represented by current and former practitioners from the big four - PwC, KPMG, Deloitte and EY - and other mid-sized firms. These same firms advise their clients on how to legally minimise tax and optimise their tax position.

Out of the eight members of the board, nine are current or former practitioners from advisory firms, while on the advisory panel we count 43 out of 48. The clear conflict of interest that their dominant position on the board creates is obvious. However, our research points to a more fundamental problem than this conflict of interest: the narrow expertise of people driving tax reforms.

We interviewed 76 people representing the broad set of stakeholders involved in the shaping of Australian tax system during the 2014-2016 Senate inquiry on corporate tax avoidance - including people sitting on the Board of Taxation.

We found that all these participants were trained in law and neo-classical economics. While this type of expertise is (and should be) central to making decisions on taxation, there is a staggering lack of diversity of thinking among the elites contributing to tax policy decisions.

In further unpacking their views on how the future of taxation should look like, we uncovered a strong belief in the corporate sector as a force for societal good, as well as the beneficence and omnipotence of markets. Time and again we met the old friend trickle-down economics: the less taxes, the more profits, the more investments, the more employment, the better for society.

READ MORE:

The corollary of these entrenched assumptions has seen the development of tax systems - not only in Australia - where there is less focus on genuine restriction to tax minimisation and more on improved collaboration between the regulator and the regulated, so that the latter, like a child, is nudged into becoming more compliant and responsible.

Of course, what better way to understand the needs of your children than to see through their own eyes. Put a child in the driver's seat when shaping regulation around the dilemma: how stringent should the diet be to reduce corporate financial obesity?

The outcome is hardly surprising. After decades of these collaborative approaches, Australia as well as other jurisdiction are facing a gap between rich and poor that is on the rise.

Shareholder wealth has been soaring worldwide. In Australia, we have witnessed senior executives of JobKeeper-rescued companies receiving seven-figure bonuses during a recession, while inflationary pressures see the average Australian struggle to make ends meet.

The trickle-down economics mantra is still so entrenched in our tax mindset that not even the critics have entertained challenging its assumptions, despite clear evidence that the trickle-down is hardly happening.

The underlying problem of tax systems is much bigger than the breach enacted by Tom Seymour. There is a need for tougher, socially-minded questions that could shake how business, consultants, policymakers and even citizens envision the tax system. For instance, should we provide tax rebates and reliefs for investments in the first place? Should we allow businesses to write off their debts at all? These are questions that clash with the assumptions on which our tax systems are currently based. The machine needs the perspective of disciplines, other than economics and law, to allow such questioning.

Unfortunately, there is not much sociology, history or anthropology within the core expertise of the current tax leadership - to mention just a few of the humanities disciplines with tax specialists.

Interdisciplinary experts may bring disruption, but as Maslow's law of instrument teaches: when the only tool you have is a hammer, you tend to see every problem as a nail. The hammer is economics, telling us that transparency (the flavour of the day) will allow markets to punish the baddies. Research has already shown that this is not the case. The response to another (very predictable) tax scandal is more of the usual: some tough postures by politicians, a media frenzy on the topic and, at best, we could hope for an inquiry a little more independent than the one set up by PwC on itself.

Tax transparency and most reforms that have been recently implemented in Australia are certainly a step forward and might appease critics and the public for a while.

But as we argue in our latest research, they should not be taken as a symptom of the tax system moving towards a more equitable direction. We need a more diverse mindset overseeing tax regime to ensure a more equitable and fair tax future.