Tax Transparency as a Public Good: Building a Better Tax System

In an article published by the Global Initiative for Financial Transparency (GIFT), Richard Murphy and Andrew Baker emphasize the importance of tax transparency as a public good and outline key principles that can lead to a better tax system. They argue that while significant progress has been made in combating international tax abuses, there is a need to shift focus towards domestic tax transparency to achieve improved tax management.

Tax transparency, defined as the disclosure and publication of quantitative and qualitative data about a jurisdiction's tax system, serves as a crucial tool for holding decision-makers accountable and enabling informed judgments on its performance. Murphy and Baker assert that tax transparency not only boosts taxpayers' morale and willingness to pay taxes, leading to increased revenue, but also enhances the legitimacy and fairness of the tax system.

The authors highlight the concept of tax spillovers, initially introduced by the International Monetary Fund (IMF) in 2014, as a means to assess how one country's tax system may undermine another's. However, existing studies on tax spillovers have faced challenges due to data limitations. To address these limitations, Murphy and Baker propose a qualitative and quantitative approach that identifies the reasons and ways in which tax systems fail to achieve their objectives, including unintended consequences and risks.

Their holistic framework for tax spillover analysis involves engaging tax professionals from various disciplines to evaluate the potential undermining of different parts of a jurisdiction's tax system. This approach acknowledges that tax abusers exploit administrative loopholes and inconsistencies across tax systems, necessitating a comprehensive understanding of the entire tax system and its supporting mechanisms.

Collaboration with the Global Initiative for Financial Transparency (GIFT) has expanded Murphy and Baker's work. They have further developed their ideas in a 2021 paper titled "Making Tax Work," which laid the groundwork for the publication of GIFT's "Transparency Principles for Tax Policy and Administration" in August 2022.

The transparency principles advocate tax transparency as a public good and emphasize the need for comprehensive data to appraise risks within tax administrations and between tax systems. The principles aim to benefit all stakeholders, including legislators, tax administrators, voters, taxpayers, and those affected beyond the jurisdiction. They outline specific requirements for tax system information, such as understanding tax determination, administrative procedures, fairness, compliance, alternative revenue options, system comparisons, and the use of tax revenues.

Murphy and Baker stress that transparency and accountability in a tax system require clear statements of goals and objectives, supported by relevant data, which are often lacking. They highlight the importance of detailed budgets, performance targets, and information on tax allowances and reliefs to enable effective tax system management.

The principles proposed by GIFT are categorized as basic, intermediate, advanced, and aspirational, with increasing levels of ambition. These principles include reinforcing stakeholder rights, publishing tax objectives and budgets, ensuring accountability, collaborating with international institutions, reporting tax gaps, justifying tax incentives, and utilizing assessment tools for tax system improvement.

In conclusion, Murphy and Baker argue that tax spillover analysis and tax transparency principles facilitate a reflective and informed society-wide dialogue on tax system performance and potential reforms. By embracing tax transparency as a public good, societies can utilize taxes more effectively to address societal challenges, promote prosperity, reduce inequality, and transition to a sustainable net-zero economy.

By fLEXI tEAM