In a typical Western European country, governments raise taxes of around 40% of national income. A large body of literature investigates the impact of taxes on behaviour. Yet much less attention has been paid to the process by which governments decide what and how much to tax. This research project set out to address the process of tax policy-making in the belief that while good tax policy-making processes may not automatically lead to good tax policy outcomes, it can significantly reduce the risk of random and avoidable failures.
We carried out a comparative analysis of the structures, processes and governance of tax policy-making making in 8 countries: Australia, Finland, France, Germany, Ireland, Jersey, New Zealand, Sweden, UK and USA. In each country we interviewed a number of people from different backgrounds involved in the tax policy-making process, including ministers and former ministers, parliamentarians, high-level officials and policy experts, other commentators, business groups and financial journalists. The aim was to capture both the formal and informal aspects of the policy-making process.
We addressed questions concerning the following: the institutional framework within government through which tax policy is developed; the formal and informal influence and role of external institutions; the role of the legislature in scrutinising 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.
Several weaknesses were common in the countries studied: tax policy-making is generally under-resourced compared with other functions of government; tax policy is made and influenced by a very small group of people; and the fundamental link between taxation and representation is generally weak because governments and political parties shy away from engagement with the electorate on serious tax policy choices.
Based on this analysis, we make a number of recommendations deigned to improve the process of tax policy-making in all the countries studied.