The tax wilderness: how to restore the rule of law.

THE FEDERAL TAX SYSTEM: THE DECLINE OF LAW'S EMPIRE

The Australian tax system displays a range of symptoms suggesting a virtual collapse of the rule of law. Those symptoms include the flourishing cash economy which, at an estimated 15 per cent of G.D.P., is one of the developed world's largest and equivalent to New Zealand's entire economy. An underground economy of that magnitude requires the involvement not only of many businesses, but also of millions of consumers, who apparently believe that the greater spending power they can achieve through cash discounts is worth more than the duty to comply with a law they obviously consider unworthy of respect.

Another symptom is the growing irrelevance of the law and its institutions. Tax advisers display increasing signs of disorientation in trying to cope with a body of law described in 1987 as "unintelligible". Normal legal advice is problematic because otherwise lawful arrangements can be overridden through the semi-subjective appraisals of purpose creeping into the application of Part IVA of the Income Tax Assessment Act 1936 (Cth). The High Court now seldom grants leave to appeal in federal tax cases, as if it had given up hope of keeping the tax system subject to legal principle and normal adjudication methods, despite revenue law's constitutional importance.

The present state of the rule of law in the federal tax arena stems from a number of immediate causes. These causes can also be viewed as symptoms because, as general systems theory tells us, effects have a tendency to feed back into the causation process.

1. Tax Legislation: Volume and Uncertainty

The sheer quantity and ever-changing content of tax legislation is undermining its ability to command general obedience. That is partly a result of the practical difficulty of knowing what the law is and what it means. Before the High Court in the First Uniform Tax Case needlessly gave the Commonwealth a monopoly (at first de jure, later de facto) of income taxation, the relevant federal legislation occupied 81 pages in the statute book. Now it has exploded to 8,500 pages, or 13,500 pages if one includes fringe benefits, capital gains and superannuation provisions. It has been estimated that if tax legislation were to keep growing at the present rate, it would cover 830 billion pages by the end of the century and would take 3 million years to read.

The sheer mass and continual amendment of this legislation, coupled with the hazardous interplay of lengthy and widely scattered definitions and deeming provisions, make predictable interpretation and reliable advice next to impossible. The A.T.O.'s assessors themselves can understand only a small part of it. Even in 1987, Justice Hill, having described much of the legislation as "unintelligible", went on to say that "[m]any provisions in the legislation are not applied for the simple reason that no one is able to comprehend them". While the rule of law does not require that all laws be applied all the time, beyond a certain point non-application creates a risk that normally unused provisions will be enforced for discriminatory or arbitrary purposes. That kind of uncertainty is inimical to productive investment and growth.

Behind the vast volume of actual legislation looms an equally massive bulk of A.T.O. public determinations, public rulings, bulletins, interpretative decisions, policy papers, circulars, administrative guidelines and practice statements. Some of these are expressed to be binding on A.T.O. officers, and in general staff (no doubt prudently) rely on these sources rather than on the legislation, thereby giving them in practice something close to the force of law. In perhaps 90 per cent of cases these materials are consistent with the enacted law, but in the remainder the A.T.O. is effectively making its own rules. In generating this mountain of administrative norms the A.T.O. may be doing little more than trying to make an unworkable law work. But the net result is to add to the system's unfathomable obscurity.

Uncertainty in the law is a major factor in undermining the rule of law, and tax is riddled with it. That stems in part from the legislation's sheer volume and detail, for which the Treasury is usually blamed, and in part from such inherently indeterminate provisions as the general anti-avoidance rule in Part IVA. Even the most punctilious compliance with all applicable specific provisions is liable to be second-guessed, and perhaps nullified, by the A.T.O. or the courts under Part IVA. Purposive interpretation is thwarted when no clear principle underlies the law, as when the legislature uses tax incentives to promote objectives other than revenue-raising.

As Lord Oliver has pointed out, where there are legal rules in an area without a clear moral imperative, the rules must be clear. On the question of tax law's moral content Justice Learned Hand was blunter: "[N]obody owes any public duty to pay more than the law demands. Taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant." Whatever moral force the legislation may have is undermined when its complexity and ambiguity make outcomes depend, not on working out the right answer, but on inside knowledge, administrative concessions or luck.

The attitude of many taxpayers (other than the wretched conscripts of the P.A.Y.E. army) is increasingly to treat the law and the courts as irrelevant. Legal advice leaves them unmoved. All they really want is an A.T.O. ruling that will protect them from penalties or prosecution. Many just surrender and let the government have its way. "A common comment by corporates now," observes K.P.M.G.'s Michael Evans, is, "I know I'm not getting it right but if the Tax Office wants to come out and go through everything and tell me where I've underpaid, I'll pay it because that is cheaper than putting a process in place to comply with it." We have come a long way-from John Hampden and "the rights of Englishmen" to Part IVA and hopeless resignation.

Taxpayers and their advisers are unanimous in pleading for tax law to be made shorter and clearer. Unfortunately, if other factors are held constant, it may be hard to have both. A tax act that is shorter and simpler may not be clearer or more certain: the legislation's stupefying detail is, after all, an attempt at certainty. On the other hand, the revenue lobby (comprising the A.T.O., the Treasury and their allies in politics, academia, the media and the welfare industry) are less perturbed. They realise that the law's very uncertainty and incomprehensibility advances their agenda, because it enables the tax authorities to offer taxpayers the predictability they need for long-term planning and adjustment in exchange for somewhat heavier assessments. As Geoffrey Brennan and James Buchanan point out, "If government can succeed in keeping taxpayers off balance in their planning, additional revenue potential may be available for exploitation." In other words, the government can run a kind of protection racket, offering immunity in exchange for larger tax payments than the law, properly construed, might require.

Others, however, see a very different kind of advantage in the complexity of tax legislation: "[T]ax complexity has a positive role to play in our national evolution. It is history's way of telling us that we have the wrong system for raising funds for public purposes--and compelling us to find another."

2. Statutory Discretions: Wagging the Dog?

A further symptom of the law's growing irrelevance in the tax field is the swelling number of wide statutory discretions granted to the commissioner.

Such discretions are not new. An early example from 1964 was s. 99A of the Income Tax Assessment Act, which left it to the commissioner to decide in certain circumstances whether a person should be required to pay tax on trust income at a higher or a lower rate. Over time such provisions have multiplied: in 1973 came s. 80DA (prior year losses), in 1981 s. 102AE(6) (non arm's-length transactions), and in 1984 the discretionary penalty remission provisions in s. 222. By 1982 the trend was arousing concern, with Chief Justice Street of New South Wales pointing out the unequal bargaining positions of citizen and bureaucrat in litigation, with its tendency to enhance the power of the bureaucracy and make it more authoritarian in its dealings with the public.

The ultimate grant of discretionary power is, of course, Part IVA, enacted in 1981 and to which the rest of the Act is subject. Australia has placed more reliance on the general anti-avoidance provisions than any other Western democracy, and Part IVA's supporters argue that it may strengthen the rule of law by increasing compliance with tax legislation. The problem, however, is that it seeks to encourage compliance by means that compromise the rule of law, for example by depending on discretion and opinion.

Part IVA enables the A.T.O. to alter the scope of the tax law, to impose what amounts to a tax by analogy where none was imposed by the statute. It can declare after the event how much tax is to be paid without saying it in advance. There is also a problem in ensuring that in reaching these decisions the A.T.O. applies only relevant criteria, not least in view of the commissioner's policy of targeting taxpayers he considers to be "aggressive" in their tax planning. Quite apart from that, Professor Jeffrey Waincymer argues, this approach "offends against the separation of powers doctrine and the requirement that laws be made by parliament not bureaucrats".

The A.T.O.'s exercise of its discretions may be reviewable by a court but, quite apart from the difficulty of persuading a court to over-rule a discretionary A.T.O. decision when the burden of proof is reversed as in Part IVA appeals, vesting a wide discretion in a court is no great improvement on vesting it in an executive official. Professor Waincymer has warned that in Part IVA "too many key policy questions have been left for judges to answer".

Judicial review serves the rule of law when courts apply known rules and principles, not when their decisions may turn on their opinion about someone's purposes or on policy questions, and when the result may be to disapply explicit statutory provisions. Sir Harry Gibbs considers that Part IVA's discretionary power to override other provisions of the Act "amount[s] to an abandonment of the rule of law". Neither Britain nor the United States has an equivalent provision, and practitioners from those countries aver that the rule of law has survived relatively well in their tax systems.

Another site of discretionary power is to be found in the commissioner's powers of settlement and compromise, which are described in the A.T.O.'s Code of Settlement Practice and in its Receivables Policy. Resting on the general provisions of s. 8 of the I.T.A.A. 1936 and s. 3A of the Taxation Administration Act 1953, these powers give effect to the "good management rule", an accepted principle in revenue law that recognises the need to make efficient and sensible use of the A.T.O.'s resources. Particularly in relation to advance pricing agreements, the exercise of these powers carries the risk that the A.T.O. may make arrangements with a taxpayer that operate outside the law, a possibility that became reality in the United Kingdom in the Fayed case. In Australia, the settlement and compromise powers have so far worked reasonably well, but their existence adds to the growing irrelevance of the law.

The grant of wide discretions on this scale has two main consequences for the rule of law. First, it conflicts with both the principle of legal certainty and the principle of equality before the law. It becomes harder for citizens to plan ahead if they have no sure way of ascertaining what their future tax liability will be (subject to the rulings system, of which more in a moment), while the discretions are so wide that there is no assurance that similar cases will be treated in a similar way. Secondly, broad discretions threaten the constitutional principle that no tax should ever be laid that has not been specifically authorised by parliament. That principle was established by John Hampden in his resistance to paying ship-money in 1637 and later reasserted, in different ways, in both the French and American revolutions. In Edmund Burke's words, "Would twenty shillings have ruined Mr Hampden's fortune? No! But the payment of half twenty shillings, on the principle it was demanded, would have made him a slave." Thus A.L. Goodhart, writing in 1958, thought it self-evident that "[i]t would be a gross violation of a basic constitutional principle if Parliament were to give any Minister discretion in a matter relating to taxation".

3. The Rise of the A.T.O. as Deciding Authority

A third symptom is the growing ascendancy of the Australian Taxation Office as the final authority, combining aspects of the executive, judicial and even legislative roles Only the largest corporations and wealthiest taxpayers can now afford to challenge an A.T.O. decision in court or otherwise seek judicial review. For most citizens today, the best source of "legal" certainty is an A.T.O. ruling. The A.T.O. knows this and encourages the attitude behind it by offering safe harbour to the taxpayer tempest-tossed on a sea of dubiety.

Under the system of self-assessment, itself made necessary by the inability of tax assessors to keep up with the flood of amendments and case-law, some form of binding ruling procedure was essential if any reliable predictions of tax liability were to be possible. Hence the introduction in 1992 of the present public and private rulings regime, embodying dispensing powers of such scope as to make a James II weep with envy.

Useful though it is in present conditions, the rulings system has adverse consequences. One is that it weakens the separation of powers. A central tenet of that doctrine is that it must not be possible to change the law at the point of application. That ensures that the judicial function determines the citizen's rights by reference to previously enunciated legal rules and principles rather than by personal opinions or extraneous policy considerations.

The system of binding rulings puts the A.T.O. in the position of effectively giving final determinations, thereby intruding into the judicial function and making the A.T.O. judge in its own cause. At the same time it overlaps into the legislative role, as in the system of internal directives described above, or when we see the A.T.O. laying down what look very much like statutory rules, as in the case of limited recourse loans in Firth's case. During the Boucher era the Commissioner occasionally went so far as to announce that the A.T.O. was proposing to "amend the law" in some way.

Some tax commentators deprecate the role of the separation of powers in the revenue context and would prefer the roles of the three branches to be seen as a mere "specialisation of functions", with the courts and the legislature "simply play[ing] different roles in the policy-making process": "The role of judges in tax cases should be to decide what result would reflect the most sensible tax policy". But there can never be that kind of collaboration or overlap between the three branches of government. The rule of law needs a degree of tension between them in order to ensure impartial enforcement and independent adjudication.

If those separation lines become blurred, as they have following the expansion of the A.T.O.'s role, other consequences will start to appear.

Under such a system, Professor Waincymer points out, "There is also no guarantee that the administrator will be impartial, fair or would appropriately balance the interests of taxpayers against the interests of revenue collection". On the contrary, there is good reason to fear that constant government pressure on the A.T.O. to maximise collections will have the opposite effect. One sees this in emerging double standards, as when the A.T.O. applies Part IVA when it considers an arrangement to be outside the "spirit" of the legislation (as the A.T.O. interprets that "spirit"), but when the Part IVA produces an unintended liability, commitment to the spirit of the law is discarded in favour of strictly literal interpretation. Again, while a concessional ruling is welcome to the parties, it can cause resentment in others who are not similarly favoured. Both these developments create a feeling that equality before the law is being compromised and strengthen perceptions of unfairness.

The advent of staff performance bonuses is unlikely to improve matters. The practice of remunerating tax officers according to the amount of revenue they collect recalls the 18th century tax-farming abuses that helped to trigger the French Revolution. It may tend to weaken the principle of even-handed enforcement which, like equality before the law, is an important element of the rule of law.

Heavy reliance on bureaucratic rulings has given rise to corruption in some Third World countries. Allegations of bribery in a pending criminal case involving A.T.O. approval of certain mass-marketed avoidance schemes suggest that the Third World phenomenon may have landed on our shores, an alarming development given the historical rarity of blatant bribery in Australian state and federal government.

THE CONSTITUTIONAL WILDERNESS

The erosion over recent decades of vital constitutional and juristic principles has brought us to an anomic state in which the law has lost its intelligibility, certainty and predictability, where the executive government exercises legislative and quasi-judicial powers, the judiciary exercises policymaking powers, where rights effectively turn on opinions about a citizen's purposes, where the principles of impartial enforcement and equality before the law are undermined and where, in a variety of ways, the law is changed at the point of application. The notion that the courts should give effect to government policy, which was banished by Entick v Carrington in 1765, is starting to return in areas such as Part IVA, with the encouragement of some commentators. The nation's highest court seems to have all but abandoned the federal tax field as doctrinally unrewarding and scholarly writers have concluded that it is no longer possible to write a treatise identifying authoritative principles in Australia's federal tax law.

The result is that the tax system can now scarcely be called "law" at all but rather direct bureaucratic rule. While the law does retain vestiges of its role--judicial review would still prevent totally arbitrary treatment, such as a higher rate for blue-eyed taxpayers--for most citizens the judicial system and the traditional analysis of legal rights in the tax arena are irrelevant. Some commentators take a relaxed view of that trend. Professor Graeme Cooper, for example, speculates "whether the rule of law is still important in the tax context. For example, the rule of law might be a value that should be given absolute primacy in cases where the curtailment of personal freedoms, or the expropriation of property without some attempt at lawful justification is threatened. But might it be appropriate to modify or circumscribe its application in a tax context ... ?"

That would be a perilous step. The constitutional importance of tax law as a template for the relationship between government and citizen is widely recognised. Even Justice Murphy warned that vesting tax officials with more and more discretion "may well lead to tax laws capable, if unchecked, of great oppression". Further, governments may use tax laws as the vehicle for the wider erosion of civil liberties. The Hawke government exploited an alleged "crisis" of tax avoidance as a pretext for introducting compulsory I.D. cards, that recurring dream of elitists and authoritarians everywhere. When the necessary implementing regulations were blocked by the Senate, the government dropped the idea and little more was heard of the tax avoidance "crisis".

THE DYNAMICS OF DEADLOCK: ENFORCEMENT VERSUS RESISTANCE

The Commonwealth's approach to avoidance and the underground economy has been to attack selected symptoms. The P.A.Y.G. system and the G.S.T. have set off in pursuit of part of the cash services sector. Discretionary powers and Part IVA lie in wait for those who do not cleave to the spirit of the law, and Australia has placed more reliance on general anti-avoidance provisions than any other Western democracy, to the detriment of more fundamental tax reform. But for all that the front-line has not moved far. Research into the psychology of taxation reveals that increasing the authorities' enforcement zeal may be counterproductive if it fails simultaneously to deal with underlying causes. More effective policing may in fact cause more effective resistance by worsening attitudes, and heavier penalties will only multiply the number of appeals.

Just as the symptoms approach to avoidance and evasion has produced disappointing gains and unintended consequences, merely targeting the specific anti-rule of law phenomena described above will not be enough to heal our institutions of government. Cutting back discretions, confining the A.T.O. and the courts to their constitutional provinces and ending Part IVA's flirtation with imputed subjective purpose will not reinstate the rule of law. The Taxpayer's Charter and the Inspector-General of Taxation will do little more than prevent or put out spot fires without mitigating the underlying problem. Simultaneously making the legislation substantially simpler, shorter and clearer--goals favoured on all sides--may be an unattainable objective.

The symptom-oriented approach will only ensure that the problems of evasion, avoidance and pathological administration will reappear in some other form, such as emigration, leisure substitution and the storming of remaining shelters, such as negative gearing or the financing of poor quality motion pictures. That will follow inevitably if reform disregards the basic dynamic of federal taxation in Australia today. That dynamic is the irreconcilable confrontation between the two opposing forces of (1) enforcement and (2) resistance.

1. Enforcement: Formerly, economists and political scientists interpreted the revenue-raising process through the "benevolent despot" model, under which the institutions of power were assumed to act in the "public interest". Government was seen as raising revenue to the extent needed to pay for a suitable list of public goods. If citizens conscientiously paid their tax and a surplus resulted, government would reward them with a tax cut.

That perspective was associated with the public finance theories of such economists as Francis Edgeworth and Arthur Cecil Pigou. It was first questioned by the Norwegian scholar Knut Wicksell, who complained that it "seem[ed] to have retained the assumptions of its infancy, in the 17th and 18th centuries, when absolute power ruled almost all Europe". It was also criticised as being "unmotivated", and thus unconvincing: it offered no reason why governments or rulers would be motivated to use their power to advance the public interest rather than their own.

A model that would explain public finance in the context of a modern mass democracy was thus needed. It was supplied by public choice theory, essentially the application of economics to political science, which posits that politicians and bureaucrats act from the same motives of self-interest as everyone else. "The State is not the agency that nobly and conveniently steps in to correct the supposed deficiencies of the free market," writes Professor Gary Anderson, "but a giant rent-seeking machine that provides coercive wealth transfers to the highest bidder (albeit in a fairly efficient market)".

Public choice economics has replaced the benevolent despot theory with the model of government as a Leviathan that spends up to the limit of its revenue-raising capacity. This view, magisterially enunciated by Professor Geoffrey Brennan of Australian National University and the Nobel laureate James Buchanan, offers a much better explanation of contemporary reality and has annihilated the old benevolent despot view, at least among economists.

The public choice perspective also points out that normal electoral processes are insufficient to restrain self-seeking governments and bureaucracies. The authors note that the tax revolt in the United States began in 1979 with Proposition 13, a California citizen-initiated referendum (C.I.R.) measure. It emerged from outside the normal parliamentary processes and interparty competition, in the face of opposition from most of the political and media establishment.

Substantial reform can also be pushed through by semi-revolutionary figures such as Margaret Thatcher or New Zealand's Roger Douglas, but where both C.I.R. and influential fire-brands are lacking, as in Australia, Leviathan can block any significant lessening of his revenue-raising power. On the contrary, any changes he makes tend to increase it. 2. Resistance: There will always be some people who will break even the fairest tax laws. Those Sydney barristers who omitted ever to lodge a return did so even in the 1960s, when they would have paid a marginal rate of only 25 per cent. But today's trench warfare between non-compliance and government arbitrariness is a comparatively recent phenomenon that dates only from the 1970s. The 1950s and 1960s, one perplexed commentator observes, were marked by an "almost sheep-like taxpayer compliance" that mysteriously broke down in the next decade. Apart from illustrating the academic tendency to portray the Australian people as somewhat less than human, this account overlooks the crucial development that transformed taxpayer attitudes. That was the ravaging inflation unleashed by Frank Crean's 1973 and 1974 federal budgets which distorted the established tax scales out of recognition and vastly increased the burden of government on the people. That may have been the intention, though the government of the day tried to make it look like an accident. Those distorted scales remain substantially uncorrected to this day.

Until the massive bracket creep (or gallop) of the 1970s, most people complied with the tax laws, partly because they considered them reasonably fair, and partly because non-compliance did not pay--the relatively minor savings obtainable did not warrant the costs and risks involved. Thus, taxpayer compliance was rewarded with reasonable tax laws; or, more accurately, reasonable tax laws were rewarded with taxpayer compliance.

It is common ground that unfairness in a tax system threatens compliance. Australians see the present federal tax system as unfair for two reasons:

(i) The rich are able to avoid tax in ways unavailable to earners whose tax is deducted from their wages; and

(ii) Income tax rates are too high.

During the 1980s in Australia, the revenue lobby succeeded in diverting the political-media debate almost exclusively onto reason (i). Reason (ii) is the one that directly affects and influences most people, but it was almost never mentioned. That is still the case today.

The result was that the great tax revolt of the 1980s passed Australia by. While in Britain, the United States and New Zealand income tax rates fell sharply, in Australia the abolition of the 60 per cent rate was more than outweighed by the abolition of tax indexation and the introduction of a raft of new taxes and restrictions, including capital gains tax (C.G.T.), fringe benefits tax, heavy taxation of retirement benefits, the tax file number and later the goods and services tax. The income tax cuts that accompanied the introduction of G.S.T. have also been swallowed by bracket creep, for Australia, unlike Britain, still has no tax indexation.

For Australians the only significant relief during the tax revolt era was obtained through the virtual abolition of death duties. That came about because the political establishment could not control Queensland's Bjelke-Petersen government, which was the first to do away with that unpopular impost. Interstate competition did the rest, for unlike the Commonwealth, individual States lack monopoly power and cannot prevent people from voting with their feet. The establishment struck back, however, reintroducing death duties by stealth via C.G.T.; and this time, the revenue flowed to Canberra rather than to the then hard-pressed States.

The result was that Australia ended the century with its tax take at an all-time high and the nation has moved significantly higher in the international tax burden league table. In 2002-03 alone, Australian taxes on wages rose by 1.2 per cent, while 19 O.E.C.D. countries registered decreases in tax burdens, 15 of them reducing their top rate. At present Germany is in the process of cutting its top rate from 48 to 42 per cent, and France has announced a general 3 per cent income tax cut. Most Australian families carry a heavier income and social security tax burden than average Britons, Americans and even the French. The O.E.C.D. reports that a production worker's family in Australia loses 14.8 per cent of gross earnings in income tax (after allowing for cash handouts), as against 14.5 in France, 11.5 in the United States, 11.1 in Britain, 9.0 in Austria and 8.5 in Switzerland. The revenue lobby's promise that the new taxes and enforcement measures would lead to substantial rate cuts has been broken--another piece of evidence against the "benevolent despot" theory and in favour of the government as Leviathan model.

The people have never voted for income taxes at the present rates and would have defeated any government that proposed them. The current situation is the result of bracket creep and failure to reform, and its results have been a decline in taxpayer morality: people do not regard working in the cash economy as cheating because they believe they are paying too much. Government must increasingly rely on withholding or reporting at source. While the cash economy has been called the tax avoidance of the masses, even the masses have been venturing into sophisticated forms of tax avoidance, with construction workers, Melbourne tram drivers and Sydney bicycle couriers being notionally employed by their own service companies and people of moderate means negatively gearing a second property.

Under our unreformed system, perverse incentives abound. At the lower levels, the growing tax burden is driving onto the welfare rolls people who could support themselves if taxes were lower. The low tax-free threshold of $6,000 gives them every incentive to stay on welfare, as they face effective marginal rates of up to 70 per cent if they resume work and there-upon lose welfare payments. At the higher levels, a tax-driven brain drain is developing. Professor Wolfgang Kasper warns: "Young, mobile Australians know from a growing number of emigrated colleagues that, in most Asian countries, income taxes are much lower. This explains why Australia suffers from skill shortages and why occasional recruitment drives by short-staffed organisations so often fail." Robert Gottliebsen agrees: "Many [expatriates] intend to return but discover the 48.5 per cent tax rate cutting in at ridiculously low levels means they can't afford to move home until they've made their fortune offshore. It's then too late ... [T]here is global competition for skilled migration, so if we wanted to increase total migration, we would have to lower our skills criteria". Australia's diaspora now numbers over one million, a high proportion for a young country of 20 million which is in other respects regarded as a good place to live.

The disincentives are multiplied by large-scale distortions. The recent unprecedented housing bubble, for example, was fuelled by the tax treatment of negative gearing. The resulting price inflation has propelled many ordinary family homes into the luxury land tax that most States levy on expensive real estate. "Parliaments and public commentators have lost sight of the fact that, beyond a certain point, government spending and taxation hamper economic growth", Professor Kasper points out: "No country has ever achieved per-capita income growth of four per cent on a sustained basis once general government spending exceeds 40 per cent of the national product. Australia is now edging close to this mark ... " Others note that Ireland did not become the "Celtic tiger" until it slashed its spending to G.D.P. ratio, which in 1985 stood at 51 per cent, but by 2000 was down to 29 per cent.

In a famous exchange of views in the 1940s, Lord Keynes agreed with the eminent Australian economist Colin Clark that if government spending and taxation exceeded 25 per cent of G.D.P. it would become counterproductive. Ironically, Australia's underground economy, estimated at 15 per cent of G.D.E, seems to bring Austral ia's spending and tax to G.D.E ratio back to the 25 per cent level, via what law and economics doctrine calls "a corrective transaction". But it does so in a haphazard and lawless way.

The rule of law is thus being steadily undermined by increasing resistance by the population, which is met by ever-increasing arbitrariness by the authorities. The two sides are deadlocked in a downward spiral of dysfunctionality. The only possible outcomes are a collapse into total authoritarianism or a thorough reappraisal and reform of the tax system.