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A Tax System for New Zealand's Future - TWG Report - Jan 2010


20-Jan-2010

Victoria University's Tax Working Group issued their much-awaited report today containing recommendations on what is needed to create a world-class tax system in New Zealand. The report (entitled "A Tax System for New Zealand's Future") will hold a lot of weight in shaping tax policy within the current Government, with some of the recommendations likely to be featured in May's Budget (though likely in a modified form).

The report contains 13 key recommendations in summarised form,along with around 70 pages of details and background information. The full report can be read here.


Summary of the Tax Working Group's Recommendations

(From the point of view of a NZ salary or wage earner)

(1) The company, top personal and trust tax rates should be aligned to improve the system's integrity...

Assuming the tax alignment is at rates lower than the current ones this can only be viewed as a positive for salary earners. It will help to create a fairer system whereby there are less loopholes and incentives for richer Kiwis to lower their taxable income where ordinary New Zealander's are unable to.

(2) New Zealand's company tax rate needs to be competitive with other countries' company tax rates, particularly that in Australia...

Obviously a very important point in order to keep New Zealand companies competitive and to discourage companies from relocating overseas.

(3) The imputation system should be retained. However, this may need to be reviewed if Australia decides to move away from its imputation system.

A neutral recommendation for many salary earners, however dividend imputation does encourage more diverse investment (or specifically, it doesn't discourage investment in companies - and we need our companies to be strong if they are to be able to grow and pay internationally competitive salaries).

(4) The top personal tax rates of 38% and 33% should be reduced as part of an alignment strategy and to better position the tax system for growth. Where possible, the Group would like to see a reduction in personal tax rates across-the-board to ensure lower rates of tax on labour more generally...

An excellent recommendation for New Zealand workers. This would have the effect of increasing take-home pay for a large chunk of New Zealand's population.

(5) Base-broadening is required to address some of the existing biases in the tax system and to improve its efficiency and sustainability...

We all know that income tax cuts will have to be paid for somehow - and base broadening is one alternative (reduced Government spending is the other). From the point of view of a wage or salary earner, broadening of the tax base is likely a positive recommendation.

(6) The most comprehensive option for base-broadening with respect to the taxation of capital is to introduce a comprehensive capital gains tax (CGT)... most members of the TWG have significant concerns over the practical challenges arising from a comprehensive CGT...

A comprehensive capital gains tax would be politically very difficult to implement in New Zealand, and the Tax Working Group have recognised this.

(7) The other approach to base broadening is to identify gaps in the current system... The majority of the TWG support detailed consideration of taxing returns from capital invested in residential rental properties on the basis of a deemed notional return calculated using a risk-free rate.

This recommendation is neutral from a worker's point of view, though everyone is likely to be affected from the flow-on effects. We may see rents rise and house prices fall - a scenario that will disadvantage some people but provide a lot of opportunity and incentive for people to own their own home.

(8) Most members of the TWG support the introduction of a low-rate land tax as a means of funding other tax rate reductions.

Neutral from a worker's point of view, but sure to create some controversy in some sectors of the economy.

(9) The following targeted options for base-broadening should be considered for introduction relatively quickly:
- Removing the 20% depreciation loading on new plant and equipment.
- Removing tax depreciation on buildings (or certain categories of buildings) if empirical evidence shows that they do not depreciate in value.
- Changing the thin capitalisation rules by lowering the safe harbour threshold to 60% or by reviewing the base for calculating this measure.

The point here seems to be to encourage investment. Though this is not likely to affect workers much in the short term, over the longer term companies will rely less on the availabilty of cheap labour and more on new technology and highly skilled (highly paid) workers.

(10) GST should continue to apply broadly. There should be no exemptions.

This makes sense from an administrative point of view but does mean that lower-income families will feel more of a hit from increased GST rates, e.g. on food.

(11) Most members of the Group consider that increasing the GST rate to 15% would have merit on efficiency grounds because it would result in reducing the taxation bias against saving and investment...

As a consumer then any increase in GST is unwelcome - but if this is what is required in order to receive substantial personal income tax cuts then it is a positive as part of the big picture. Increased saving and investment will help everyone over the long term.

(12) There should be a comprehensive review of welfare policy and how it interacts with the tax system, with an objective being to reduce high effective marginal tax rates.

Working for Families has been controversal and not without reason. Although the tax credits are very welcome (even necessary) for many families there has been an unintended and perverse effect on marginal tax rates; Marginal tax rates can be in excess of 50% in some cases. This has created a disincentive to work harder and created a strong incentive to avoid tax by means of structuring ones income through companies, trusts and other methods. So a comprehensive review of welfare policy and how it interacts with the tax system sounds like a good idea.

(13) Government should introduce institutional arrangements to ensure there is a stronger focus on achieving and sustaining efficiency, fairness, coherence and integrity of the tax system when tax changes are proposed.

Agreed.

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Comments

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Brian said on 9-Jul-2010, "What a silly and pointless comparison!":
Who gives a toss what the tax rate is when the wage packet is a pittance?

Probusiness policy and a flat 10% income and corporate tax is the bare minimum NZ needs to jolt the corpse into life.

Meanwhile, from toilet scrubbers to CEOs - you're way better off spending your working years overseas.
salaries.co.nz said on 9-Jul-2010:
Agreed - salaries need to rise, and business productivity needs to increase for that to happen.

Low flat-rate tax rates would go a long way in lifting the country's productivity and salaries but don't you think the short/medium term damage to lower income earners would make such changes too politically difficult to achieve?
Brian said on 14-Jul-2010:
How would a low flat-rate tax damage lower income earners? The most damaging thing for low income earners in NZ is the welfare handouts acting as a handbrake we have on our economic development. A 16 year old kid working two paper runs then an after school job at McDonalds should not be forced to pay for dropout losers in unsustainable little towns lounging around all day as an elected lifestyle. I just hope there will come a day when honest hard working Kiwis sit up and ask why it is that they get paid 50% less than Australians doing the same thing. We need forced labour for welfare benefits immediately, and that's just the start. Suspended voting entitlement for beneficiaries would stop people like Clark getting her hooks into the place for multiple terms. If we do not make a radical course change RIGHT NOW, we're heading down the same inevitable cliff all socialist regimes end up at the bottom of. NZ will be a horribly dreary, backwards, broke little country to live in within 2 decades if we don't fix this. The handouts will eventually stop one way or another.
salaries.co.nz said on 14-Jul-2010:
Brian, I'm all in favour of low income tax rates, and I agree that low tax rates should boost productivity and incomes meaning that low earners may also be better off over time.

But what to most people do when they get more money? They spend it rather than save it, and in a world of limited resources that causes prices to rise. There's a good chance things like accommodation, healthcare and education costs would increase faster than low income earners could cope with so in the short-medium term they could be worse off by the introduction of a low flat income tax rate.

Remember too that it's not just beneficiaries and unskilled labourers on low incomes - recent graduates and single-income families really struggle with high housing costs.

I think the Government is on the right track with the current tax changes - it would be good to see income tax rates drop a little quicker but at least they're heading in the right direction.
Brian said on 15-Jul-2010:
Riiight. So if more people have more money, they'll only spend it, which will cause inflation, which is bad. So therefore people having more disposable income is bad?

You should get a job with the Labour party :-)
salaries.co.nz said on 15-Jul-2010:
Ha ha, well I used to think exactly like you but have now lived through enough different situations in a number of different countries (with high and low tax rates) to realise that some protection is required for lower earners. + People need time to adapt.

Having more disposable income is great and should be a policy objective, but I'd be concerned about the short-term effects of any sudden large changes in income tax policy. Keep the tax cuts rolling in over time I say.
Brian said on 20-Jul-2010:
Like you from the sound of it, for over 20 years I've lived in many countries on all continents except South America, from the third world to the first, dictatorships, pseudo-monarchies, democracies and communism.

But like many educated and intelligent kiwis, you seem unaware of the sheer magnitude of the welfare problem we've created in NZ. This is what all of these discussions come back to in NZ, oh there's a certain element that needs to be saved from themselves, they're incapable of personal responsibility and they need our help.

And within reasonable bounds, I agree - surely thats one of the hallmarks of any civilised and well developed society.

But unfortunately, that's not what we've been doing. Did you know that beneficiary numbers have grown by THOUSANDS of percent since 1973 when the DPB was first introduced?

By our own creation, we've set in motion a massive wave of violent crime and social problems in NZ. We're only just beginning to see the tip of the iceberg. In 10-20 years time, violent crime in NZ will rise hundreds of percent from where it is now, as we witness the coming of age of an entire generation of children who've been suckled on the government tit from birth, never knowing personal responsibility or there own fathers. I'll leave you with a link to an article on this topic that sums up the sheer magnitude of this problem in NZ, which is the single most pressing economic and social development issue our country faces:
www.michaelbassett.co.nz/article_care.htm

Really I can't be bothered talking about it any more so I'll leave you to have the last word on this.

That we would agree to disagree is usually the inevitable conclusion of such discussions :-) I look forward to reading more of your site when time allows - thanks for your posts.
salaries.co.nz said on 22-Jul-2010:
Brian, I don't think our views of the goalposts are that much different - how we get to the goal is where our ideas differ.

Anyway, thanks for sharing your thoughts.
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