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.