Editorial: Best tax brains are worth listening to

OPINION: The tax working group established by the Government doesn't expect to report its findings before Christmas, but it is clear already that ministers will get more than they bargained for.

The group, set up to explore ways of aligning the top personal tax rate with company and trust rates, has carried out a root and branch review of the tax system. Its findings make for sobering reading.

The system is inefficient, counter-productive and unfair. The tax burden is being disproportionately borne by wage and salary earners who cannot restructure their affairs to take advantage of vagaries in the system.

The high proportion of the total tax take gathered from company and income tax increases the incentive for individuals and businesses to shift overseas. And the differing rates at which earnings on different types of investment are taxed is distorting investment decisions.

In the words of stock exchange chief executive Mark Weldon, New Zealand's "current polyglot higgledy-piggledy tax system drives capital away from the productive sector".

The working group won't produce a single solution but, at a conference in Wellington last week, members outlined a range of options that could be used to align the company rate (presently 30 per cent), personal rates (38 and 33 per cent) and the trust rate (33 per cent), or, alternatively, to cut the company rate more sharply.

The options include a capital gains tax, a land tax, increasing the rate of GST from 12.5 per cent to 15 per cent and assuming a risk-free rate of return on rental housing of up to 6 per cent and taxing landlords accordingly.

The group's goal is not just to broaden the tax base but to make the system fairer and more efficient and to reduce the incentives for people and businesses to shift overseas by taxing things that are fixed, such as land and buildings, rather than things that are mobile, such as capital and labour.

A property or land tax would have the added benefit of encouraging investment in productive enterprise by making investment in property less attractive.

Whatever the working group eventually decides, its recommendations are likely to draw howls of protest from the asset-rich and cash-poor who have arranged their affairs to reduce their taxable income.

However, the Government, which has already dismissed out of hand the Brash task force recommendations to close the economic gap with Australia, does not have the luxury of being able to pander to every interest group.

New Zealand is not operating in isolation or, as Mr Weldon put it, "we don't draw the confines of our own sandpit". The country is competing for capital and labour in a global market. If the tax environment is not right, New Zealand will slip further behind its peers and lose more people and capital overseas.

The best tax brains in the country have given the Government a chance to make the system fairer and the economy more efficient. Doing so is in the long-term interests of everyone. The Government should grasp the opportunity.

- © Fairfax NZ News

Newest First

Oldest First