Editorial: Reform taxation, but don't tinker

OPINION: There isn't much profit for individuals in reducing one form of taxation they face and increasing another unless it produces some tangible advances in the way they are able to apply their income.

Cutting personal tax rates while increasing GST is the case in point. That's part of what the Tax Working Group has recommended – but the Government shouldn't seize on it unless it offers an improvement in the circumstances of low and middle-income earners, and that is yet to be convincingly shown.

The advantage of GST is that it's a consumption tax faced by everyone regardless of their income. It can't be dodged and, because the biggest earners are also the biggest spenders, it shares the taxation burden in an equitable way that other forms of taxation often do not. Finance Minister Bill English was startled to discover that a survey of 100 very wealthy New Zealanders found only half of them were paying the top tax rate, but it is widely known that such individuals do find legal ways around the taxation system that aren't open to wage and salary earners, and the working group is quite right to suggest that these rorts should be stopped. Bumping up GST is one way to have an effect on that.

However, if GST is a clean leveller, it is also unavoidable for those at the other end of the scale, where the spending is about paying for necessities rather than splashing out on luxuries. An increase from 12.5 to 15 per cent, as mooted, would have to be accompanied by a related reduction in income tax at all levels, not just for those earning over $70,000 and paying the top rate of 38 per cent. If there were cuts across the board, there is the possibility that such a move would encourage saving and investment. Otherwise it will achieve little except to complicate the lives of the poor and those on middle incomes.

It is important, though, not to focus only on GST and income tax when the working group's recommendations are evaluated. Its chairman, Victoria University professor Bob Buckle, says that the tax system is "broken and needs to be fixed". The balance is wrong and the system is unfair, he says. To repair it, the recommendations include slashing the top tax rate and reducing company tax, doing away with depreciation tax breaks on buildings, a new tax on residential properties and a land tax. Each has wide ramifications.

Mr English has begun work on his May budget and he will be tempted towards cutting tax rates – particularly at the upper end – if he can find ways to recover the money from elsewhere in the system. That's what the working group is offering. But this is not the time for tinkering. The key message in the group's report is not that GST could go up and personal tax rates come down, or that property investors might be getting away with too much. It is that the entire system needs reform. With 53 per cent of the total tax take coming from personal income tax and enough loopholes to allow those with the most money to get away with not paying as much as those who have much less, Mr English's task is bigger than simply finding ways to please National voters. It is not an exercise that should be rushed.

- © Fairfax NZ News

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