Tax much more than raising revenue

TAXING TIMES

MURRAY MCCLENNAN
Last updated 13:29 30/07/2014
Taxing Times
Taxing Times is a weekly column that looks at various aspects of tax and money management.

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Why do governments impose tax? The following draws on an article by Richard Murphy, of UK Tax Research, on why it is necessary for governments to impose taxes.

The three main reasons why governments impose tax are: Raising revenue;

Redistributing income and wealth; and

Reorganising the economy.

The primary reason why governments impose tax is to raise revenue. Some countries with large oil or other mineral wealth derive royalty or other income and do not impose taxation. Most countries, however, have taxation as the main form of government income.

In New Zealand, government income is derived from:

Taxation.

Dividends from state-owned enterprises.

Other sources such as royalties.

Collectively, all taxes constituted nearly 68 per cent of the government's revenue in the year to June 2013. The total tax take of $58.6 billion was made up of:

GST: $15b

Income tax paid by individuals: $26.3b

Company tax: $9.3b

Other (customs duty, excise duty etc): $8b.

Taxation represents 27.6 per cent of New Zealand's gross domestic product (GDP).

Treasury forecasts that taxation as a percentage of GDP will need to increase as the population ages.

Government and its agencies Treasury and Inland Revenue continually grapple with how to maintain and, ideally, increase the tax base.

Some commentators and political parties argue that a capital gains tax (CGT) is the answer to our tax problems. In my next article I will discuss CGT in greater depth; however, I am not in favour of a separate CGT.

Rather, I would expand the definition of income to include gains that are now tax-free, bolstered by an annual land tax; but more about that next time.

In designing a tax system, regard must also be given to income redistribution and reorganising the economy.

I accept that most people focus on the amount of tax paid, or rather the amount of income left after tax is deducted, rather than the design and maintenance of the tax system. However, if there is a perception that the tax system is unfair, some people will react by:

Avoiding or evading tax.

Investing on the basis of tax rather than productivity.

Emigrating.

I'd rather have a general acceptance of a tax system with a wide base and few exceptions that helps foster sustainable economic growth. The choice, collectively, is ours.

Murray McClennan is the principal of Tax Central Ltd, a specialist tax consulting firm. Email taxcentral@xtra.co.nz to contact him. The above comments are of a general nature only and are not a substitute for specific advice.

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