Tax may boost productivity

OPINION: As you will know from earlier articles, a tax working group is considering options for the tax mix, writes Murray McClennan in this week's Taxing Times.

Already there has been discussion about raising the rate of GST and the possible introduction of a capital gains tax or perhaps a land tax.

Two years ago Arthur Grimes, an economist, suggested the following tax mix:Company tax of 20 per cent.

A top personal tax rate of 20 per cent (the initial $9500 would be tax free, income between $9500 and $38,000 would be taxed at 10 per cent). GST at 15 per cent.An annual land tax of 1 per cent.

I believe that this would be better than the current "tax mix".

The only difference is that I would favour a specific tax on realised capital gains as opposed to an annual land tax.

Some European countries have both a capital gains tax and a wealth tax (similar to a land tax); it might be possible to have a mixture of both.

The theory is that the overall tax mix would encourage overseas and domestic investment in businesses, with a resulting increase in jobs and productivity.

That is, current "high income tax rates" are a disincentive to work or undertake a business and favour investment in less productive assets, such as rental properties.

Designing a fair tax mix is difficult, but a viable tax system must be seen to be fair.

Continued voluntary compliance with tax laws requires a high degree of perception that the system is fair. A change in the tax mix may be needed to retain the perception of fairness.

Typically any new tax is met with mistrust. The advantage of an existing tax is that taxpayers are used to it. Any wholesale change to the tax mix may require a great sales pitch and co-operation from both National and Labour.

» Queenstown-based Murray McClennan is a tax director at WHK Cook Adam Ward Wilson.

- © Fairfax NZ News

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