A closer look at the Tax Working Group
Today's Business View columnist is New Plymouth's Brent Hulbert , a partner with chartered accountants PricewaterhouseCoopers.
Column: Business view
The Tax Working Group, which released its findings last month, worked to a brief to look at ways to boost the efficiency of savings and investment decisions and provide people with better reward for working, spread the tax base more fairly and make the tax system easier to comply with and administer.
The TWG had to consider tax reform on a fiscally neutral basis - in other words so the total tax- take would remain the same.
There has been much criticism in the media, and by special interest groups, of the report. This criticism has often been along the lines that taxes will increase and that this is not fair.
However, in fact, it is very clear that the TWG's recommendations are designed to maintain the same total tax take, with some redistribution for fairness, efficiency and productive reasons.
So let's take a look at a few key areas and some of the criticisms:
Rental property investment
One of the TWG's most important proposals is taxes on land ownership, particularly residential property investment.
The TWG has identified that $200 billion is invested in New Zealand residential rental property, four times the market capitalisation of all firms on the NZX. It is astounding to learn that this investment in 2008 generated a net tax refund to investors of $150 million. Is that fair to the salary and wage earners and productive business whose taxes are subsidising $200b of property investment?
Theoretically, a capital-gains tax would be the best economic way to extract a fair share of tax from this investment. In practice it is probably unworkable. Hence the land tax and risk-free rate of return recommendations.
Tax rates for different entities
Many business people and investors enjoy an income tax rate advantage over ordinary salary and wage earners.
Often business people are able to limit their tax rates to 30 per cent (in companies) or 33 per cent (in trusts). However, salary and wage earners are subject to a top tax rate of 38 per cent. Is it fair to tax a salary and wage earner at a higher rate than a business person or investor?
GST rate increase
One suggestion is to increase the GST rate to 15 per cent. GST is a very efficient method of collecting tax.
It is difficult to avoid, and relatively easy to administer.
The report acknowledges that lower-income earners would need to be compensated if there was an increase in the GST rate.
We need to make the tax system fair for all by spreading the tax burden across different types of taxpayers and different types of investment in a fair and consistent manner.
I think the report does an admirable job of analysing this in a holistic manner.
It's easy to find those who don't like individual recommendations - those who are not paying their fair share at present will be particularly vocal, but it pays to stand back and look at the bigger picture.
And remember, the report is limited to an outcome which doesn't change the current total tax take.
Is the current level of total taxation appropriate?
Well, that is a whole other debate . . .
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