Editorial: Scaring the horses

OPINION: Even the most strident critics of the current Government would have to give it credit for one thing; it is not afraid of tackling the trickiest of issues.

One of the hardest nuts to crack is the reform of our tax system, which the Government, to its credit, has not shied away from.

The potential for political suicide in the suite of possible reforms unveiled this week by the Tax Working Group was boundless, and the Government now faces the tricky task of picking a safe route through the tax minefield.

The working group has concluded that the tax system is broken, and needs fixing. The previous Government was content to tinker while the system creaked along, but this is clearly no longer an option.

The suite of possible reforms include increasing the rate of GST from 12.5 per cent to 15 per cent, cutting personal income and company tax rates, a land tax, and cracking down on tax breaks for landlords.

Central to what the Government decides to do has to be the concept of equity, and making sure the changes do not penalise the vulnerable, and in particular lower income families.

Cuts to the top rates of tax reward the well off, and will no doubt be a vote winner with those earning over $70,000.

But an increase to the rate of GST – a consumption tax – penalises everyone without exception. Those on higher incomes are less likely to notice the increase, while the nation's's strugglers will.

The other concern for those on low incomes is the likely increase in rentals which will logically follow the proposed reforms of property taxes.

The working group has targeted housing for very sound reasons – the Kiwi obsession with property investment at the expense of other types of saving has been a handbrake on our economy for too long.

The system has been skewed for a long time by our tax laws that reward property investment and divert much-needed capital away from the sharemarket and other forms of investment. A crackdown will be as unpopular as it is necessary.

Another potential vote loser is the group's proposed land tax, which will send a shudder up the spine of the farming sector. This sector is the backbone of our economy, and it would be a brave Government that introduced a punitive tax on rural New Zealand. Diverting investment away from farming would be economic suicide as well as politically foolish.

If the aim of the working group was to scare the horses, it has succeeded. The Government now has a mountain to climb to find a politically tenable and equitable combination of tax reforms.

- © Fairfax NZ News