Editorial: Slow down on tax reforms

OPINION: Changes in government policy always make somebody worse off, and we quickly heard who some of these people would be after the Tax Working Group published its raft of recommendations.

Landlords were concerned about proposed property tax changes; low-income people fretted at the prospect of GST being raised; Thames-Coromandel Mayor Philippa Barriball was anxious about a tax on second properties forcing baches out of the reach of ordinary Kiwis.

Farmers had a reasonable grouch, too. The Government aims to rebalance the economy in favour of the productive and tradeable sectors, but a tax on land would hurt the agricultural sector, increasing farm costs and reducing land values.

A critical issue is the tax working group's finding that our tax system is "incoherent, unfair, lacks integrity, unduly discourages work participation and biases investment decisions". In short, is it a crock?

Following the tax reforms of the 1980s, our tax system was widely regarded as one of the least distortionary in the OECD, and the Tax Review led by businessman Rob McLeod in 2002 found it was in good shape.

Several dubious tax measures were introduced under the Clark Government. The top personal income tax rate was raised from 33 per cent to 39 per cent (although the Government did not need extra cash) and subsequent measures further complicated the tax system.

Arguably, they also were contrary to an aim to lift the country up the OECD income per capita ladder.

Business Roundtable executive director Roger Kerr nevertheless contends that the structure of our tax system still compares favourably with many others and challenges the tax working group's claim we have a "once-in-a-generation opportunity" to redesign the tax system.

Moreover, he notes that the group was split on most of the main options it considered, such as a capital gains tax, the taxation of rental property investment, a land tax and a GST/income tax switch.

This dissent should cool whatever ardour there might be in the Beehive to rush to improve the tax system.

Another reason to look hard at the report is that the working group was constrained from taking a more comprehensive look at the tax system by not being able to examine other tax options.

The merits of carbon or pollution taxes were ruled out of consideration, although these would pave the way for taxing things we don't want – emissions and industrial waste – instead of things we do want like hard work and enterprise.

Above all, income alone does not influence whether people want to live and work in New Zealand. Quality of life is a dimension, too.

If taxes were spent on reducing urban congestion, for example, living in a city like Auckland would be more attractive than living in a more congested overseas city, even if the wages were less.

Tax reform and the prospect of tax cuts, in other words, can't be considered without examining the obverse side of the coin: Government spending and the quality of it.

- © Fairfax NZ News