Fair enough? How should New Zealanders be taxed?

Monday, 16 April 2018, 4:19 pm
Article: HiveMind

Scoop and PEP invite you to share your issues, ideas and perspectives on the NZ tax system with other New Zealanders using Scoop’s HiveMind.

This Tax HiveMind is intended to complement and feed into the review being run by the Government-appointed Tax Working Group (TWG), which is looking at the fairness, balance and structure of the tax system with a 10-year time horizon. The TWG has invited the public to send in written submissions, which close on 30 April.

We at Scoop and PEP believe that an issue as important as the fairness of the tax regime should be open for discussion, debate and dialogue. Unfortunately, a written submission process just doesn’t encourage the kind of public exchange we think is necessary in a well-functioning democracy.

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Holly Sklar: “Taxes are how we pool our money for public health and safety, infrastructure, research, and services--from the development of vaccines and the Internet to public schools and universities, transportation, courts, police, parks, and safe drinking water”.

Mark Twain: "What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin."

You might think that tax rates should be kept low so that hard work is fairly rewarded or that the current tax system, which raises most of its revenue from individual income tax, from the goods and services tax (GST) and from company income tax, unfairly affects low and middle income earners who are less able to afford these taxes than high income earners. We hope you will take this opportunity to explore ideas of fairness with others.

Your concern might be about the state of NZ’s public services and infrastructure, and our ability fund and maintain - let alone improve - them when we have an aging population, changing weather patterns, natural disasters, disruptive technologies - and that’s to name just a few of the challenges. If so, how might the tax system need to change, if at all?

You might also want to explore whether a more comprehensive approach to taxing capital gains or more taxes aimed at changing behaviours (e.g. a sugar tax) should be considered.

While the TWG’s Terms of Reference mean that it will not be considering a number of issues, including how abatements makes it difficult for welfare recipients and low-income earners to avoid poverty and debt - you are welcome to raise this issue and any other tax issue as part of this HiveMind.

The Tax Working Group (TWG) has structured its public consultation around the following questions:

1. What does the future of tax look like to you?
2. What is the purpose of tax?
3. Are we taxing the right things?
4. Can tax make housing more affordable?
5. What tax issues matter most to you?

It has made ‘fact sheets’ and videos for each of these questions. The consultation is also supported by a background paper and other supporting data. You can access these and make a submission at https://taxworkinggroup.govt.nz/have-your-say-future-tax. The TWG’s submission process closes on 30 April.

The following text re-presents the section on the design of the current tax system from the TWG’s Submissions Background Paper and consolidates the fact sheets prepared for each of the TWG’s 5 questions.

The design of the current tax system

New Zealand currently has a ‘broad-based, low-rate' tax system. The Government raises about 90% of its tax revenue from three tax bases:

• Individual income tax
• Goods and services tax (GST)
• Company income tax.

There are very few exemptions to these three taxes (which is why our tax system is described as ‘broad-based'). The benefit of having a broad base is that it allows the Government to raise substantial revenue with relatively low rates of taxation. Overall, the current level of tax revenue, including local government rates, is equivalent to 32% of gross domestic product (GDP), which is slightly below the OECD average of 34% of GDP.

New Zealand's tax system is distinct in other ways. Unlike many other countries, New Zealand does not generally use the tax system to deliberately modify behaviour - with the notable exceptions of alcohol and tobacco excise taxes, which are intended to discourage drinking and smoking.

New Zealand's approach to the taxation of retirement savings is also distinct. The tax system does not offer large concessions for retirement savings; retirement savings contributions are taxed when they are made and as investment income is earned, rather than when the savings are drawn down in retirement.

The Group's work provides an opportunity to examine whether a broad-based, low rate system remains fit-for-purpose, and whether there is a case to depart from the internationally distinctive approaches to behavioural taxes and retirement savings. It is also an opportunity to explore whether there is a case to broaden the base further, for example with new taxes such as a comprehensive capital gains tax (excluding the family home).

Changing Demographics

There will be fewer working age people to pay for the support of a larger retired population. Over time taxation of investment income may become more important than taxation of wages, and more working age people will be Māori, Pasifika or Asian. What role can tax play in helping us manage this change?

Te Ao Māori and the Future

The Māori economy is growing - between 2010 and 2017, the Māori asset base grew from $36.9 billion to $50 billion. Māori have a thriving entrepreneurial base, with around 8,500 Māori owned businesses and 21,000 self-employed Māori across Aotearoa New Zealand. Māori values such as manaakitanga (the care of land and each other), whanaungatanga (wider kinship ties) and kaitiakitanga (guardianship and sustainability) drive business decisions. How can the tax system support this growth?

The Changing Nature of Work

We are seeing a growth in the ‘gig economy’ - where workers have a less regular income, fewer working hours and different conditions. This could have an effect on the collection of taxes as this would make collecting income tax on a pay-as-you-earn (PAYE) basis harder. A more internationally mobile and ageing workforce could also mean work looks very different in the future. Can tax play a role in managing this change?

Environmental Challenges

New Zealand’s unique ecosystem makes an important contribution to our economy and quality of life. However, this could be under threat when you consider that 72% of native freshwater fish species are threatened or at risk of extinction; emissions of major air pollutants have increased; and we have the second highest level of carbon emissions per GDP in the OECD. Should current polluters incur the cost of any future financial loss being caused by their activity? Should they also pay for a possible loss in our future quality of life?

Technology

The digital revolution is already impacting many parts of New Zealanders’ lives. Online platforms have made it easier for people to rent out their car or home. New technological changes could also mean tasks that were once done by people are performed by machines. How can the tax system be flexible enough to keep collecting revenue whatever changes come?

Improving Productivity

The productivity of the New Zealand economy is well below leading OECD countries. At the same time, New Zealand’s company tax rate is the tenth highest in the OECD. It is important that the tax system promotes the right balance between supporting the productive economy and the speculative economy. Are the current settings working for New Zealand?

Inequality

It’s not clear whether income and wealth inequality is increasing, decreasing or staying the same. It all depends on what you measure. But public concern about inequality is rising and is likely to continue to rise. Taxation plays a major role in redressing inequality. How could it be done better?

Globalisation

Some multinational corporations pay little or no tax anywhere in the world. This is particularly a problem in the digital economy, where goods and services can be sold to New Zealanders from anywhere. This has to be addressed internationally, but are there issues that we in New Zealand should be particularly focused on?

Questions

• What do you see as the main challenges and opportunities for the tax system? How should it change to meet them?

• How much does our tax system need to change to be ready for the future?

Health, education, a justice system, providing a minimum standard of living for its citizens and maintaining national parks are just some of the things a government provides through taxes.

In New Zealand we try to keep our tax system simple, while ensuring it is still there to pay for the things we need to function as a society. We consider that a good tax system should collect taxes with minimum disruption to people and businesses and ensure that those in similar circumstances pay the same amount.

Should our tax system just be as simple as possible or should it do more to incentivise certain behaviours we want to see? The wellbeing of a country is not just about the finances but also about how we live together and protect our natural resources for our children.

We don’t generally use our tax system to incentivise or discourage certain behaviours. The two exceptions are tobacco and alcohol.

Other countries try to incentivise behaviour based on one of two ideas:

• The first is when an activity has a social cost like the pollution of public rivers. Most economists agree that those whose activity create a social cost should be made to bear those costs. It’s not always easy to do but NZ doesn’t have many taxes like this.

• The second is when the activity is harmful to the individual, and for some reason the individual is not able or willing to act in their best interest. The recent debate on a sugar tax is an example of this. Taking GST off healthier options is another way of doing it. Again, it’s not always easy to know that implementing such a tax would have the desired effect. But NZ does very little of this compared to other countries.

If we do want to use tax to incentivise behaviour, then we need to consider two things. First, how much will it increase the complexity of tax for businesses and people? And second, if it reduces the tax revenue, how will that be made up?

So, should New Zealand use the tax system to encourage better choices and discourage harmful ones?

Around 30% of New Zealand’s GDP goes to the Government in taxes. That’s a bit lower than the OECD average. But where does it come from?

New Zealand has the 5th highest revenue from income tax in the OECD (as a proportion of GDP). That’s despite our maximum income tax rate, 33%, being one of the lowest. That’s because the maximum rate kicks in at a fairly low income, and every dollar of income is taxed, whereas many countries have a tax-free threshold.

New Zealand has the 5th highest revenue from company tax. In fact, it’s the highest before consolidated reporting. Our company tax rate of 28%, while above average, is only the 10th highest in the OECD. This is partly because there are relatively few exemptions allowed to companies in NZ.

New Zealand leads the OECD in collecting the most revenue from GST even though our GST rate of 15% is relatively low. This is because it is collected from nearly everything, whereas most countries have GST on some things and not on others.

So how is it that our overall tax revenue is relatively modest, while our collection from Income Tax, Company Tax and GST is so high?

Partly, that’s due to what we don’t tax.

We don’t generally tax the money people make from holding onto assets that increase in value over the long-term. Property is a prime example, but the money someone makes from a company they’ve built up isn’t taxed either. We also don’t tax them if their art collection sells well. This is what’s called a capital gains tax.

We don’t have a separate payroll tax to pay for social security measures like unemployment benefit, pensions or universal healthcare.

We don’t tax charities, even if they make a profit through owning businesses. We don’t generally tax people just for owning stuff (apart from local rates). We don’t generate revenue through a land tax, a wealth tax or when it is given to others through a gift tax or estate duty.

And we don’t tax companies who don’t really do anything in NZ but whose goods are sold here. That’s completely normal, as almost no country does. But maybe it no longer suits the reality of the digital world.

So, have we got the mix right or should we start taxing some things more and other things less?

It is widely understood that New Zealand has a housing affordability problem. Rents are rising at a faster rate than average incomes and house prices are speeding even further ahead. This disparity is particularly felt in urban areas – including Auckland, Hamilton, Tauranga, Wellington and Christchurch.

What housing is currently taxed?

Rental property investments are taxed on the basis of the income received (minus expenses). Any capital gains on the property’s value are normally untaxed. Rates paid to local councils are paid on both rental and owner-occupied housing.

Any profits on non-owner-occupied properties bought and sold within two years are currently taxable under the bright-line test. The government is looking to extend the period to five years.

Property investors who buy housing with the intention of selling property for a profit are also taxed – although in practice this is difficult to enforce due to the subjective nature of intention.

The Government is also looking to stop property investors from using tax losses on rental properties to offset their tax on other income.

What more could tax do?

In some ways property remains under taxed compared to other investments. For instance, any profits from the sale of a long term property investment generally isn’t taxed.

How do you think the tax system affects housing affordability for owners and renters? Is there a case to make changes to promote greater housing affordability?

The family home is off the table for any new property taxes but should New Zealand have a capital gains tax for other types of housing? What features would it have?

We will face a range of specific challenges over the coming years and our tax system can play a role in helping us meet them.

Capital Gains Tax

People often make money by buying and selling things that increase in value. Sometimes that money is taxed, sometimes it isn’t.

Things where the capital gain is taxed:

• Some investments, such as gold

• Shares if bought and sold regularly

• Property sold within two years, or by a developer or dealer

Things where the capital gain isn’t taxed:

• Some shares

• Rental properties held for the long-term

• The family home (which isn’t included in this review)

• Some vintage cars, fine wines, art, and anything else that might go up in value over time.

A Capital Gains Tax would mean some people pay tax on what they own, just as others pay tax on their wages or businesses income. For example, should they pay tax when they sell the asset or every year as it increases in value or when it is given away or go overseas? What if the vintage car, fine wines or art goes down in value: should the government give them a tax refund? What if it’s something really volatile like a crypto currency?

Land Tax

A land tax is when you pay some tax every year based on the value of the land you own. This is similar to local government rates (although this review does not include a tax on the family home).

But it also has its problems:

• If the tax doesn’t cover all land, then it makes investing in land that isn’t being taxed more attractive. That might not be desirable.

• People who hold a lot of their wealth in land will be taxed more than those who have wealth in other things, like gold or shares. These might not be the people we want to tax more.

• Land ownership isn’t always simple. Where land is owned collectively, who would own the land for tax purposes? Just because someone has land doesn’t mean they have the cash to pay more tax each year.

Progressive company tax

Some countries have a lower tax rate for small companies compared to large. These countries include Australia, although they’re about to change it back so the tax rates are the same.

It would be nice to help small companies to grow. NZ has a lot of them, and we tend to like them. But if they’re doing something right and growing to be big, should they be ‘penalised’ with a higher tax rate? And some big companies don’t make much profit, while some small companies make a lot of profit. Should they pay a lower tax rate anyway?

Tax and the environment

Through tax you can make some things more expensive. Like polluting the environment. Economists agree that if an activity is causing a cost to society, it should be taxed. So taxing polluters arguably makes good sense.

But sometimes it’s hard to work out what the cost of pollution is. What is the cost to society if one particular river is no good for swimming? What if it’s in an area where no one lives? Or in a popular tourist area?

At the same time, we can make some activities that are good for the environment relatively cheaper, like planting trees and driving electric cars. But who determines what is ‘good’ and how much cheaper it should be?

Should GST be on everything?

Lots of countries don’t have GST on items that are deemed to be healthy or necessary, like fresh fruit & vegetables or sanitary items. That sounds good but it gets complicated:

· Should apples have GST? Pineapple? Grapes? Avocado? Does it depend on the sugar and fat content of the fruit or vegetable?

· In the UK, the Court of Appeal overturned a High Court decision that Pringles were not crisps. Crisps are taxed in the UK, other food generally is not.

· Should we pay GST on tomato sauce? What about tomato soup? Tomato soup with chunks of beef? Low sugar tomato soup with celery?

How do we choose what to apply GST to and not?

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