Bill English's really taxing question

The knee-jerkers are out in force, fighting tax changes. They are premature.

Bill English’s “working group” of academic economists, lawyers, accountants and businesspeople is still to get to its core question. Even then it is unlikely to canvas all possibilities.

English set up the group in May. He challenged it to redesign the tax system from the ground up and from the inside out.

So far it has had two sessions, on the fiscal and economic backdrop and on personal tax, GST and transfers.

The next session, in September, is the most important. That is on the options to broaden the tax base, jargon for widening the range of things and/or people that are taxed so rates overall can be lower.

Three interlocking principles underlie the group’s approach: tax should be fair, efficient and sustainable. Taxpayers should feel they are paying a fair share and everyone else is, too. The tax system should cost no more to run than necessary and should contribute to productivity growth. And it should survive over time with limited need of repair.

To meet these principles the structure should be coherent, should have “integrity” — there should not be incentives to avoid or minimise tax, for instance, by channelling income through trusts, as large numbers have done this decade — and should be simple to administer and comply with.

During this decade tax changes have chipped away at coherence, integrity and simplicity. The top income tax rate was raised, Working for Families added complexity and high marginal tax rates for some, special rates were set for some long-term saving and KiwiSaver added more complexity.

In addition, aggressive bracket creep lifted the proportion of income ordinary folk paid in income tax.

Add that many other countries, including those we most compare ourselves with, have cut some tax rates, notably on personal and company income.

That changing relativity reduces New Zealand’s attraction as a place to earn income and invest. That is an ingredient, for example, in the large exodus to Australia (despite offsetting tax, fee and regulatory factors).

Moreover, that comparison is with OECD — rich and mainly “western” — economies. Over the coming decades, the comparison will increasingly be with east and south Asian economies, where taxes are generally lower and whence we draw a large proportion of the immigrants we need to plug the holes emigrants leave in the workforce.

So the tax system needs revision. The group and the Treasury have cast a wide net.

For example, if income tax is to be fair, logically all income must be taxed. That includes all investment income and income from capital gain. Hence the group’s and the Treasury’s interest in that tax source.

The mistaken reason the Greens advance for taxing capital gains is that it would have stopped the house price bubble. The evidence from capital-gains-taxing countries which have had house price bubbles is that it has limited effect. The real reasons are efficiency and fairness.

Next, note the global movement of people, capital and finance. There is a strong argument for taxing immobile factors, such as land and spending, and not internationally mobile ones, such as company and personal income and investment.

Thus the group has explored a shift in incidence of tax from incomes to property (its focus is actually land, an option favoured by some, but regressive) and spending, by way of a rise in GST. An additional reason is that GST is avoidable only by not spending, by contrast with well-off people’s options to minimise income tax.

There was a chorus of complaints last week that raising GST would disproportionately hurt the less-well-off. And it would. But over their lifetimes many less-well-off people lift their incomes. And in any case the group argues, it is better to compensate the less-well-off through spending measures than by manipulating the tax system.

But is the group exploring all options for broadening the tax base? No.

It will not examine the potential to shift tax from desired activities (earning income and doing business) to undesired ones (pollution, damage to health and plunder of the commons) — that is, taxing “goods” less and taxing “bads” more, as the Greens put it. (Tobacco and alcohol taxes are existing examples of taxing “bads”.)

The group has an excuse: there isn’t time. It is supposed to report within the next six months. In any case its mandated perspective is the “medium term” — three to five years — not the long term.

That doesn’t look like a complete attempt to meet the “sustainable” principle. And watch the shuffling of feet by John Key and English every time a tax option surfaces in the media. English, dealing with a yet-to-be-convinced cabinet, last week even pointedly said he might do nothing.

If so, Key will not have the “world class tax system” he says he wants. That requires far-sightedness and political will. Next year’s budget will tell us how much he and his cabinet have of either.