One thing is uncertain in life: taxes. You can never be sure what the government will do to you next year.
Where the cabinet goes on tax will say a lot: how strategic it is, how adventurous, how well it can pick its way through intellectual complexity, how prepared it is to face down vested interests and how good it is at selling reform.
Tax will be a core ingredient of any policy recipe for catching Australia in wealth per person by 2025 — on which Don Brash’s taskforce, charged with telling us how to get there, will make a first pronouncement today.
In political debate tax usually comes down to a four-letter word: less. With the budget in deep deficit, the debate is about an even smaller word: the mix.
“Mix” is a deceptively simple word — as a conference tomorrow called by Bill English’s tax working group of academics, economists, tax professionals and officials will demonstrate.
The group has taken seriously English’s instruction to assess all options. The papers from its five sessions amount to a textbook on options, complexities and interconnections.
One big lesson is that there is no one golden mix. Another is that a tax’s equity and efficiency can change as circumstances and social and economic pressures change.
Thirty years ago consumption taxes were mostly thought unfair to the less-well-off — that is, regressive. But GST in its near-pure New Zealand version has proved very efficient at gathering revenue, which has enabled cuts in other taxes (Working for Families is an income tax cut). Also, the working group says, many on low incomes don’t stay there and some are in households with high combined incomes.
Moreover, steeply progressive income taxes aimed at advantaging the less-well-off invite those who can afford accountants and lawyers to avoid them. Then the less-well-off pay more in other taxes.
And if high personal and company taxes discourage investment in jobs and productivity improvements, does that help the less-well-off? Labour and business are “mobile” and tax is a factor in decisions where to work and invest.
Land is immobile. So, whereas a century ago land tax was dropped in favour of income tax, a working group paper argues strongly to go back the other way.
On business tax, New Zealand, thanks to Michael Cullen, does better than Australia in a recent PriceWaterhouseCoopers study for the World Bank. It rated New Zealand ninth easiest country in which to pay business tax and in compliance time — Australia was 47th and 24th respectively. In total tax take from business Australia was 127th out of 183 countries studied and New Zealand 53rd.
But why invest here when 52 countries tax less? Yes, there is a stable political system and the rule of law, access to resources and land (a growing Chinese factor). But “headline” numbers also carry weight.
Thus Australia’s lower personal income tax rates (on higher wages) attract New Zealanders, even though Australians pay higher fees, charges and social services costs which our taxes pay for or moderate and even though Working for Families cuts the tax burden for large numbers in the workforce.
In any case, a working group paper says, Working for Families distorts the tax scales and makes the system less efficient. Would it be more efficient to help working families with children via welfare “transfers”?
The lesson is that the more you load on to the tax system, the more burdensome it is on officials — and on taxpayers. A tax that is easy to comply with is more likely to be paid, the working group says. Chasing non-compliers eats up a lot of tax officials’ time and money.
Ideally, working group papers imply, a tax should tax all items in a category. GST very nearly does. Income tax doesn’t. Most income from capital gains is tax-free, which, the papers show, distorts investment patterns and harms economic development and efficiency. Trusts and other devices, much used by the better off, are taxed less or not at all. Overall rates could be lower but for such dodges.
And what about new taxes? The working group ruled “green taxes” off its agenda but in October the Treasury did a brief scan. The argument for green taxes is they tax “bads” and income tax taxes “goods”, like work.
All this and far, far more will go to English soon in a report (to be made public early next year).
What will the government do? John Key has ruled out or appeared to rule out a number of options in advance. Some ministers say the economic crisis has passed and the system isn’t broken.
Treasury Secretary John Whitehead half-agreed when he told the working group in June that, unlike in the 1980s, there is no immediate crisis and the system is not fundamentally broken.
“But,” he added, “over time pressures will increase and options narrow.”
Insiders say the group has shown officials the system is actually broken. That is poor economics. Key has the personal mana to drive deep and wide reform if he chooses. Tomorrow’s conference might offer him that choice.