The Government's Tax Working Group is gearing up to take submissions on how to improve the structure and fairness of the tax system, and today it releases a backgrounder on the challenges facing the current system. Thomas Coughlan looks at what it might contain.
One of first acts of the new Labour-led Government was to set up its promised Tax Working Group, tasked with creating a more flexible and fair tax system.
Submissions to the Group are due by the end of April, but it is releasing a background paper today which will give an idea of the challenges that will frame its thinking as it pushes ahead with its program to research the current tax system and recommend changes to the Government.
As well as outlining the structure of the current system and the major challenges it is facing, the backgrounder will include five questions to guide members of the public in their submissions to the Group.
It will not contain any recommendations, but will include information and guidance for submitters, and questions to stir debate.
What we know so far
The chair of the Group, former Minister of Finance Michael Cullen, touched on some of the issues the Group will be considering in a speech to the International Fiscal Association earlier this month.
He said the terms of reference task the Group with examining ways to improve the structure, fairness and balance of the tax system, while "reaffirming the established New Zealand guiding principle that tax should operate neutrally and as much in the background as possible".
The Group will need to achieve this while staying within strict parameters set by the Government.
It will not consider increases to personal income or corporate tax rates, meaning it will not be recommending a return to the 39 percent top income tax rate that Cullen instituted as Minister of Finance.
Increases to GST are also off the table, although removing GST from certain items like feminine hygiene products, fruit and vegetables and "basic food" can be considered.
Crucially, it is also banned from considering inheritance taxes or a capital gains tax on the family home and the land under it).
Cullen said these parameters left scope for potential changes to financial transactions taxes, wealth taxes, equalisation taxes, through to "a more generalised capital gains tax", land tax (excluding land under the family home), and environmental taxes.
He indicated six aspects of the tax system that would come under scrutiny, as well as issues likely to be covered in today's paper.
One of the challenges facing the tax system is the erosion of the tax base due to changing demographics. As the median age creeps upward, there will be fewer taxpayers paying the superannuation and health costs of a growing number of retirees.
In his speech, Cullen mentioned the fact that Treasury predicts operating expenditure to rise to just below 40 percent of GDP in 2045 - far above the current norms. Cullen's gesturing to this problem was significant as, by his own admission, 2045 is outside the ten-year parameter of the Group. Cullen is also one of the architects of the New Zealand's Superannuation Fund, which now unofficially carries his name.
"Embedded within all of this are intergenerational equity issues which would require substantial retrospective - and thus impossible - action to address properly," he said.
Cullen used the frame of demographic change to move onto the subject of taxes on capital income, such as capital gains on investment property.
"Capital income may, of necessity, bulk larger in the future in total tax revenue," he said.
"This will be particularly so if the general trend continues for the returns to capital to grow faster than the returns to labour."
In his speech, Cullen also touched on changes in the nature of work, including the challenge presented by the gig economy. More people working irregular and uncertain hours makes tax assessment - and tax collection - difficult.
Cullen also indicated that growth in the Maori economy and greater emphasis on tikanga Maori would be considered.
A capital gains tax?
National's Finance spokeswoman Amy Adams told Newsroom that Cullen's speech and statements by Finance Minister Grant Robertson all pointed towards a capital gains tax recommendation from the Group.
"The indication is clear that this has been set-up to effectively deliver the government a recommendation with a capital gains tax," Adams said.
"But equally the comments by Michael Cullen are clear that he is looking for what he calls a more 'redistributive tax system'."
"You've got to look at where the burden falls. The top three percent of tax payers already pay twenty-four percent of tax," she said.
Issues of equity and fairness are central to the Group's task, and will be covered in today's background paper. In his speech, Cullen mentioned two "starting points" for considering equity in the tax system: vertical equity (meaning those who earn more should pay more) and horizontal equity (meaning those in similar circumstances should pay the same amount).
The concept of horizontal equity could see some interesting proposals from the Group, given the current mismatch between income from labour and income from capital gains within the current tax system.
Adams' argument about the top three percent could, of course, be turned on its head: the tax burden on a small base of taxpayers could also be a symptom of increasing inequality.
As Cullen touched on in his speech, New Zealand's tax base has steadily eroded since the 1980s, but this has been accompanied by a steady rise in inequality. The Gini coefficient, a measure of income inequality, rose from 0.27 in 1982 to 0.34 in 2015.
Adams agreed that taxation could be used to change behaviour, but said that, so far, it seemed any recommendations the Group might make would only discourage behaviour that is desirable.
"It could discourage savings, discourage investment and discourage people getting into the housing market, in terms of increasing housing supply," she said.
Adams said that she would like commitment from Robertson that the outcomes of the Group would be revenue neutral, saying she feared the extra taxes would be used to fund a Labour "shopping list" of spending promises.
The ultimate heresy?
Terry Baucher, director of Baucher Consulting, said he was looking forward to seeing the statistics in today's report, which would shed greater light on which parts of the system had greater weighting.
"What I'm hoping to see are some interesting statistics to look at about what parts of the tax system contribute how much tax," he said.
"The comment that really intrigued me was regarding the narrowing of the tax base since the 1980s," he said, "particularly given Cullen is a former Minister of Finance".
Cullen said in his speech that former taxes were unlikely to make a return, but Baucher was interested in the ways the tax base might be broadening in other ways.
"We could be broadening the scope of taxes. He talks about hypothecated taxes and maybe also environmental taxes," Baucher said.
Cullen also paid extensive attention to "ecological and environmental challenges" in his speech.
"The possible use of the system to change people's behaviour in ways which increase the wellbeing of all of us is very much on the agenda at the present time," he said.
This was a significant signal from Cullen that the Group could consider behavioural and hypothecated taxes related to the environment. Behavioural taxes, such as those raised on tobacco, are designed to change people's behaviour. Hypothecated taxes, such as road user charges, are designed to raise revenue on something to cover a certain cost associated with it. Road user charges are levied on vehicle owners for the maintenance of the roads they use.
New Zealand has historically made little use of these taxes as they can have an unintended distortionary effect, which any government will have to weigh-up should it choose to implement one.
"If one holds the view - as many do - that our current economic system is far from sustainable, fair, or ethically sound then the notion that a particular tax is distortionary might be a good, not a bad, thing", Cullen told his audience, joking that he had perhaps uttered "the ultimate heresy".
A while to wait
Believing that Labour's push for a capital gains tax (excluding the family home) was one of the reasons for the party's defeat in the 2011 and 2014 elections, Andrew Little ditched the plan before the last election. But soon after Jacinda Ardern took over as leader, Robertson stated he could not rule out the introduction of a GCT in Labour's first term, if it won the election.
The backlash was swift and sudden, with Steven Joyce immediately launching a campaign warning of Labour's "seven new taxes."
Labour was forced to pivot and concede that any tax changes proposed by the Group would not be implemented until the 2021 tax year, giving voters the chance to have their say on them in the 2020 election.
The Group is receiving submissions from the public on the bill until April 30 and will come back with an interim report in September ahead of a final report next February.