The Tax Working Group has released its Future of Tax background paper, which will guide submissions to the group. The paper is divided into seven sections and considers everything from the current state of the tax system, the challenges it faces in the future, and what might be done moving forward.
The paper was largely free of surprises. Its content followed signals its Chair, Sir Michael Cullen made in a speech to the International Fiscal Association earlier this month.
He outlined six trends that are likely to have implications for the tax system: demographic change; the nature of work; technological change; the growth of the Maori economy; international tax trends and ecological and environmental challenges. The paper yesterday added two further areas: growing concerns about inequality and the impacts of globalisation and changes in its patterns.
Observers contacted by Newsroom yesterday were keen to see how the document steered discussion on tax through the questions that it asked and the data that it used to supplement and steer the discussion.
Issues like the sustainability of the tax system given the burdens of the ageing population, the proportion of tax collected as income tax and GST, and housing affordability are discussed. The possibility of introducing taxes to effect change in the area of the Environment will also be considered.
The sustainability of the tax base in the face of an ageing population loomed large in the document. It notes that primary expenses exceeded primary revenue in 2015 by 0.5 percent (a surplus), but by 2030 there would be a deficit of 1.2 percent, blowing out to four percent by 2045. This suggests the importance of increasing the overall tax take to compensate for the increased revenue needed to pay for an ageing population.
The statistic’s inclusion is significant as the Group’s terms of reference confine it to looking at the next five to ten years and ask it to look at ways of maintaining revenue sufficient to fund expenditure at historical levels of 30 percent of GDP.
The paper also looked at where the tax burden falls and which taxes make up the largest proportion of revenue. Individual income tax makes up 40.2 percent of revenue, whilst GST (including customs GST) accounts for 31.4 percent of revenue in 2017.
This is significant for two reasons. Increases to both taxes have been explicitly ruled out by the Government, meaning that changes will need to come from company tax (16.3 percent) and other taxes (12.1 percent) that account for the other 28.4 percent of revenue. A tax switch, meaning one tax being cut to compensate for the raising of another, is also a possibility.
The group has also said that changes to the way people work and changing demographics mean that income tax’s share of overall revenue is likely to decline. Expect the group to look at new taxes (potentially a capital gains tax) that will compensate for this decline in revenue.
More to follow...