By Alex Tarrant
Whether New Zealand should introduce a land tax or more comprehensive capital gains tax is again under discussion, this time by an external panel assessing Treasury’s long-term projections.
And while Treasury argued a land tax would be the most economically efficient option for raising the tax take, the panel appeared resigned to the fact politics might get in the way of implementation.
Concerns were raised about how a land tax would be interpreted, and of political pressure for exemptions, which ultimately led to land tax being discarded in the 1980s.
The panel said returns from a capital gains tax could be volatile, and that there would be challenges administering a sound CGT framework.
It also noted that the introduction of a capital gains tax on owner-occupied housing would have implications for lower and middle income individuals as relatively more of their wealth tended to be held in their homes.
Given these perceived problems, the panel noted Treasury saying that, of the existing tax base, the least inefficient way of increasing the tax take would be by raising GST.
The Long-Term Fiscal External Panel was set up to test Treasury’s key assumptions and analysis as Treasury formulates its next long-term projections forecasting fiscal pressures over the next 40 years.
It has already questioned whether the government’s target to reduce net debt to 20% of GDP and sustaining it at that level was too high.
If so, that could mean the government would have to run bigger surpluses post 2014/15 than it is planning to, or at least put more surplus cash towards debt repayments at the expense of spending on public services.
Land, capital gains taxes
In a summary released yesterday on its third meeting to test Treasury’s assumptions, the panel said it considered a wide range of tax and spending policy options that might address long-term fiscal pressures.
An enduring response to managing the long-term fiscal pressures would likely involve a package of subtle policy changes implemented gradually, the panel said, noting not every member agreed with every point it raised.
It said an ageing voting population and New Zealand’s MMP environment meant that one-off or abrupt policy changes may be inappropriate.
The impacts of policy changes on all New Zealanders, and especially those of lower incomes, should be carefully considered - in terms of fairness and of securing policy responses that would endure, the panel said.
“The panel raised questions about the merits of some of the tax options and were concerned to ensure the efficiency, distribution and administrative cost, sustainability and coherence features of tax options were considered and well founded and that there was a clear rationale for choosing an option, especially if there were proposals to consider introducing a new tax base,” it said in the summary.
“For example, if the rate of GST rises, there may be greater risk of political pressure for exemptions to be introduced, reducing GST revenue and adding to complexity, thereby reducing the efficiency and integrity of GST,” it said.
The panel discussed the merits of broadening the tax system by means of either a land tax or more comprehensive capital gains tax.
“Concerns were raised over the interpretation of the purported economic efficiency properties of a land tax. Some argued that reintroduction of a land tax could have adverse implications for investment and may also mean pressure for the sorts of exemptions that contributed to it being discarded in the 1980s,” the panel said in the summary.
“While some acknowledged that in principle a capital gains tax may be attractive from the point of view of improving the integrity of the tax system, revenue from a capital gains tax may prove to be volatile and there are administrative challenges in administering a sound capital gains tax,” it said.
Land tax economically efficient
In a review of submissions to its third meeting, the panel said Treasury presented a range of options for raising more tax revenue including: raising personal income tax rates, raising GST rates, raising the company tax rate, taxing capital gains on a realisation basis and a tax based on unimproved land.
"Treasury argued that the most economically efficient option would be a land tax, as there would be minimal reduction in economic performance," the panel said.
"A GST rate increase would have some efficiency cost by discouraging labour force participation, but would be the least inefficient rate increase among existing tax bases," it said.
"If distributional impact is the primary concern, changes that increase the tax burden on capital income, eg, introducing a capital gains tax or increasing the company rate, would increase the progressivity of the tax system."
"If the sustainability of revenue is the primary concern, Treasury considered it most likely that increases to personal income tax or GST rates, or introduction of a land tax, would be the most stable sources of future tax revenue," the panel said.
"Treasury noted that historically most major tax changes are made as part of broader packages of reform. It is unclear whether using one particular tax measure alone to close the fiscal gap would be durable, or efficient, over the long-term," it said.
What the panel had to say
The summary said there was agreement among the panel that the international context would continue to inform consideration of expenditure and tax settings.
"The mobility of labour and capital are important considerations. On the other hand, population ageing is an international issue and other governments are also likely to consider tax increases as they meet the fiscal and economic challenges presented by demographic change," the panel said.
Future tax policy changes would need to be gradual and done in the context of international developments, to ensure New Zealand was moving in the direction of international trends and that changes did not adversely affect the relative competitiveness of New Zealand's economy.
"The panel was generally supportive of maintaining a broad-base low-rate approach to tax policy design in New Zealand. However, it was less supportive of some of the individual tax policy options being presented, in terms of their usefulness as a response to spending pressures arising from demographic change and there were contrasting views amongst members of the panel concerning Treasury’s interpretation of the distributional effects of some taxes, including GST," it said.
"It was acknowledged that an increase in GST has less adverse efficiency implications than increases in income taxes. However, a rise in GST may raise the likelihood of exemptions that would reduce revenue raised and reduce the efficiency of New Zealand’s GST system; the sustainability of an effective GST system in the face of emerging information technologies and globalisation was discussed, developments which suggest caution may be warranted when assuming GST a stable source of long term revenue."
"Similarly, some panel members challenged the purported efficiency properties of a land tax. Land usually requires some form of investment to render it productive. If the introduction of a tax that targeted just one form of wealth created uncertainty over future tax policy this could adversely impact on investment and further increase the efficiency costs of the tax," the panel said.
"The panel also considered that its re-introduction may lead to pressure for the sorts of exemptions that contributed to its being discarded in the 1980s," it said.
"While a capital gains tax could enhance the integrity and distributional properties of the overall tax system, it is administratively challenging and it may prove to be a volatile source of revenue. More specifically, the introduction of a capital gains tax on owner-occupied housing would have implications for lower and middle income individuals as relatively more of their wealth tends to be held in their homes."
Some members of the panel noted that these tax changes may still form part of an overall tax strategy for reasons other than long-term fiscal pressures.
Meanwhile, Treasury’s base projections fix the Crown’s tax revenue at a set ratio to GDP from 2020. Some members suggested that Treasury consider an alternative projection of revenue based on the indexation of personal tax rate thresholds to consumer price inflation, from a certain point in the future.
"Doing this would still prevent 'bracket creep’ to some extent while securing more revenue to the Crown over the long term than would occur in the Treasury’s base projections. On the basis of current Treasury projections, this could generate extra revenue equivalent to about 2% of GDP by 2060," the panel said.