Tax Working Group: A running post with updates from the 1 day conference

I'm here at Victoria University in Wellington reporting on the all-day Tax Working Group conference which is the final wrapup session for the group before it reports back to the government. I'll update this post through the day with the highlights from all the presentations. Here is the schedule of the day's presentations and here is the background on the Tax Working Group, which is being run by Victoria University. Here are the background papers for the conference. First up is Finance Minister Bill English. English says the economic recession hasn't been as severe as first thought, but the economy remains unbalanced with too much investment in housing and the non-tradeable sector and not enough investment in the tradeable sector.

"That mix of recovery isn't as sustainable as an export led recovery. If we are to succeed in rebalancing the economy it's going to take some fairly focused policy," English said. "The government remains committed to catching up with Australia by 2025. We are adopting a steady and balanced approach to this goal." English said New Zealand's private sector productivity growth had actually kept up with Australia, but the public sector's productivity had lagged. "The non measured sector, which is largely government, has had particularly poor productivity. One way to improve that is to spend less time telling other people how to run their businesses and spend more time focusing on its own spending," he said. "There will be extensive change in the public sector," he said. "Our economic goals are pretty bold. Tax has a pervasive effect in th eeconomy so if we want to achieve a significant increase in performance then we need to pull the bigger levers in the economy and there's no doubt that tax is one of those bigger levers." "By 2022 the person on the average wage will end up paying the top tax rate. That may not be transparent to the public yet,  but it's clearly not an acceptable result to have the person on the average wage paying the top tax rate so that's why we need to make long term change to the tax system." English says the government will focus on fairness and equity. He says he will look forward to considering the Tax Working Group report in the early part of next year as part of the 2010 budget process. Bill English then held a short standup news conference outside the conference. He said the only option for reform that had been ruled out was a capital gains tax on owner-occupied homes. He said the government would look at the options proposed by the Tax Working Group early next year and some of its ideas may be included in the May 2010 budget. English was careful not to rule anything in or out, including any move to equalise the corporate and top income tax rates. He pointed out the Australian tax review may also cut the corporate tax rate and New Zealand needed to avoid any gap opening up with Australia. Asked about a land tax, he said: "That's been in the mix, but we haven't really looked at it yet." Next up is Ernst and Young Managing Partner Rob McLeod, who is a member of the group and the author of the 2001 McLeod report. McLeod says the current tax system has now lost much of its coherence with the top tax rate at 38 cents while Working for Families creates very high marginal tax rates. He also says there is pressure to drop the corporate tax rate. Asked about doing away with imputation credits, he said the advice from officials was that removing imputation credits was unlikely to provide enough revenue to reduce the corporate tax rate. Norman Gemmell the Principal Adviser on Tax for Treasury then spoke about various options for income and GST changes. The options included: - reducing the top income tax rate from 38% to 30% and funding that by base broadening that falls mainly on incomes over NZ$70,000. - Switch towards GST: Reduce all income tax rates by 2-3% and reduce the top rate of 38% to 33% or 30% and fund that by lifting GST to 15%. - Reform Working For Families (WFF) to reduce high marginal tax rates, including targeting WFF more at lower incomes. One new idea put forward was a flat income tax with an annual payment of say NZ$5,000 to those below a certain threshold to make the tax more progressive. PwC partner John Shewan then spoke about base broadening measures to tax capital gains and land. He said the pros for a Capital Gains Tax (CGT) included reducing biases in favour of investing in assets expected to create capital gains. It was also a progressive tax and may or may not raise significant extra income. The cons were that a pure CGT with accrual taxation on all gains on capital was not feasible in practical or political terms. Therefore any CGT would have to be on realisation, carve out owner occupied homes and the quarantining of capital losses. This would create lock-in problems where few wanted to sell and 60% of property wouldn't be included because that was the amount owner-occupied. It would also be complex and difficult to administer. Shewan also said a CGT would be great business for tax accountants and lawyers. That went down well with the audience of tax experts. There was about NZ$213 billion tied up in residential rental investment, which compared with NZ$37 billion invested in the stock market. This rental investment was generating tax losses of about NZ$500 million, with lost revenue of NZ$150 million to NZ$200 million. He then detailed two types of capital gains tax reform, including ad-hoc measures and a 'risk free rate of return' tax. Other base broadening options including denying rental loss offsets against income, which could raise NZ$165-175 million, denying depreciation on buildings (NZ$1.3 billion), remove depreciation loading (NZ$600 million), make depreciable buildings taxable (NZ$1,3 billion) and changing the 'thin capitalisation' threshold on debt for foreign owners of assets to 60% from 75% (NZ$177 million) "There's no consensus in the TWG on what the particular measure should be, but consensus that the current situation is a mess and untenable and 'something needs to be done', and that one or more of these options need to be pursued," Shewan said. Gareth Morgan then looked a the the taxation of capital income. A full article is available here. Motu economist Arthur Grimes and Deloitte Partner Mike Shaw then presented papers on land tax. I will do a separate story on this shortly. Assistant Deputy Commissioner Matt Benge produced an interesting paper I'll post shortly with a couple of great charts showing the extent of the tax sheltering and income denial since 1999.