Have your say: Should we raise GST, cut and flatten income tax, remove WfF and impose a CGT or land tax?
18th Aug 09, 10:08am
The government appointed Tax Working Group, which includes NZX CEO Mark Weldon, economist Arthur Grimes, PwC partner John Shewan, Gareth Morgan and others, has completed its second session discussing potential changes to the tax system. The full briefing papers for the meeting and a summary of the discussion (published below) are available here. The Working Group met on July 31 and discussed a variety of tax changes, including increasing GST, introducing a flat tax rate and removing or changing Working for Families. Here is the key section from the summary of the meeting.
This included considering several (approximately revenue"neutral) hypothetical scenarios developed to deliberately highlight the effects across five areas " economic growth and efficiency measured by effective marginal and average tax rates (EMTRs), equity measured by equality and poverty indices, fiscal integrity, administrative and compliance aspects, and fiscal cost " of quite different tax and transfer packages. These included: 1. Removing tax credits; and a top rate of 23% " to show the effect of a fiscally neutral switch from tax credits to a reduction in the top rate of personal tax 2. Removing tax credits; and a top rate of 30% with a universal child payment of $2000/child " to show effect of improving incentives at higher incomes; reducing administrative difficulties of targeted tax credit system 3. Reduce WfF abatement threshold; two"stage abatement; top rate of 33% " to show effect of increased targeting of WFF at lower"middle income families 4. Increase WfF abatement rate; top rate of 33% " to show alternative method of increased targeting of WfF at lower"middle income families 5. "˜Dual' tax schedule: opt in to "˜family' schedule (if dependent children) "“ to show a simplification of the administration by reducing the "churn" of tax paid on one hand and returned via tax credits on the other. Conclusions included: · Scenarios 1, 2 and 5 improve EMTRs, fiscal integrity and administration, but at the cost of substantial increases in measures of after"tax"&"transfer income inequality and especially poverty · Changes to Working for Families (scenarios 3 and 4) * do not change poverty measures and make little difference to inequality * have modest positive or ambiguous efficiency benefits * Further consideration should be given to: * relaxing fiscal neutrality within tax/transfer system * whether extra revenue could allow efficiency/integrity improvements of 1, 2 & 5, and reduce or eliminate the equity problems * extending the "˜dual' tax/welfare system to include transfer payments * examining some "˜non"family' social assistance options.The Tax Working Group (TWG) then went on to discuss increasing the GST rate to as high as 20% from the current 12.5%.
There may be fairness issues with changing the GST rate. Although GST is less regressive than generally believed" particularly if measured by expenditure or on a lifetime basis " increasing the rate could impact lower income or vulnerable households, particularly in the short run. In addition, there could be short run macroeconomic impacts that should be taken into account, including changes in consumption, and price levels. It was generally accepted by the TWG that changes to GST would be an effective way of altering the tax system. However GST should not be raised to fund additional spending, but to contribute to a revenue"neutral package of tax reform. The TWG thought the avoidance risks were less at higher rates (17.5% or 20%) than the papers suggested; they also thought that any GST increase would be only slightly regressive but felt that this could in part be addressed by automatic compensation mechanisms for most of those on low incomes, and other tax changes for those on middle incomes. If the GST rate is to be changed, then compensation for those on lower incomes should be considered further as part of any tax reform package.The Tax Working Group then considered how the retiring babyboomers would change the fiscal picture.
Without any change in policy settings for NZS, or major fiscal consolidation, significant tax increases would be required to meet the increasing cost of superannuation within 20 years. With current NZS settings, the costs of NZS are expected to approximately double over the next 40 years; and most of this occurs over the next 20 years. Measured in terms of personal income tax revenues, NZS expenditures rise from around 22% in 2010 to 36% by 2030 and 42% by 2050. This "˜pure ageing' effect means that NZS cost will rise from $5.2 bn. to $9.9 bn.The Tax Working Group's next two sessions hosted by Victoria University are on September 16 (tax base broadening) and October 9 (Corporate taxes and tax integrity). The September 16 meeting will discuss Capital Gains Tax and a Land Tax.
As the TWG's next meeting will focus on base extension options, officials will provide worked examples involving funding changes via a land or property tax and/or Capital Gains Tax or by combinations of GST, land tax and/or Capital Gains Tax.The group aims to produce a short report before Christmas "covering the principles of a good tax system, the key problems with the current tax system, key directions for reform, and analysis of specific illustrative reform options." Its key meeting will be on December 1 where a draft report will be discussed and then finalised for presentation to Ministers by mid-December. What I think This is the first time I've seen these revenue-neutral tax reform options prepared by Treasury and laid out in public. They're fascinating. It's great to see this group (helped by Treasury research) is considering a flat income tax, no Working for Families and a capital gains and or land tax. It's sort of heartening. I'd go for option 1 (flat income tax at 23% and removing Working for Families) with some sort of compensation package for poorer taxpayers paid for by an increase in the GST to 20%, the imposition of a land tax and a broad corporate and trust tax rate at 23%. That would remove the ruinously high marginal tax rates involved with Working for Families, destroy the tax avoidance industry, incentivise investment and discourage consumption. We might actually have a hope of sparking real growth and reducing debt if we did that. Your view? We welcome your comments below. NZTaxWorkingGroupSession2