By Terry Baucher*
If Labour forms the next government after this weekend’s election as part of establishing its promised tax working group it will need to consider three key issues: The group’s terms of reference, a likely timeline and its membership.
Although as Michael Reddell noted Labour has now taken off the tax review table a number of issues he also pointed out quite a few topics remain beside the vexed issue of a capital gains tax.
I believe the terms of reference for any tax working group should include:
►reviewing the under-taxation of capital and the over-taxation of savings;
►the interaction of tax and social assistance such as working for families’ tax credits and the issue of high effective marginal tax rates;
►the taxation of multinationals; and
►the role of “environmental” taxes such as the Green Party’s mooted Carbon Tax and the Labour Party’s controversial Water Tax.
Coincidentally, these topics are similar to those covered by the terms of reference of the McLeod Review in 2001. Its terms of reference announced in July 2000 covered four main questions:
“whether the tax system can be fairer in its role of redistributing income;
how the tax system can be designed to encourage desirable conduct such as work and saving and to discourage such undesirable behaviour as the wasteful use of non-renewable resources;
how the level of tax that is reasonably required by the Government for the provision of essential social services can be achieved reliably in the medium and long term; and
whether the tax system and tax rates need to be modified in light of new technology and international competition.”
By contrast, the Victoria University of Wellington Tax Working Group (the VUW TWG) formed in May 2009 had a much more limited brief. It was to “consider the medium-term direction of the tax system, including assessing policy options.”
As a result of its more limited scope (and resources, all the members of the VUW TWG volunteered their time although they were reimbursed their travel expenses), the VUW TWG’s final report in January 2010 passed over making recommendations on environmental taxes as being beyond its scope.
Any new tax working group should not be so prescribed. In fact, if the intention is to put the group’s recommendations to the electorate in the 2020 election, it would make sense to include in the review everything previously excluded, such as a land tax and/or capital gains tax on the family home.
Labour has not renounced its commitment to the “broad-base, low rate” principle which has governed New Zealand’s tax policy for the last 30 years. A significant broadening of the tax base such as a comprehensive land tax or a capital gains tax could be part of a revenue-neutral package which lowered income tax and GST rates.
One thing I would not expect any tax review group to recommend would be introducing exemptions from GST such as the zero-rating of fresh fruit and vegetables. Although such proposals are well meant, proponents gloss over the problems from the many definitional issues involved.
Both the McLeod Review and the VUW TWG opposed the introduction of any GST exemptions and I expect a new tax review group to follow their example. In my view, it would be better to go for an across the board cut in the rate of GST.
As for a process and timeline, assuming the group’s brief is to undertake a comprehensive review of the tax system then maybe the process followed by the McLeod Review in 2001 would be appropriate. Its terms of reference were announced in July 2000 with the membership of the group revealed in October. The tax review team met for the first time on 3rd November and on 19th December called for public submissions. An issues paper incorporating the 100 submissions received was released in June 2001 before the final report was released on 24th October 2001.
Following the example of the McLeod Review, if the terms of reference and membership of the tax review group are announced by the end of the year, then it’s likely to be late 2018 at the earliest before the final recommendations are released. Allowing time for the Government to consider the group’s recommendations, any relevant legislation would probably be introduced in the latter part of 2019. Such legislation could probably take force from the start of the 2020-2021 tax year on 1st April 2020.
As for the membership of the tax review group, you wouldn’t go far wrong if you followed the suggestions of former Inland Revenue and Treasury policy advisor Andrea Black. (Andrea would be one of my first picks with the hope that the report was written in the style of her entertaining and informative blog). Apart from an under-representation of women, a criticism of the membership of the last two tax reviews is that they were perhaps too dominated by the large law and accounting firms.
It’s therefore important that there’s also representation from organisations such as the Accountants and Tax Agents Institute of New Zealand and the NZ Bookkeepers Association who deal regularly with the SMEs which form the bulk of businesses in New Zealand. Given the problems of the interaction of tax and social welfare assistance I think its imperative someone like Susan St John of Auckland University with practical experience of this issue is a member.
The VUW TWG remarked in its final report, “tax reform should be viewed as a long-term or quasi-constitutional exercise”.
It therefore recommended the Government consider;
“institutional arrangements for ensuring the New Zealand tax system has a stronger focus on achieving and sustaining coherence, integrity, efficiency and fairness.”
As part of this the VUW TWG suggested the establishment of something similar to the Australian Board of Taxation. This is a non-statutory advisory body which advises the Australian Government on the development and implementation of taxation legislation and the ongoing operation of the Australian tax system.
This recommendation wasn’t followed but it’s something a new tax working group should consider. (For more on a possible New Zealand Board of Taxation see chapters seven and eight of Tax and Fairness by Deborah Russell and myself).
In the absence of something like a Board of Taxation, regular tax reviews should be a feature of any democracy. They should act as a sort of conscience for governments by pointing out some politically inconvenient facts about distortions in the tax system. If Labour does form the next Government it will be interesting to see how it reacts to the findings of a tax working group.
*Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting. You can contact him here »