By David Snell*
The Tax Working Group’s interim report leans towards extending income from capital, a bigger role for tax in sustaining our natural environment and a mild nudge towards boosting national savings.
They’re the main messages I took from Thursday’s launch lock-up with Sir Michael Cullen in downtown Wellington.
Sir Michael promised the Tax Working Group would take a “fair, large and liberal” interpretation of its terms of reference. It would kick start a national conversation on tax.
I’ll give them a pass mark on both topics. For me, today’s interim report recommendations boil down to two issues.
1. Taxation of income from capital is ripe for reform.
What would a capital gains tax – under another name – look like if the Government decides to follow Sir Michael’s heavy hints in favour of reform?
The group has put forward two options; it’s clear that reform is favoured, despite recent speculation to the contrary. Those options are:
An extended tax on realised gains, which looks to have wide potential scope. Interests in land, intangible property, goodwill, business assets, shares and certain choses in action are all included, or
A risk- free rate of return method, deeming a notional return from assets.
The report contains initial options and findings, along with some “roughly right” costings from which Sir Michael was at pains to distance himself.
Importantly, Finance Minister Grant Robertson has invited the group to choose between these methods in its final report. His words falls short of an instruction to recommend a tax. There is reference only to a potential capital gains tax. But Robertson’s words can be read as showing a focus on how, rather than whether, extended tax is a good idea in the first place.
2. Environmental taxation is central to the group’s sustainability agenda.
It’s pleasing to see the weight placed on setting a long-term direction for environment taxes. This is an opportunity not to be missed. Tax Working Groups do not come along very often. The Government has committed to a target of a net zero emissions economy by 2050 under a Zero Carbon Act, a Green Investment Fund, a Provincial Growth Fund and an independent Climate Change Commission.
The mass of scientific evidence shows our climate is changing, with carbon emissions the single biggest cause.
Primary sector industries are crucial to New Zealand’s future and to our national identity, with sustainability important across the sector. Sir Michael argues that even tourism is a land-based issue. It’s clear that the group sees sustainability as crucial to New Zealand’s long-term future.
Today’s interim report from the Tax Working Group argues the benefits from a tax approach to our natural capital are potentially largest when those taxed will change their behaviour: they have some low cost abatement responses.
EY’s own submission to the Tax Working Group highlighted that our taxes are poorly aligned with the environmental and climate costs of our economic footprint.
While statistics vary, according to the OECD, at 1.3% of GDP New Zealand’s revenue from environmentally related taxes is among the lowest of its members.
Environmental taxes are by no means the only way for government to respond to environmental issues, nor should they be the only response. However, I’d agree environmental taxes are an essential part of the Government’s toolkit, and can play a key role in delivering positive environmental and ecological outcomes in both the medium and long term.
There is a sense of how the constraints in the terms of reference – no changes to tax rates, don’t cover tax’s impact on the transfer system and don’t tax the family home – have influenced the group’s thinking.
Taxing the self-employed under today’s changing gig economy needs a rethink. Re-examining the current employee/contractor boundary should have been examined.
Inland Revenue research shows the self-employed under-report income by about 20%, often in error rather than deliberately. It would have been great to see the group explore emerging opportunities to use technology and smart withholding techniques.
Tax conversation under threat
Sir Michael has narrowed down the national conversation. Feedback is actively sought from selected groups and specialists only. The report’s executive summary reads as if that conversation is in the past. For me, that’s a shame. Accessible language and innovative use of social media were crucial in delivering a record number of submissions, many of which were thoughtful and high in quality.
The debate will run for days.
*David Snell is EY’s New Zealand Tax Policy Leader.