Taxing matters

When all the rorts, loopholes and mechanisms by which a significant proportion of New Zealanders either avoid paying tax - or, quite legally, are not required to - are taken into account, few people would disagree with the proposition, put forward by the Tax Working Group, that the system is "broken".

They might have varying views on the extent to which this is the case, and almost inevitably will diverge on what the appropriate remedies might be, but Prime Minister John Key and his Government, elected on a platform of tax reform (more popularly described as "tax cuts") are on solid ground in at least beginning to address the associated issues.

While much of the detail will not be revealed until the May Budget, there may be further indications along the way - Finance Minister Bill English is expected to deliver a keynote speech towards the end of next week and this might consolidate expectations - but for now, following Mr Key's address to Parliament on Tuesday, the nation is left with a steady-as-she-goes "step change", rather than a radical assault on the status quo.

As such, there is not a great deal to frighten the horses in Mr Key's tax indications.

But if there is one potentially explosive device, it is the prospect of an increase in GST from 12.5% to 15%.

"The net result of a reduction in personal income taxes, and a modest increase in GST, is to give people more choice," Mr Key said.

"Their take-home pay would increase and they could use that increase to save or pay off their mortgage, without being taxed on it."

As he went on to say, GST is a very difficult tax to avoid, citing the comment once made by former Labour prime minister David Lange that "even drug dealers pay GST".

It was, of course, politically necessary to stress that the Government would not embark on such a policy unless it was convinced increasing GST would benefit the economy in the long term and the "vast bulk" of citizens would be better off as a result.

For while there are many positives in the application of a universal discretionary tax, the one significant downside is the impact it will have on people on the breadline - when, for instance, the price of their bread goes up.

There has to date been no indication that essential foodstuffs, such as bread and milk, would be exempt from GST as it is in Australia, but the Government must have at least considered it.

Could it be the big talking point come Budget day?

In ruling out working group proposals such as a land tax, comprehensive capital gains tax and the a risk-free return method for taxing residential properties, Mr Key appears to have blunted the edges of his Government's intentions towards the residential property market.

Here, again, politics and pragmatism are at work.

The great Kiwi love affair with property is doubtless subscribed to primarily by traditional National voters: it would not do to cut them off at the knees; and nor would it be politically palatable should moves on property investment be so stringent as to lead to a plunge in prices - leaving some property owners in a negative equity situation, owing the banks more than their properties are worth.

Still, neither could the Government ignore what has long been regarded as a serious imbalancing factor in the New Zealand economy.

Besides removal of a depreciation tax off-set where a property is actually rising in value, Mr Key has indicated there will be other tax-related moves to recoup monies from this sector to the country's tax take.

Landlords are protesting that such moves will inevitably lead to rent rises, but it might also reduce the number of "part-timers" in the business - those who, in the past, have quite happily taken their depreciation allowance but neglected to put any of it back into their rental properties.

While the game has been lifted in North Dunedin in this respect, there remain parts of Scarfieville that appear untouched by such considerations.

Caught by 2008's global financial meltdown and by the accompanying credit crunch, last year the Government had little leeway in tax matters.

With the global and local economies showing tentative signs of improvement, the Government can finally afford to make some firm overtures towards its promised transformative agenda.

But, as Mr Key has pointed out, he and Mr English do not have the luxury of large surpluses to splash around.

They must proceed with caution and it is this that has some critics bagging the plans, as outlined, for their timidity.

Others will see in them a redistributive agenda with the top and middle-income earners set to benefit most.

To any student of politics, this will not come as a surprise - it is what National governments do - but the extent to which this and other projections eventuate will have to wait until the party reveals the fine print of its policies, and the colour of its money, in May.