Tax changes must be popular

The Tax Working Group is expected to deliver its final report next week. Its recommendations will be seen as necessary and fair by some, and as inefficient and unfair by others. Which camp is biggest will ultimately determine whether the recommendations stick.

The group's role was to come up with a ''fairer'' tax system. An emphasis was placed on alleviating the country's growing house prices. Ironically, another tax working group formed in New Zealand just a decade ago was also tasked with making the country's tax system fairer.

Fairness, though, means different things to different people. One of the imbalances that group was asked to address was that just 118,000 people - 3% of the population at the time - contributed 26% of the country's taxes. Its report, released in 2010, helped form the tax system we have now. All personal tax rates were cut, the company tax rate was cut, GST was raised, property investment loopholes were closed and the discrepancy between top-tier income taxes and trust tax rates was removed.

The result was a streamlined tax system encouraging saving over consumption, held up by international tax experts as being a model of efficiency. But now that tax system is, according to some, broken. Not only that, it is the cause of poverty and inequality in New Zealand.

That is nonsense, of course. Since 2010, New Zealand has experienced ongoing economic growth. People have made money in that time - some people have made a lot of money. Many have invested in real estate to furnish their retirements. At the same time, New Zealand managed to reverse what was long seen as one of its primary problems - the ''brain drain''.

From a situation where the country's best and brightest were leaving to foreign shores at an alarming rate, the country became an immigration magnet and has welcomed back many of its prodigal sons and daughters.

The population has rocketed, but housing supply has not kept up with demand. People with property investments have seen their assets grow in value and those adept at making money have done so in a buoyant economy. Others, of course, have gained neither property nor wealth, often through no other reason than timing.

The country is enjoying low unemployment, constantly increasing minimum wage rates, a world-renowned welfare system, relatively free education and health, and a plethora of infrastructure investments.

But it is also experiencing a growing gap between rich and poor. Policies to address that gap are reasonable and timely.

But taxes have consequences. They shape behaviour. A common story before the 2010 tax reform was the effort being made by those in the top tax bracket - 39% at the time - to funnel their income into lower-taxed trusts. The tax system had led to an industry of what could euphemistically be called tax minimisation. It was inefficient, expensive and unproductive. By cutting tax rates and raising GST, the problem vanished.

The big-ticket item for this year's Tax Working Group is whether the country's existing capital gains taxes be extended. As in 2010, such a shift will create a shift in behaviour. But unlike collecting GST, collecting taxes on capital gains is expensive, complicated, and will inevitably lead to new tax minimisation schemes.

New Zealanders are generally a pragmatic bunch, open to change, to fairness, and to reasonable arguments. Time and again, though, they have proven less accommodating to political ideologies dressed as fairness and reasonableness. They are unlikely to accept a new tax system which is demonstrably worse than the current one - regardless of the accompanying narrative.

The Government has ensured the people will ultimately decide whether next week's tax proposals become law, by promising any changes will be delayed until after next year's election. That is fair and reasonable. It highlights the need for the Tax Working Group's recommendations to be the same.

Comments

A good analysis of the tax situation. We live in a country that is very expensive to live in and seems inevitable that the brain drain will start happening again soon as more inflationary policy is implemented. There have been strong hints of a $7,000 tax free band but that is still very low compared to other countries. Remove GST on food and power to try and reduce the cost of living in NZ.

 

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