Keeping it simple

My dad spent his entire career with the Irish IRD. I wish I could say some of his commitment to tax and tax policy rubbed off on me. But it hasn’t. Tax issues make my eyes glaze over. You probably feel the same.

But neither of us are going to be able to dodge the bullet for much longer. Two high-level policy groups are beavering away, one here and one in Australia, and we can expect proposals for changes to the tax systems of both countries by the end of this year. If you want to influence the outcome, you’re going to have to get up to speed on the issues.

Here’s what I’d be arguing for, from a business perspective. Keep the good bits. By international standards, we’ve got a clean, simple, broad and fair system. For example, far too few OECD countries have our dividend imputation system, which removes the basic unfairness, and the important economic distortion, of taxing company profits more than once. Many countries have complex schemes favouring this or penalising that; we’ve got very few incentives or subsidies.

The broadness is especially important, because that keeps the marginal rate on any one thing lower rather than higher, and it’s the high marginal rates that cause the worst outcomes. And simplicity has also got to be right up there as one of the key criteria. Many Kiwis can do their own tax returns.

That said, we have been drifting into greater complexity and compliance costs. At a recent symposium at Auckland University’s Retirement Policy and Research Centre it was pointed out, “there are 13-plus different ways that overseas bonds can be owned and taxed. For most Australian-listed shares, there are 11-plus different ways”.

One obvious bit of simplification would be the same top rate of income tax across everything — individuals, companies, trusts and collective investment vehicles of all kinds. That would stop all the wasted effort that went into channelling income through the likes of ‘cash PIEs’ (30% tops) as opposed to other income (39% tops).

In all probability, though, standardising the top rate means standardising it at some lower level than today, as one of the issues both Australia and New Zealand face is lower corporate tax rates overseas in a world where companies are more mobile. Chances are, one of the issues facing both policy groups will be, how do we fill the tax hole that emerges if the corporate and top personal rates go down?

There have already been some suggestions a lower income tax/higher GST combo might be the answer. My first instinct was to recoil, on grounds of fairness: wouldn’t it be ‘regressive’, with richer people gaining (lower income tax matters more to them) and poorer people losing (they pay the higher GST, just like the rich)?

After delving around a bit, though, I’m not sure it would necessarily be ‘regressive’. Here’s the idea: Joe Sixpack on $100K pays PAYE and GST. John Moneybags on $100 million of capital gains pays no income tax but like us lesser mortals has to pay GST. Now: lower the income tax rate and raise the GST and (with the right numbers) Joe is no worse off, plus Mrs Sixpack may find it more worthwhile (post income tax) to take up a job. John Moneybags, however, now pays more through a higher GST rate. Good outcome.

Especially if the other main potential way to balance the government’s shortfall is a capital gains tax. I don’t have any philosophical issues with one. But I struggle to see any country that has implemented one that is (a) well designed (b) simple and (c) matters a damn in the great scheme of things in terms of raising serious tax dollars.
At this point, I’ve got an open mind about the taxation of savings and investments. The purist in me says, let’s have as few incentives in the tax system as possible. The pragmatist says, maybe our big macroeconomic problem is not enough household savings, plus there’s the longer-term demographic issue of rising pension costs, as well as underdeveloped local capital markets . Would it be so terrible to tilt the tax system towards a more savings-favoured place and hit all these buttons at once? What about a compulsory KiwiSaver scheme with a sheltered internal tax rate, which apart from arguably being a good idea in its own right, would move us closer to the Australian scheme of things?

Not that harmonisation at all costs is the way to go. If the two tax groups get to the same sensible places, well and good. But there has been a bit of bloodymindedness on the Aussie side about mutual recognition of imputation credits, and short of sacrificing virgins (or the Bledisloe Cup) to them, they don’t seem to be minded to listen to us. If we have to peel off on our own, fine.

economics@xtra.co.nz
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