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Where should tax come from?

Tax is topical right now.  The Tax Working Group reports have made headline news around the country.  Should a new land tax be introduced? Should GST be increased?  Is it time for a comprehensive CGT?

Whether we like a tax, however it is imposed, is largely irrelevant.  If a tax is imposed we’re stuck with it.  That said, it is generally accepted that a “good” tax is one that is seen to be fair (so that less effort goes into evasion) and one that is not so expensive to administer that it contributes little to the tax base.

In the interests of generating some debate I’m happy to state a preference for an increased GST in exchange for a reduction in income tax.  GST is a relatively inexpensive tax to collect and administer, is difficult to avoid, and as a consumption tax, taxpayers have a choice as to their level of participation.

Accordingly, GST should be accepted as a “good” tax.

In contrast, in my view a land tax cannot be considered a good tax.  The fact that it is limited to a single form of capital means that distortion is inevitable.  Further, given the consequent loss in capital value and the subsequent economic cost bring the real return from a land tax into question.

A middle ground position such as a comprehensive capital gains tax would provide a less distorting tax and for this reason deserves consideration.

However, an option not put out by the tax working group, but perhaps worth debate is the option to abandon the income capital dichotomy and tax all realised gains regardless of source.

5 Responses

Carla Cross on February 7, 2010 at 12:50 pm

While I am not against a well thought out CGT regime in New Zealand, I agree that increasing GST may give the most immediate and fair results. The administrative framework is already in place for both the IRD and those persons registered for GST.

Those opposed to increasing GST often cite financial hardships to those in lower income brackets. I feel that if different rates were introduced for different goods and supplies this problem may be preventable. If goods that were classified as “necessities of life”, e.g. bread and milk were zero-rated, and luxury items like cigarettes, alcohol and motor vehicles were taxed at a higher rate than 15%, then government could ensure increased revenue without impacting negatively on the lower socio-economic groups.

This approach would also assist other govenment organisations which are trying to make New Zealanders aware of their health issues.

At the end of the day nobody wants to pay more tax, but the reality is that for continued first-world infrustructure and benefits more revenue is needed.

Sybrand van Schalkwyk on February 7, 2010 at 8:49 pm

Hi Vicki

A few points:

(1) Increasing GST: I think it is a good idea, and I agree with Carla that we should then also include the exemptions other countries have with high rates of indirect tax. GST is bound to become far more complex though, and we should all be prepared, instead of funding hospitals, to fund lawyers to argue over whether a Jaffa Cake is a cake or a biscuit.

(2) Removing the capital revenue distinction is just another way of saying let’s introduce a capital gains tax, isn’t it? The base will just be different from a normal capital gains tax. However, the reason for the amendments to the base of a capital gains tax is because the amendments overcome the problems usually identified with a capital gains tax. For example, a capital gains tax might have indexation, whereas an obliteration of the capital/revenue distinction won’t. What I do like about this idea is that we won’t have to fund lawyers arguing about whether replacing a roof is a capital or revenue improvement.

(3) Another idea not canvassed by the TWG is the abolition of Gift Duty. Whenever I work with this tax I can’t help thinking that it is an absolute waste of time. It brings in around $1m in revenue, and it must cost millions to administer. Most of the estate planning work I do involves planning around Gift Duty. It catches only the stupid and the poor. The only reasons I can think of having Gift Duty is to stop people from getting wealth into trusts to avoid means testing or creditors. It also adds information gathering powers to the IRD. I can’t think of any other uses for it, but maybe there are. Anyway, the time to consign this tax to the scrap heap has certainly come.

Thanks for this post. It certainly made me think.

Mark on February 11, 2010 at 12:11 pm

What about a Capital Gains Tax for just foreigners?

Dear Viki,

Why is the discourse around Capital Gains Tax (CGT), always positioned in terms of a comprehensive CGT system or non at all? Surely their are variations that could be applied. For example, a non-resident CGT system.

While I appreciate that enabling a comprehensive CGT is accepted by all sides of Parliament (and those outside) as political suicide, I do not believe restraining CGT to non-residents (eg foreign investors), would have the same political consequences. In fact, it might even score a few political points with those taxpayers who blame foreign investors for pushing up house prices (due to the absence of a CGT in New Zealand).

Perhaps the Government should give some serious thought to introducing a non-resident CGT system. A non-resident CGT would put foreign investors on a level playing field with their own tax systems – most if not all OECD countries have CGT (eg, Australia, UK, USA). At the same time, a non-resident CGT would have no application to resident taxpayers (eg, all New Zealand taxpayers would not be caught as they are resident). Foreign investors could hardly complain as they already have CGT in their own tax systems. No doubt their might be some clever non-residents who might look to get around the non-resident rules through resident corporate entities and trusts. But no doubt our very broad general tax avoidance rules (summarised recently by the Supreme Court and revisited by Penny & Hooper in the Court of Appeal) would sweep these up.

From a compliance perspective it would have no impact on resident taxpayers. In fact, the introduction of a non-resident CGT system might even offer the additional 2.5% of tax revenue, an increase to GST would have provided? And raise it from foreigners, not New Zealanders. While at the same time providing the Government another tool to address the residential property market. From a political capital perspective it also offers the Government a way out, from what looks like a very damaging political storm brewing over raising GST?

Sybrand van Schalkwyk on February 11, 2010 at 8:40 pm

Hi Mark

Thanks for your comment on this blog, it is great to have a bit of debate going, as I think this is where blogs have their advantage over conventional websites.

Regarding your proposal for a capital gains tax on foreigners only, although at first blush a good idea, I think the biggest problem with it is the message it sends to investors from overseas. It would basically say, “please don’t invest here”. Not sure that we can afford such a message, even if it does bring in more tax than a hike in GST.

You correctly point out that most of our big trading partners have a capital gains tax in any event. Therefore, if we had one for foreigners only, they may not have to pay more tax overall, because, presumably, they would be getting a credit for the New Zealand tax in their own country. What NZ would essentially be doing is stealing the tax base of those foreign countries, assuming the foreign countries allow a credit in these circumstances, which they may not. However, my suspicion is that most foreign direct investment does not come from our trading partners, but rather come via Singapore, Hong Kong etc. ( the stats may prove me wrong on this point, and I have not checked) The investments would be structured in such a way as to not pay capital gains tax in any event. So the NZ tax would hit the bottom line, thus a real cost to investing in NZ.

There are a few other points to consider, but I think the above points would be enough to ensure that taxing only non-residents on capital gains does not gain any political traction. Only my opinion though.

Mark on February 12, 2010 at 11:05 am

Hi Vicki,

A right of reply

Yes I appreciate there is probably little interest in tax blogs, and probably less in CGT, now that Mr Key has declined to entertain it further. Which is all rather disappointing, as this is the time to open up the discussion, not close it down.

Your opinion is … interesting. Although I’m not sure the Tax Working Group (TWG) would agree with you, given they advocated for a comprehensive CGT (that would impact on both non-residents and residents). Are you suggesting the TWG did not considered the economic impact of CGT on foreign investment in New Zealand, from countries like Singapore, etc? Perhaps a member of the TWG might like to comment?

I’m also not sure I agree with your comment that implementing a CGT in New Zealand is effectively stealing the tax base of other foreign countries? One could suggest a contrary view (eg, we are finally asserting a legal right we have waived for so long – a right other nations have already asserted). Surely, its the other countries that have been stealing from us, because we don’t have CGT, so funds we might have taxed, have returned to those foreign nations (for them to tax). Surely CGT puts us on an international level playing field.

Finally, any structures or arrangements that avoid paying CGT could invoke the anti-avoidance measures that protect our tax base. I think arguments about not paying CGT are red herrings. Other jurisdictions have CGT, and no doubt they face the same issue – certainly revenue collected in other nations suggest its worth implementing.

PS: With regard to your poll, could it also canvas a non-resident option – rather than putting the debate in such black and white positions – which was the thrust of my initial comment? Thanks in anticipation.

And good luck with your blog. Lets hope I have ruffled a few feathers. Perhaps even Mr Key might be enticed to comment?

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