The Tax Working Group has set a new standard for transparency, so its report today won't exactly be full of surprises. That doesn't mean the political dynamite it contains will be any less explosive, however

When the Tax Working Group – aka the Buckle Brigade – release their final report this morning the government will be handed the final piece of the toolkit with which they're to rebuild the New Zealand economy this year.

Cabinet has been waiting on three reviews – the first report by the 2025 Taskforce (abysmal), the Capital Markets Taskforce (vital), and now the 60-odd pages expected from the Tax Working Group – before it decides what reforms it wants to make as New Zealand emerges in relative good health from a recession that has left America and Europe reeling, and still fragile. Thank goodness for Asia!

I had reservations about the make up of the tax group from the start. Its thirteen members were almost exclusively rich pakeha men. Women? Not a single one. Maori? Rob McLeod was there, the former Business Roundtable head. And, er... Anyone who isn't right of centre? Um, anyone?

Taxation and representation go hand in hand, yet frankly this group is an elite cabal.

Who was there to challenge conventional wisdom? Perhaps John Shewan of PricewaterhouseCoopers? He advised Westpac on its taxes when it was cheating New Zealanders out of $961 million. As the Sunday Star-Times Business section said as it awarded him one of the brickbats of the year,

While some may view this as legitimate sport, the fact is, tax dodging is damaging to this country and increases the burden on the ordinary mortals who pay their dues.

I'm left wondering why he wasn't charged, or at least censured by the accountants professional organisation, for giving such advice; so why on earth is he helping re-design the country's tax system? Sometimes New Zealand is just too small for sanity.

All of those concerns remain, and we'll see today whether these knights of prosperity have been able to see beyond themselves to the greater good of their country, because taxes are political dynamite. Just ask Michael 'chewing gum' Cullen or Mike 'deep, dark secret' Williams. Dynamite, I tell you.

But beyond the politics, the process that the working group and the government has followed has been admirable. Exemplary, even.

First up, Bill English has been crystal clear with his message; any tax reforms must be fiscally neutral, fair and broaden the government's sources of income. It can't afford to sacrifice revenue. Although that's angered some on the right, it's only common sense and reflects the public appetite (and another sign this government is willing to incentivise rather than get caught up in free market ideology). English deserves praise for giving the group clear parameters.

But more importantly, the group itself has set a new standard for public reviews. The group refused to be rushed and, perhaps recognising its own weakness, has sought outside advice. Even a less than conservative woman, Susan St John, was invited to attend some sessions.

However the most impressive part of the process has been the group's transparency. The group created its own website, and at the end of each of its five sessions it has released a full summary of its meetings, plus the papers and presentations it considered in its deliberations. Chair Bob Buckle even came on Q+A last October and, while choosing his words carefully, was willing to engage, even calling our taxes on capital "inconsistent and ad hoc".

Now that a government review body has done its business in such pure sunlight without our democracy dissolving or the free flow of ideas being hampered, my hope is that a new threshold has been set and others will be compelled to follow. From now on, such transparency should be a given.

The group's openness means that, while I don't know what will be in the report, I can make a few informed guesses.

For a start, personal taxes will be declared too high and unproductive. The group says it's considering "changes to align the top personal and corporate and trust rates", ie cutting the top tax bracket to avoid avoidance.

Is it a coincidence that the members of the working group, those they advise and most of their mates all pay the top tax rate on their incomes?

I'll be interested to see what evidence they draw upon to support their claim that our top tax rates is cripplingly high and, as a result, costing us talent. Yes, we rely more heavily on income tax than most countries because we don't have a capital gains tax. But look at this OECD report from 2008. Table 1.7 measures, "top marginal combined personal income tax rates on gross wage for a single individual, measured at the income level where the top statutory rate first applies". If you leave out social security contributions and stick to straight income tax, 12 OECD countries demand lower taxes, 17 countries higher. We're hardly out of kilter.

To offset the recommended income tax cuts, there will be new taxes on capital.The group has said,

"Consideration needed to be given to changing and extending the taxation of capital to make it more consistent and principled across the capital base."

Land tax? Capital Gains Tax? I'm not sure. The group will offer the government several options to choose from, and the government will choose one.

But one recommedndation I'm picking, and which the government can be expected to run with, is the end of Loss Attributing Qualifying Company (LAQCs). Why encourage people to set up companies merely to make a loss and lock in tax advantages? LAQCs have driven thousands of New Zealanders (myself included) and $200 million into rental property, at the expense of other savings and investments. Five times as much is invested in residential rental property than the share market; it's got to stop.

The government may not be able to un-do the LAQCs already created, but it can stop any more being started. So long LAQCs.

What I'm most interested in is whether the group will also recommend an increase in GST. From a pure, theoretical tax perspective higher GST makes sense. It's simple, unavoidable, no compliance costs... But it's also regressive, hitting the poor hardest. If the government wants to hold onto seats such as Waitakere and Maungakiekie next year, it should stay well away from any such recommendations.

Because after all's said and done, it's all for nought if the politics don't work. For the government, the reports are in and it's finally time to make some decisions. It's about to get very interesting. Put your fingers in your ears and wait for the bang.

Comments (3)

by on January 22, 2010
Anonymous

I agree on the fact that too much capital has been diverted to idle and unproductive use by the current set of incentives to invest in rental properties in NZ. This, along with the expectation of growth in property values, has held back the country significantly. So, I subscribe to the recommendation of putting an end to LQCAs, but I would go further and recommend capital gains taxes on all rental properties and second homes, along with a compulsory standard certification of building fitness in commercial transactions conerning buildings (rental, leases and sales), so as to incetivize maintenance and up-keep investment. On the other hand I am not persuaded by your comparison across marginal income tax across OECD countries. I feel that one cannot compare directly marginal income tax in NZ with the rest of the OECD countries simply because the public sector provides much more -- on average -- in other OECD countries than it does in NZ. Let's take an example which concerns us all as parents (but one can also look at public transport and transport monopoly): the educational standard of High School teachers in NZ. I believe it is the only (or one of the few) OECD country in which one can be a high school teacher in a subject without a university degree on that subject. This is a serious anomaly which no-one talks about but has serious consequences for the general level of educational attainment of our high school graduates. The end result is a relatively low level of human capital, which forces the "dumming down" of tertiary education institutions. There has been no serious debate in the public sector (or invetigation) on the true economics consequences of such a low level of educational qualifications in the system. I expect it to be very costly to NZ society. So, what most of us pay in marginal taxes DOES NOT deliver what the public sectpor delivers elsewhere in the OECD.

by J Keenan on January 22, 2010
J Keenan

 

Tim the figure is $200 billion, not million into rental property.

The TWG aside from being chaired by Bob Buckle had two other academics from Victoria, Arthur Grimes from Motu Economic and Public Policy Research and Gareth Morgan amongst its permanent 'membership'.

I think in the world of NZ taxation these guys would be considered liberal (in the left-right sense) and at the very least independent.

Add to that as you mentioned input from Susan St John you also have Peter Conway (CTU), Andrew Coleman (another Motu member) and two further academics (one an American who worked in tax analysis in the Clinton Administration) attending selected sessions I find it kind of hard to see how much more balanced the TWG could have been in a predominantly right wing sphere.

"Is it a coincidence that the members of the working group, those they advise and most of their mates all pay the top tax rate on their incomes"?

I think you'll find from their own admission it would be only half their mates who would pay the top tax bracket, the other half as the media has rightly ripped into will already be sheltering their income away.

 

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