Qualified support for tax changes

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Craig Elliffe, a consultant at Chapman Tripp and a professor of taxation law and policy at Auckland Univer- sity, has given the govern-
ment’s plans to revamp the tax system a seven out of 10 score card.
He welcomed the move to a more indirect weighting on the system through the increase in GST to 15% from 12.5%, but said more consid- eration should have been given to a capital gains tax.
On the tax changes overall, Elliffe said: “It’s got to be provisional because we just don’t know the detail, but broadly I think that they are moving in the right direction.”
Elliffe says the government should have looked seriously at becoming more like most other sophisticated OECD countries and introduced a tax on capital profits.
“But the broad issue is that the changes represent movement from direct tax to indirect tax, so that to me seems to make sense. It will encourage savings, which we have been so poor on, even though it could be a bit lop- sided,” he says.
The government’s plan to reduce the top tax rate was driven by three key issues.
“The first was that the top rate of tax is perceived to be a tax which is imposed on what would be termed a highly mobile tax base,” he says.
“Unless you are relatively attractive
to highly mobile taxpayers, then you will lose them to overseas jurisdictions. That’s the reason why they have been focusing firstly on the corporate tax rate, and then secondly on the tax on high individual earners.”
Elliffe says the government would have been sensitive to the fact that the country loses a lot of its highly paid people overseas as the evidence suggests New Zealand has the highest skilled working diaspora in the OECD.
“One in four of our skilled workers works overseas and we are second overall to Ireland, in general (non- skilled) diaspora.”
The second point to be drawn from the government’s plan is that it partly addresses the issue of directly taxing the most productive parts of the economy.
As a matter of efficient investment, he says the worst tax that you can impose on a tax system is a tax on business and highly productive units.
“The third argument, which has quite a lot of validity, is that if you have quite different rates of tax for different entities, then you are going to have a lack of integrity in your tax system.
“You are going to have a lot of tax planning, so people will decide for instance that rather than earning income in their own name, they will earn it in the name of a company or in the name of a trust.”
All three arguments are aimed at ad- dressing the need for what tax experts
call “horizontal equity” – a principle in that someone, being an entity or a unit, should be taxed at the same rate on the same amount of income.
Elliffe welcomed the raising of GST, but again with qualifications.
“GST is a honey of a tax. It can collect things very well and easily just by increasing it by a little bit.
“But the difficulty with it is that no matter how they present it, it is genuinely a regressive tax, and by that I mean basically it will be tax that will affect lower income earners more than it will affect higher income earners.
“So the rich are going to be absolute- ly quids in, when you examine it from a broad fiscal perspective.
“Unless they are compensated, which is the intention, lower or middle income earners will be bearing quite a proportion of that.”
The Government has indicated de- preciation allowances for buildings will be rescinded but the situation is still not clear as to how the new tax regimewill treat property in the broader sense.
“Something is not quite right as it currently stands,” Elliffe says. “We know it is a sector that does not pay its fair share of tax.
“It also doesn’t seem quite right that the proposal should be to just further complicate and sectionalise the tax system, so that residential property investors are disallowed deprecia-
tion deductions. Why should they be singled out, particularly, for that? “That’s the real issue there. The
real problem is that there is systemic asymmetry that we allow deductions for the expenses but we don’t tax the gains.”
“My own personal view is that they should bite the bullet and introduce a capital gains tax, excepting the personal home.”
John Key has ruled out introduc- ing a comprehensive capital gains tax, which as is it broadly understood, is a
tax on absolutely all assets. But Elliffe says it could well be that more work will be done on some kind of other capital gain tax.
“There are so many problems in defining what is capital and what is income. It would actually be signifi- cantly better if they just bit the hard question and introduced a capital gains tax, but just exempted the personal home.”
Elliffe says the Government should be congratulated for not introducing a land tax, as was recommended by the Tax Working Group. He says the proposed land was “too selective and too draconian”.
Now, with the Government’s inten- tions on the table, people can now move forward with some idea of what will lie ahead for the tax system.
Finance Minister Bill English will outline the government’s definitive plan for tax when he releases the budget on May 20

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