Comment: With the Tax Working Group’s interim report due on Thursday, Thomas Coughlan looks at the problems of the current tax system and how they might be overcome. 

Parliament exists because of taxation. Not just in the sense that taxation keeps the lights on. It runs much deeper than that. Taxation is, in many ways, Parliament’s raison d’être.  

Before the advent of regular parliamentary sessions, a monarch would call a Parliament whenever their court was close to running out of money, often when they had a war to fight. Taxes were levied intermittently and randomly – income for the Crown came from raising revenue on things like the number of ships in a harbour, the value of land, imports and even the number of windows in buildings.

Parliaments (as our current leaders well know) can be noisome things and monarchs would go to extreme lengths to avoid calling one. King Charles I managed to survive without a Parliament for 11 years, until he needed to raise a round of taxes to fight rebels in Scotland. 

Tax policy is no longer the exclusive province of politicians. Since the 1980s, New Zealand has taken the view that tax policy should be proposed by groups of experts, before politicians get their hands on it. 

The current iteration, the Tax Working Group (which will surely be committed to history as “the Cullen group”) will publish its first report on Thursday. That report will give an indication of where the group would like to steer our tax policy in years to come.

The group’s chair, Michael Cullen, made bold suggestions in March implying many of the Government’s could be addressed through taxation. Environmental problems? Tax pollution. Housing unaffordability? Tax capital gains. Rising levels of obesity? Tax sugar. 

Flat but not so fair?

Far removed from the random and often bizarre taxes imposed by monarchs on their nobles, New Zealand has a fairly flat, broad-based income tax system supplemented by GST.

Taxing income is relatively easy, which is why revenue from income tax accounts for the lion’s share of the money flowing into Government coffers. But it isn’t necessarily fair, or efficient. 

New Zealand is home to a small but growing landed gentry, whose wealth lies in property, rather than income. 

Taxing income but not wealth sends the wrong message: it discourages people from working and it encourages savers to plough their money into land instead of investing in more productive forms of saving.

Tax me the money

New Zealand isn’t far from being the first county with a tax system no longer fit for purpose. 

The first income tax was introduced in 1798 by English Prime Minister William Pitt the Younger.

Pitt needed the money. He was wracking up debt fighting Napoleon’s armies in Europe. There was wealth in Britain, thanks to the first stage of the industrial revolution, but the medieval forms of taxation failed to take advantage of the windfall gains.

Wealth was no longer about how much land someone owned, but how productive their factories were. The Government wanted a slice of that revenue and a graduated income tax was the way to do it.

But the industrial revolution is long over and, with an economy refocused on capital gains, an ageing population and the rise of the “gig economy”, the old tax system is in need of overhaul.

How much money

The question of how much money should be taxed will not be answered by the group’s report, which has committed to being fiscally neutral.

A discussion document released in March, gestured towards the challenges of a fiscally neutral tax system.

While primary revenue will remain steady at close to 30 percent of GDP, the pressures of the ageing population will mean operational expenditure will increase to 33.8 percent by 2045.

The group obviously cannot solve these problems by keeping the system fiscally neutral. By illustrating the severity of the problem, the best it can hope to achieve is to whip-up a political appetite for a more sustainable tax system. 

The Government would be wise to learn from Pitt and look to areas of new wealth for sources of revenue.

It might have more luck with creating a more efficient tax system. The discussion document signalled a move from a reliance on revenue raised from income tax, which currently makes up 40.2 percent of total revenue. 

That ageing population, along with the growth of the “gig economy” will eat into this revenue, meaning a replacement source will need to be found.

There is still wealth in the economy — just not in its traditional sources. 

The Government would be wise to learn from Pitt and look to areas of new wealth for sources of revenue.

Taxes on wealth, a capital gains tax or even a land tax could address these problems.

A land tax would encourage land to be put to its most productive use. Households with empty rooms would look to fill them, owners of small houses would look to bowl them and build bigger ones that house more people, maximising revenue.

Unfortunately, none of these are likely. A capital gains tax or a land tax could potentially be recommended, but they cannot apply to the family home or the land under it, which excludes most households in New Zealand. 

The working group is ultimately a political exercise, born out of Labour’s fear of taking its favoured capital gains tax to an election. The lasting outcome of the working group may not be the taxes it recommends but the framework it provides for a more root-and-branch reform of the tax code in the future.

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