Keeping taxes low and easy to comply with should be the primary focus
Comment: As a former minister of revenue, New Zealand’s longest serving to date, I took more than a passing interest in a speech last week from the current minister, David Parker. In it, he proposed establishing a set of tax principles that could be included in legislation to guide the tax policy direction of future governments.
Such a move would help ensure greater consistency and certainty in future tax policy, as well as giving the public a clear set of measures against which they could assess the tax performance and policy of those governments.
There is much merit in what Parker suggested, although as he himself acknowledged, many obstacles will need to be overcome. Correctly, he suggested for such an approach to be viable it would need the buy-in of at least the major Opposition party to give it any durability and credibility beyond the life of the current Government.
That will require the principles to be established at a high and general level, which risks making them little more than meaningless platitudes.
In any case, the National Party has already expressed cynicism about Parker’s idea, claiming it is no more than a ruse to enable Labour to introduce new taxes if re-elected next year, something Parker has denied.
Unfortunately for him, the Prime Minister’s less than clear comments this week on whether Labour will introduce a wealth tax if re-elected – despite, during the 2020 election campaign, having ruled it out so long as she was Prime Minister – play right into National’s hands.
Nevertheless, Parker should stick to his guns, at least for the time being. The debate is worth having, no matter the difficulties and entrenched positions. It is unlikely though, over the longer term, to lead to the specific outcome that Parker may be seeking.
“Experience suggests that taxes imposed for other than revenue-raising reasons – for example, income redistribution, reducing inequity, or just political reasons – are unlikely to be administratively efficient or generate the revenue anticipated.”
Tax is an inherently political question, even though the tax system itself is merely the mechanism by which the government collects the revenue it needs to do its job. Since the 1980s, successive governments have worked hard to ensure greater certainty about government spending plans through measures such as the Public Finance Act, the Fiscal Responsibility Act, and the Budget Policy Statement process.
Alongside that, the Generic Tax Policy Process based on discussion documents and inviting public feedback has brought about more transparency. However, the process is still nowhere as clear cut as it has become on the expenditure side, which is another argument in favour of Parker’s proposal.
The fundamental debate is the extent to which the tax system should focus on collecting revenue as efficiently as possible, and how much it should be used to redistribute wealth and deliver social policy programmes.
Since the advent of the welfare state and the development of progressive taxation, the tax system has become inherently more complicated as people seek to minimise their tax liability through legitimate means such as tax rebates, or illegitimately through tax evasion.
That in turn has led to the development and constant upgrading of what are called anti-avoidance rules to close loopholes as they arise and prevent the tax evasion. And, as new avoidance and evasion practices develop, ever more rules become necessary to plug the gaps, making the system increasingly more complicated, and harder to administer.
Alongside that, the legal and accounting professions now spend much more of their time advising their business and corporate clients about how to legitimately meet and legally minimise their tax obligations.
At the same time, the tax system has been used more and more by governments for purposes other than the strict collection of tax, simply because Inland Revenue’s database is more comprehensive than most others in the public sector.
In addition to its basic function, we now use our tax system for the delivery of Working for Families Tax Credits, the collection of student loan repayments, the Child Support Scheme, and collecting the Accident Compensation Income Earner levy. All these add to the complexity of the tax system, even if an overarching set of tax principles is adopted.
Since the 1980s, all governments have adopted a “broad base, low rate” model, whereby the spread of taxes should be broadly based between business, personal income, and consumption, with the individual rates being progressive, but kept as low as possible. I have always believed that keeping taxes low and easy to comply with should be the primary focus.
I always kept on my desk a copy of Canada’s first income tax statute, the Income Tax War Act 1917, as a reminder of how complex tax systems had become. This act is but 24 clauses long, 11 pages in total, and is breathtaking in its simplicity. Now, Canada’s Income Tax Act is 3,227 pages long!
During my first stint as minister of revenue in the mid-1990s, during the National/United coalition government, I began work on simplifying the tax system and rewriting the Income Tax Act in plain English.
That lengthy project was led very thoroughly by the eminent jurist, the late Justice Sir Ivor Richardson, and I was delighted, as part of the Clark Labour-led government, to steer his rewritten, and still current today, act through Parliament in 2007. Even so, it is about the same length as Canada’s act.
As well as trying to simplify the tax system and make it operate more smoothly, I was also keen to improve the collection of taxes that had been properly levied but were not being paid. In 2008, with Sir Michael Cullen’s support, I secured more resources for Inland Revenue’s collection and enforcement work.
Within a year, officials were reporting that they were getting a six-fold return on that additional funding in terms of collecting those outstanding taxes. Consequently, that programme has been expanded by successive governments.
My strong view is that, with one notable area of exception, New Zealand does not need new or additional taxes. If current tax law is applied fully, and the system resourced to operate accordingly, New Zealand can easily and fairly raise the revenue it needs to do its job. Experience suggests that taxes imposed for other than revenue-raising reasons – for example, income redistribution, reducing inequity, or just political reasons – are unlikely to be administratively efficient or generate the revenue anticipated.
Moreover, to have any chance of working they will almost certainly require substantial bolstering of the anti-avoidance rules, further adding to the complexity of the system. And the more complex the system is, the more people will look to even more ways of getting around it.
The one notable area of exception is, in my view, environmental taxes, but as a replacement for and not extension of other existing forms of taxation. Much more work needs to be done here, but the idea certainly merits more consideration, especially as the social and economic consequences of climate change begin to bite more strongly.
Whatever else they may achieve, Parker’s proposals have drawn fresh attention to the function and purpose of our tax system. His initiative may well falter because of its ideological coyness, being a little too cute for many to believe he does not have a wider agenda.
Nonetheless, he could make considerable progress by further ensuring all current taxes are efficiently, properly, and therefore fairly, collected, consistent with the “broad base, low rate” objective, and that the system overall is continuously simplified.
Further strengthening of enforcement mechanisms would help answer Parker’s other legitimate question: whether the wealthy are paying their fair share of those taxes. And he could also bring his parallel experience as minister for the environment to the table to initiate a thorough debate about the scope and merit of resource allocation and consumption taxes.
Both would be more lasting achievements than settling for a vague and general set of tax principles, likely to be so meaningless no future government would take them seriously.