New tax regime could be ‘equality neutral’

by Jake Quinn

The release of the Victoria University Tax Working Group (TWG) report has been met with mixed reactions. Business NZ don’t want a land tax, are concerned about a Capital Gains Tax, but wholeheartedly support dropping and aligning the top income and business tax rates to 30 percent.

The CTU and the Greens don’t want GST increases but are happy to see taxes on property investment.  Labour welcomes the report but urges the government to take quite seriously its equity implications, for fear of hitting the ‘hard working middle class’ who own property but wouldn’t benefit much from the income tax cuts, all while National doesn’t want us to get our knickers in a twist, saying “there is plenty of time for debate”.

The possible implications of this report, if its put into action, are huge, both in terms of benefits and risks. If the bulk of the recommendations were implemented this reform would approach in magnitude the neo-liberal reforms of Roger Douglas in the mid 1980s.

The genius of the TWG report is that it doesn’t prescribe a set of specific rates and cuts, but merely provides a guide for where change ought to occur, based on what they, rightly or wrongly, think is ‘wrong’ with the tax system.

In short they suggest cutting middle and higher income taxes to 30 percent, and paying for this with a Land and Capital Gains Tax. They also suggest GST be increased from 12.5 to 15 percent, although the money gained through that measure would likely be almost soaked up by the ‘equity provisions’ required, say through a tax-free threshold, to ensure such an increase didn’t hit the poor too hard.

Interestingly, the TWG’s suggestions could, if implemented ‘fairly’ be a) revenue neutral (ie they would create the same amount of tax revenue for the government as the current system does) and b) just as progressive, or fair, as the current system.

Cutting income taxes (especially the top rates) would advantage the wealthy, but a Lands and Capital Gains tax would disadvantage them, as they own the bulk of such assets.  If the levels of tax cut and new tax were set right, the balance could be such that the average wealthy person would be no better or worse off than they were before.

The same measure could be applied to the average middle class and poor person, although I imagine a tax-free threshold for income tax would be required to offset the Land and Capital Gains Tax losses by the middle class.

It is possible for this entire exercise to be ‘equality neutral’ in that the gaps between the rich and poor are unchanged, and this is the challenge*.  If this balance was met the advantage would be a more efficient tax system and a faster growing economy, without an obvious downside.

I have serious doubts however, that National would keep all this in mind with their changes to the tax system. It is more likely that they would abandon the Land and Capital Gains aspects of this plan because they are ‘politically difficult’, while using the TWG report as a good excuse to cut income and corporate tax rates.

*Personally i’d have no problem with a system that redistributed more wealth from the haves to the have-nots, but I realise that is not politically possible, especially under a National government.