Tax Working Group is inherently flawed.

Written By: - Date published: 3:40 pm, January 8th, 2010 - 16 comments
Categories: tax - Tags:

Marty wrote on taxation expert Craig Elliffes opinion series in the Herald a few days ago. The third in the series wound up with statement at the end that exemplifies the major issue with the Tax Working Group and its process.

At the tax conference of the Tax Working Group, Susan St John of the University of Auckland questioned whether it was appropriate that the group had embraced the objective of aligning tax rates which aimed at improving efficiency while not making equity (the transfer of taxes to the needy and the poor) any worse.

She asked whether “is not making equity worse” an appropriate equity goal?

It was a poignant question. Maybe it would have been a good idea to have had a wider representation in this review group.

Perhaps someone other than a male earning over $100,000?

Craig, thank you for pointing out the basic flaw in the group makeup and focus. As well as the group ignored equity issues, many startup companies and talented people in the industries I’ve been associated with over the year would argue that many of the basic objectives and assumptions of the TWG are flawed.

As Craig points out the government is only interested in a basic fix.

It quickly emerged in the discussions at the Victoria University Tax Working Group that any recommended changes to the tax system would have to be revenue-neutral at least. The financial position of the government is such that any proposal that increases the budget deficit is unacceptable.

The main intent of the tax changes appears to be related to a precept from treasury. It looks like simply an article of faith at the treasury rather than anything supported by evidence at small changes in tax rates.

A reduction in personal rates will also assist in retaining and attracting highly mobile individuals and it is the view of Treasury that reducing business and personal taxation will increase productivity and the growth of the economy.

From my experience around innovative businesses and the people that work in them, that is utter bullshit. In NZ the major reason people leave is because of either a hankering for travel when they are younger. The best immediate way of getting productivity is to be able to invest money into productivity improving systems and technology. To get long term productivity gains you need

The reason that they don’t return, or older more experienced people leave is the same – lack of an appropriate opportunity to work further in their fields of expertise. The main reason that we don’t have the types of innovative businesses around that can employ them and which they can grow their skills in is the incredible constraints on getting working and development capital. Virtually all major capital in NZ gets sucked into the safer property market rather than into productive businesses.

The capital available for startup businesses, especially the ones working on export markets, comes at such a cost that it amounts to giving away your business to the capital provider and working as an employee to them.

Highly mobile people with talents move away from NZ because they cannot find opportunities to work in NZ. Personal tax rates seldom have much of an impact. Virtually everywhere else that our people go to, the effective tax rates are higher once you add in all of the taxes and account for the reductions in services and the prices to get them.

This is clearly the case for Australia, the UK, and for much of US, which are the major locations of the kiwi diaspora. What is different in these markets is that the market is larger, it is usually easier to get capital at a reasonable rate, and there are more interesting smaller startup companies to work for.

It is clear from the proposed likely changes that the impacts will effectively shift the burden of tax from the more affluent in society to the less affluent. This may be in the form of increased GST or increased rents. This is the essence of Susan St Johns argument.

It also does little or nothing to increase the amount and availability of startup capital in NZ. While we are currently getting an influx of returning kiwis due to the global recession. We will continue to bleed talent as soon as the global recession starts weakening because there aren’t the small startups here to soak up our talent.

The results of this look at tax, assuming that the government takes up the ideas will probably be an effective shift of taxation from the affluent to the less affluent, partially concealed in higher rents. But there will be no significant change in anything productive for the economy. Structurally we will probably just see some tinkering at the edges and a lot of people who cannot afford it getting more costs lumped onto them.

Craig Elliffe: Some taxing problems built into system
Craig Elliffe: Time for tax reform but alternatives present new issues
Craig Elliffe: The $1.6b question – How to fill tax hole

16 comments on “Tax Working Group is inherently flawed.”

  1. yesss 1

    With due respect to those musing as above, the TAX working group isn’t a WELFARE working group and as such their remit was tax reform.

    • prism 1.1

      Tax and welfare go together. People in the past have known that very well when kings put an impost on them that left them with little. Fair taxation leaving people with a living wage sufficient to enable them to carry out their responsibilities and have some left over for discretionary spending too, is part of a well-run country’s revenue system.

      • yesss 1.1.1

        It’s a TAX working group not a 3rd form social studies essay on medieval feudalism.

        • prism

          The same problem of needing money for running things in a geographical area occurred in both medieval times then and now. It’s the same object only the taxation method may be different.
          The taxation burden is quite high on ordinary workers with GST on most things as well as PAYE and secondary tax and marginal taxes that affect low income people. I wonder what the clever lot on the TWG will do about those?
          But I get the feeling that you are not ordinary yessssss so you would be above and apart from these basic tax problems.

  2. infused 2

    I think you’re wrong about the statement saying people want to travel. That is part of it. Of all my mates that are now overseas, it’s about the money, honey.

  3. tc 3

    The premise and intent is all wrong…..there’s plenty to go around as long as those at the top accept reasonable reward and pay appropriate tax…..companies and individuals.

    But the top tier want more more more….whine on and on about how much tax they pay, how long it takes them to get to their beach houses, how tough it is etc etc

    The gap between ‘have and have not’ grows ever wider….this is all a load of BS to make it appear like NACT are into radical reform………yeah right !

    The mindset is all me me me and greed………..look where we are as a result.

  4. infused 4

    It’s not the top tier leaving over seas. Greed? How about wanting to get somewhere in life? Yeah, lets work in nz for $45k or go to aussie for 90k. Not only is the money better, so is the weather 😛

  5. Norma 5

    Whay don’t you all wait until the Report of the Tax Working Group is released and see what it says instead of making inane comments. You don’t even know what’s in it.

    • jarbury 5.1

      Yeah but expecting a bunch of rich white guys to promote tax changes that reduce inequality is like expecting a bunch of turkeys to vote for Xmas.

    • handle 5.2

      Norma, how about reading the linked stories. They talk explicitly about what is likely to be in the report, by one of its authors.

  6. Dr Graham Tayler, Ph.D Accounting & Finance) 6

    Imputed rental value of owner occupied housing (net of mortgage interest) should be taxed as income. This was the case in the UK until the 1960’s. It’s explained on the internet – just Google it. No great mystery. The policymakers are undoubtedly quite aware of it but they choose to overlook it because it is politically very contentious. Clearly, failure to tax it amounts to a subsidy to owner occupiers effectively capitalised into higher house prices. Also it is inequitable that rent payers effectively do pay tax at income tax rates on the rental value of the property they occupy (they have to find a gross amount of income and pay tax on that before having a net amount of income with which to pay rent). Introduction, would broaden the tax base, remove a subsidy capitalised into higher house prices and remove a gross inequity.

    • prism 6.1

      Imputed rental value of owner occupied housing (net of mortgage interest) –
      Governments find it contentious no wonder. Getting a dwelling that people can afford and which gives them security of tenure, a place where they belong and are settled and can live their lives should not be turned into an object for grasping taxation organised by the haves of our society.
      People on modest incomes who have bought a house can maintain it and invest in safety, and have real monetary return when they sell rather than an illusory pot of gold from investment in cold-hearted business schemes.
      It’s the difference between the greys who exist for themselves and money, status and orderliness and the others who may get along in a haphazard way, but just being people trying to make a happy, fulfilling life even at the unwealthy level of society. Taxing personal housing is similar to taxing every little amount of savings so that cents of tax are being drawn from bank accounts. We know that people have been discouraged from saving and tilted towards borrowing, not for capital investment in a house but consumer spending and borrowing. The government is always mouthing off about its bad consequences for a healthy national economy. Don’t try to quench people’s enthusiasm for investment in their own homes which help give a stable life and sure financial independence. This imputed rent idea would be self-defeating from a national point of view because it would increase more ‘nomadic’ living, which tends to
      social conditions deteriorating. Trying to tip more tax from the shoulders of the big earners to the middle and lower incomes in this way is contemptible.

  7. randal 7

    the tax working group eh?
    has anybody heard of welfare for out of work central bank governors and other panjandrums who need a bit of taxpayer money for their services.
    nice work if yu can get it.

  8. “No taxation without representation”.

    Why would you give any representation on a tax working group to groups in society who don’t actually have large amounts of members who are net contributors of tax?

    Bit like whinging why there aren’t more Chinese immigrants on a Treaty Grievance Review Committee..

  9. Pascal's bookie 9

    No house music without MDMA.

    /= only people listening to house music should be allowed MDMA.

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