PAUL Now the last time the government asked for a review of the tax system it was 2001, a group led by Accountant and Tax Specialist Rob McLeod came up with a list of ideas, some of them quite radical, and this was promptly ignored by the then Finance Minister Michael Cullen. In May this year, a new government followed the same path, asking a group of 13 men to figure out how to improve our tax system, men such as Gareth Morgan, Rob Cameron and once again Rob McLeod. After six months their work is all but done, they're due to report to government in December and the report is sure to spark some heated political debate, but today we get an advanced peak into the working group's thinking. Will this report follow its predecessor into the dustbin of history, or might it actually hit our wallets. The head of the working group, the tax working group at Victoria University, is Victoria University's Professor Bob Buckle, and you are the Professor of Economics at Victoria University, welcome to Q+A.
PROF BOB BUCKLE - Pro Vice Chancellor, Victoria
Thank you Paul, it's a pleasure to be on your programme.
PAUL Why do we need a reassessment of the tax system?
BOB Paul, in 1989 the OECD said that New Zealand had one of the least distorting tax systems in the world and even by the lat 1990s that was probably a fair assessment. In the intervening years quite a bit has changed and I don't think we can say any longer that we have a world class tax system. The Prime Minister recently in a speech discussing some of the issues required to improve New Zealand's economic performance, identified the tax system as one of the six pillars. He said we need a world class tax system. Today I don't think we've got that system, and there are a number of reasons why that's the case.
PAUL The OECD still thinks we have a good tax system doesn't it?
BOB Well since the early part of this decade a number of things have changed really to sort of eat away at what was at one time a reasonably coherent tax system.
PAUL So when you say we had a coherent tax system, what it was simpler than it is now? In 89 we had a simpler tax system than we have now?
BOB And in the late 90s as well.
PAUL And this is perceived to be an impediment to productivity is it?
BOB What we want, and the Minister of Finance has recently made this point, what we want is a tax system that's fair, that's simple, and a tax system that does little to damage economic growth. In the last decade we've had changes to the tax system which have undermined those objectives, and maybe I could mention some of those changes. I think one of the significant changes is when we broke the alignment between the corporate tax rates and the trustee tax rates and the top personal tax rates. That opened up quite a number of incentives to change people's financial affairs, to get around the tax system and bias activities in ways which may not have been beneficial for growth, and also it has created an unfair tax system. Another thing that has changed is that the world has moved on. The world has moved on in quite significant ways. Corporate tax rates around the world have started to fall, and we have not significantly changed tax rates, also personal tax rates are changing, and we also need to be very conscious of the fact that Australia is reviewing its tax system, and where it goes particularly on corporate tax rates, we need to be ready to offer a menu of options to respond to that.
PAUL Have you got a suggestion yet of where the corporate rate should be set, cos we have reduced?
BOB Well let me just go back a wee bit and explain why I mentioned that rate in particular. In New Zealand we tend to put quite a heavy emphasis on collecting taxes from those activities, or relying on taxes which are most damaging for growth, that is we collect around about 60% of our tax revenue from taxing salary and wage earners, and from drawing on company taxes, and that's fairly high compared to a lot of developed countries. The research and experience suggests that those are the taxes which are probably most damaging for growth and employment in investment, and our ability to compete internationally.
PAUL What corporate and income tax?
BOB And personal income tax.
PAUL Yeah exactly, good, okay. Your brief of course, Bill English wants you to broaden the tax base right, what does that mean, broadening the tax base?
BOB The way in which our deliberations are going - can I just say that the tax working group has been meeting together now since June, we have been working through the entire tax system, and we have been putting our deliberations up on the internet for people to actually review and respond to, and two of sort of the issues that I think are merging - one is whether or not we should be broadening the tax base, and secondly whether or not we should be changing the mix.
PAUL Right, now let's talk about the mix, so you say that personal income tax and corporate rate, that's where we get most of our taxation and that might be damaging to the economy. Something that's been discussed a lot lately is capital gains tax, and you had an American expert, Len Burman, come here to speak and he said we have to have a capital gains tax, he said the current regime favours the rich, who of course can buy and sell a beach property or a commercial property, make maybe half a million dollars and pay no tax on that. What's your thinking on a capital gains tax?
BOB Well Paul, we're looking at a range of options for broadening the tax base, and capital gains tax is certainly one of those options which we're looking at, but it's not the only one, so I should stress that at this point in time.
PAUL Well no I'll get on to other ones. So tell me about capital gains tax, because we've never really had a capital gains tax have we? How much revenue could we get from a capital gains tax do you think?
BOB Well New Zealand's unusual in not having a capital gains tax, we do tax activities which generate income from capital gains, but it's inconsistent and ad hoc, so one of the attractions of looking at capital gains tax is if you like it's a more comprehensive way of taxing incomes, so that would then bring into the net, if one was introduced, and of course that's a decision for government to make - it would bring into the net income that's generated from for instance the buying and selling of holiday homes or other assets which may not be contributing directly to ...
PAUL If we had a comprehensive capital gains tax which included pay8ing tax on any profit you make from the sale of the family home, your first home, how much could we recoup, how much could come into the net?
BOB Well a comprehensive capital gains tax, one estimate we've been given would be quite a substantial amount of revenue, it would be of the order of maybe eight to nine billion dollars, and that would give you a lot of scope to change the mix of the tax system. If you excluded the family home that would halve that, and a lot of countries do provide exclusions for the family homes in one form or another, but I just stress this is only one of the options for broadening the tax base that we're looking at.
PAUL So should we have - is it the working party's view at the moment that we should have a capital gains tax?
BOB Paul, the working party is still working through different options at this point.
PAUL Would it be worth recommending it because the Prime Minister has said he'll take an awful lot of convincing, I spose because he wants a second term.
BOB Well Paul the decisions about what changes are made to the tax system will be the decisions by government. Our role as the tax working group is to say what's wrong with the current tax system, what are the direction of changes we think warrant serious consideration, and as I said before we think two serious issues are, looking at changing the mix, and that that might need some financing from alternative taxes broadening the base.
PAUL But it does seem from what you say, that if we were to get a capital gains tax with or without the family home being included under the umbrella of that, that there could be room for significant income tax reductions or reduction in the corporate rate, yes?
BOB Quite possibly, if that was the direction in which they wanted to go.
PAUL What about estate tax, death duties?
BOB Well again that's been thrown into the mix of the types of taxes we could look at to broaden the base. We did have those taxes at one point, they were eliminated, and the group when looking at this was concerned about incentives to move elsewhere to avoid that sort of tax, so it's been assessed.
PAUL Do they have that in Queensland, do they have that in Australia, death duties?
BOB I'm not quite sure.
PAUL Pass. GST you've been looking at, is it possible we could take something of a little bit of a hike in GST?
BOB Well again that's part of the mix of options for say broadening the tax base, and what are the attractions of the Goods and Services Tax? Well it's a very efficient tax in the sense that it's less damaging to growth activities than say taxing personal incomes and corporate taxes, so it has that attraction, and also New Zealand has a very comprehensive and well managed Goods and Services Tax, but there are some downsides to increasing the Goods and Service Tax as well.
PAUL One of which I spose is a matter of fairness where GST really starts to get dodgy is if we go up say to 15%, the millionaire is paying the same tax for a loaf of bread as the pauper.
BOB Yes, that's one way of explaining that if you do increase Goods and Services Tax, at least in terms of current income, tends to be as a proportion of their current income, the lower income pay more than the higher income, so it tends to be what we call regressive, but in terms of a life time income that's not quite the same, but another reason why we have to look carefully at changing those sort of taxes is that at the moment there's good compliance of that tax, and one does need to be - with introducing any new tax - making sure that you can maintain good compliance.
PAUL I suppose one thing we've gotta bear in mind also is our international position, we cannot afford to get too far out of line with Australia for example, in our taxation system.
BOB That is certainly a key indicator for us, and as I mentioned before, one of the keys to changing the tax system is what are corporate tax rates doing internationally, and actually internationally they have been coming down. We had a relatively low corporate tax rate in the early 90s, we no longer have a relatively low corporate tax rate, so we do have to be wary of that because corporate tax rates will influence where firms locate, where investment will flow, and that makes a difference to family incomes, to jobs, and so we do have to keep any eye on that.
PAUL Whatever you decide, do you expect the government to take any notice of you?
BOB Well, I think it's a very good exercise to go through, it is timely to assess our tax system, and it's important for our economic income, it's important for income distribution, it has to be fair, we don't have a fair and efficient tax system, or at least not as fair an efficient as it was, so it is very timely to review the tax system, and we will be reporting at the end of December. I'm sure the government will put that in the mix and weigh that up with other advice they'll be getting.
PAUL Professor Bob Buckle, thank you very much. Bob Buckle is the leader if you like of the taxation working group.