Let’s not complicate the tax system even more
Keeping taxes low and easy to comply with should be the main objective
Comment: As a former revenue minister, New Zealand’s longest-serving minister to date, I took more than passing interest in a speech last week by current minister David Parker. It proposed to establish a set of tax principles that could be included in legislation to guide the direction of tax policy for future governments.
Such a move would help ensure greater consistency and certainty in future tax policy, while giving the public a clear set of metrics against which to assess the tax performance and policy of these governments.
There is a lot of merit in what Parker has suggested, although, as he himself acknowledged, there are many hurdles that will have to be overcome. Rightly, he suggested that for such an approach to be viable, it would need the buy-in of at least the main opposition party to give it durability and credibility beyond the lifetime. of the current government.
This will require that the principles be set out at a high and general level, which risks turning them into meaningless platitudes.
In any case, the National Party has already expressed cynicism about Parker’s idea, saying it is just a ruse to allow Labor to introduce new taxes if they are re-elected l next year, which Parker denied.
Unfortunately for him, the Prime Minister’s unclear comments this week on whether Labor will introduce a wealth tax if re-elected – despite ruling it out during the 2020 election campaign as long as ‘she was Prime Minister – play directly into the National hands.
Nonetheless, Parker should stick to his guns, at least for now. The debate is worthwhile, whatever the difficulties and the entrenched positions. However, it’s unlikely in the longer term that this will lead to the specific result Parker might be looking for.
“Experience suggests that taxes imposed for reasons other than the collection of revenue – for example, the redistribution of income, the reduction of inequality or simply political reasons – are unlikely to be administratively or effectively effective. to generate the expected revenue.
Taxation is an inherently political issue, even though the tax system itself is only the mechanism by which the government collects the revenue it needs to do its job. Since the 1980s, successive governments have worked hard to provide greater certainty about government spending plans through measures such as the Public Finances Act, the Fiscal Accountability Act and the Statement of Accountability process. Political budget.
At the same time, the generic tax policy process based on discussion papers and inviting public feedback has brought more transparency. However, the process is still nowhere as clear as it has become on the spending side, which is another argument in favor of Parker’s proposal.
The fundamental debate is to what extent the tax system should focus on collecting revenue as efficiently as possible, and to what extent it should be used to redistribute wealth and implement social policy programs.
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 minimize their tax liability through legitimate means such as tax refunds. tax, or illegitimately through tax evasion.
This, in turn, has led to the development and constant updating of so-called anti-avoidance rules to close loopholes as they arise and prevent tax evasion. And, as new avoidance and evasion practices develop, more and more rules become necessary to fill in the gaps, making the system increasingly complicated and difficult to administer.
Along with this, the legal and accounting professions now spend much more time advising their businesses and clients on how to legitimately meet and legally minimize their tax obligations.
At the same time, the tax system has been increasingly used by governments for purposes other than strict tax collection, simply because the Inland Revenue database is more comprehensive than most others in the public sector.
In addition to its core function, we now use our tax system for granting Working for Families tax credits, collecting student loan repayments, the Child Support Scheme and collecting Accident Compensation Income Earner tax. All of these add to the complexity of the tax system, even if an overall set of tax principles is adopted.
Since the 1980s, all governments have adopted a “broad base, low rate” model, according to which the distribution of taxes should be spread broadly between business, personal income and consumption, with individual rates being progressive, but also maintained. low as possible. I have always believed that keeping taxes low and easy to comply with should be the main objective.
I always kept on my desk a copy of Canada’s first income tax law, the Income Tax War Act of 1917, as a reminder of how tax systems had become complex. This act has only 24 clauses, 11 pages in total, and is breathtaking in its simplicity. Now Canada’s Income Tax Act is 3,227 pages long!
During my first term as Minister of Revenue in the mid-1990s, under the National/United coalition government, I began working to simplify the tax system and rewrite the Income Tax Act plain language income.
This long project was carried out in great detail by the eminent jurist, the late Mr Justice Sir Ivor Richardson, and I was delighted, as a member of the government led by Clark Labour, to get his rewritten law passed, and still current today, by Parliament in 2007. Even so, it is about the same length as the law of Canada.
In addition to trying to simplify the tax system and make it more fluid, I also wanted to improve the collection of taxes that had been correctly levied but were not paid. In 2008, with the support of Sir Michael Cullen, I secured more resources for the collection and enforcement work of the Inland Revenue.
Within a year, officials reported that they were getting a sixfold return on that extra funding in terms of collecting those unpaid taxes. Consequently, this program has been expanded by successive governments.
My belief is that, with one notable exception, New Zealand does not need new or additional taxes. If current tax laws are fully enforced and the system has the resources to operate accordingly, New Zealand can easily and fairly raise the revenue it needs to do its job. Experience shows that taxes imposed for reasons other than revenue collection – for example, income redistribution, reduction of inequality or simply political reasons – are unlikely to be administratively efficient or effective. generate the expected revenue.
Moreover, to have any chance of working, they will almost certainly need a substantial strengthening of anti-avoidance rules, which will further add to the complexity of the system. And the more complex the system, the more people will look for even more ways to circumvent it.
The only notable area of exception is, in my view, environmental taxes, but replacing and not extending other existing forms of taxation. A lot more work needs to be done here, but the idea certainly deserves more thought, especially as the social and economic consequences of climate change start to bite harder.
Whatever else they might accomplish, Parker’s proposals have brought renewed attention to the function and purpose of our tax system. His initiative may well fail due to his ideological timidity, being a bit too cute for many to believe he doesn’t have a broader agenda.
Nevertheless, it could make considerable progress by ensuring that all current taxes are efficiently, correctly and therefore fairly collected, in line with the objective of “broad base, low rates”, and that the system as a whole 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 environment minister to the table to start a thorough debate on the scope and merit of resource allocation and consumption taxes.
Both would be more enduring achievements than settling for a vague and general set of tax principles, likely to be so meaningless that no future government would take them seriously.