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Herald on Sunday editorial: Tax decision is common sense

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Christchurch orthopaedic surgeon Gary Hooper is surely not the only member of his profession to enjoy a game of golf on a Wednesday afternoon. But being interviewed on the course about a court ruling that he had been rorting the tax system was perhaps not the best look.

Hooper spoke to Radio New Zealand from the verdant fairways on Wednesday after the Supreme Court delivered its judgment in a landmark case that he and another surgeon, Ian Penny, had taken.

The court found that the two men had used company structures and family trusts to artificially lower their salaries and avoid tax.

The arrangements were not illegal at the time they made them. When the Labour Government raised the top personal tax rate to 39 cents in the dollar in April 2000, the surgeons' annual incomes, previously between $655,000 and $832,000, dropped to between $100,000 and $120,000.

The men formed companies which paid them lower salaries and distributed the rest to their families through family trusts. "There were no rules in place," Hooper said, "to suggest we had to pay ourselves a commercially appropriate salary."

Reaching that conclusion would have required the assistance of an accountant and a lawyer. But the rest of us would need no professional advice to realise that what was happening was wrong.

The pair enjoyed the support of "at least 90" people and doubtless thousands more were rooting for them to win. But the Supreme Court's finding struck a blow for common sense when it ruled that "income derived from personal exertion should belong in its appropriate taxation band and should not be inappropriately diverted away".

The hundreds of thousands of wage and salary earners who cannot organise their affairs so as to minimise their tax burden will resoundingly agree.

The decision follows months of discussion about whether the rich are paying their fair share. The National Business Review's annual Rich List, published last month, showed that the combined wealth of New Zealand's richest people has ballooned from $38.2 billion to $45.2 billion - the highest total ever - in a year of recession and global financial crisis.

Those for whom a rich list is something they take to the supermarket were urged to applaud the flourishing of a treasured entrepreneur class. But plenty of dissenting voices, including investment billionaire Warren Buffett and Trade Me founder Sam Morgan, say that they should pay more tax.

Phillip Mills of Les Mills International has said the wealthiest should pay higher taxes to get the economy back on track and stop cuts to health, welfare and education. And Sam Morgan's father Gareth co-wrote a book published last week that channels everyone from Plato to Adam Smith in arguing for the morality of taxation and of the "vertical equity" principle, which requires that the rich should pay disproportionately more than their share.

But ingrained in the Kiwi psyche is the idea (distilled into the popular bumper sticker that reads "Don't Steal: The Government Hates Competition") that taxation is a form of legalised theft, depriving people of their hard-earned money.

The landmark decision handed down this week provides the basis for a change of heart. In the past 25 years, the gap between the rich and poor has widened faster here than in any other country in the world and we are currently the sixth most unequal society in the OECD. It is time to ask ourselves whether this is the kind of society we want to live in, much less encourage.

- Herald on Sunday

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