Should the way tax is gathered be changed? We set out the arguments for and against.
The debate about how New Zealanders should be taxed has begun again, now a Government appointed Tax Working Group of academics, officials and tax accountants has issued its lastest report.
They say raising the rate of the Goods and Services Tax (GST) could increase the economy's efficiency if it was
used to shift the mix of taxes away from income tax.
An officials' briefing paper issued yesterday said lifting GST to 15 per cent would raise an extra $2.1 billion a year. That would rise to $6.2 billion if the tax was set at 20 per cent.
The group says GST is less regressive than generally believed, especially if measured over a lifetime. Compensation for those on lower incomes should be considered as part of any tax reform package.
Quick opposition to the group's claims came from Council of Trade Unions economist Bill Rosenberg, who said any increase in GST would hit low income families and workers hard.
The rise was being proposed, said Rosenberg, in order to lower income tax rates, on the rationale that higher income tax rates cause people to leave New Zealand. "We do not accept that people move that readily simply because of tax rates."
It was much more likely, he said, that the low wages and salaries in New Zealand are the biggest driver for emigration."
The CTU is arguing for a more progressive tax system - one that had higher proportional rates for those more able to pay.
It also supports introduction of a capital gains tax to raise revenue, tax more fairly, and encourage investment in productive assets other than property, as long as the first home is excluded.
What the Tax Working Group says:
"Changing the rate of GST could provide extra revenue as part of a broader tax package, and if used to shift the mix of taxes away from income taxes, could increase the efficiency of the economy in the long term."
"The amount of additional revenue received, for example, at the 15 per cent rate, is $2.15 billion, in the absence of behavioural changes."
"GST is arguably New Zealand's most efficient tax, and the broad base and few exemptions mean there is a high rate of compliance among taxpayers.
"Because of this, and the low 12.5 per cent rate (both relative to other taxes, and to other countries), raising GST is less at risk from avoidance and more efficient
than it otherwise would be."
And since GST is already in place, there is no need for a big implementation or re-design of the system.
Inland Revenue has said that shifting the tax mix toward GST was "potentially a good move". But if the rate was raised, they did not want new GST tax exemptions.
"Maintaining a broad base is critical to the efficiency, fairness, revenue potential, and administration of the tax and the group was generally in agreement with that position," said the group.
"There may be fairness issues with changing the GST rate. Although GST is less regressive than generally believed - particularly if measured by expenditure or on a lifetime basis - increasing the rate could impact lower income or vulnerable households, particularly in the short run."
Tax avoidance risks were less at new, higher rates of GST - for instance 17.5 per cent or 20 per cent, than some suggested, and the impact would "only slightly regressive" - but this could be addressed by way of automatic compensation mechanisms for most of those on low incomes, and other tax changes for those on middle incomes.
If the rate of GST was changed, then compensation for those on low incomes should be considered.
See more at the Policy Advice Division of the IRD. More from the Tax Working Group here.