Inland Revenue weighs up ways of hiking taxes to pay for ageing population

The Inland Revenue is supportive of lifting the GST rate from 15%, if required.

Inland Revenue is flagging its view that Kiwis will likely need to pay more tax in the future to cover rising costs associated with an ageing population.

The tax department notes that by 2060, a quarter of the country’s population is expected to be over the age of 65, up from about 16% today.

It is using its three-yearly “Long-Term Insights Briefing” to put options on the table for how governments can prepare for the future.

Releasing its draft for consultation on Thursday, Inland Revenue recognised governments could cut spending rather than collect more tax.

But it made the point that the future is uncertain, so the tax system should be designed in such a way that more revenue can be generated fairly and efficiently if required.

Inland Revenue concluded the priority should be figuring out how income and consumption taxes can be easily adjusted.

Indeed, personal income tax makes up 52% of New Zealand’s tax take, company tax accounts for 17% and GST for 25%.

Inland Revenue said exploring new types of taxes, like wealth, land or social security taxes for example, should be a secondary consideration.

On the consumption tax side, the department was supportive of lifting the GST rate from 15%, if required.

It said the impact on low-income earners could be mitigated with the use of tax credits.

It saw this as more effective than lowering the GST rate on necessities, like groceries.

Inland Revenue was less definitive when it came to identifying the best ways of lifting income taxes.

It noted the lack of a capital gains tax in New Zealand, but didn’t say whether it was for or against the introduction of one.

Inland Revenue said the challenge lifting existing income tax rates was that this could create too much variability between rates.

For example, if the top income tax rate went up too much, people would try to earn more income through companies. The Government’s ability to lift the company tax rate might be limited by the fact it needed to ensure New Zealand remains an internationally competitive place to do business.

Inland Revenue said it was interested in members of the public’s views on how to “ensure our tax system is durable in the face of long-term fiscal pressures”.

People have until September 1 to make submissions on its briefing.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.