Thomas Pippos: Tax reform debate only just beginning

Thomas Pippos

A week since the Government's first Budget and the debate has raged about the suspension of contributions to the Superannuation Fund and the general economic outlook, but little has been said about tax reform other than the deferral of the personal tax cuts.

However, in a speech to the New Zealand Institute of Directors on Wednesday, Treasury Secretary John Whitehead sent a deliberate signal that the status quo around tax isn't really an option. He explicitly raised the prospect of significant tax reform including the potential for a capital gains tax.

This is not the first time Treasury has signalled its desire for a capital gains tax but this year the Treasury has materially accelerated and finessed its tax challenge around structural tax reform.

In February Treasury released a paper outlining its concerns with the structure of the tax system, including distortions caused by tax-free capital gains and the current tax mix being weighted away from property taxes.

It also raised the entire dilemma about the mobility of capital and labour and how New Zealand is over-exposed to this risk, the issues around the level of tax paid by a disproportionate few, effective marginal tax rates, downward international pressures on the corporate tax rate, to list a few.

In March the Government's tax policy work programme was released in tandem with a speech made by the Minister of Revenue, resonating some of these Treasury sentiments.

Last month a Tax Working Group was established to consider tax policy challenges facing New Zealand.

The Budget, interestingly, was deafeningly silent on any of these issues yet Treasury, correctly, is continuing to send strong and deliberate signals that a debate around the destination of tax reform is long overdue.

Although the Government has steered clear of publicly confronting these issues, in its defence, the wider platform of issues have only recently been articulated in this way.

But at some stage the Government will have to come to a watershed, recognising also that the status quo doesn't leave it much wriggle room without engaging in material controversy.

But coming to a view on the ultimate destination of tax reform is a good thing. Any such policy changes will in part be likely made by way of increments rather than big bang, such that an ultimate destination does facilitate finessing those increments in the correct way rather than in some other ad hoc fashion.

How the dust settles is far from certain, but one thing is clear - the debate is only just beginning and the divide between economic theory and political realities will not be easily spanned.

* Thomas Pippos is managing tax partner for Deloitte.