Published by The New Zealand Initiative (Wellington), 30 April 2018 (PDF)
We strongly support an efficient tax system while recognising that no tax system can stand still. We agree that the ability of the government to raise revenue ‘rests ultimately on the consent and acceptance of all New Zealanders.’
The Initiative has produced several reports over recent years which bear directly on some of the issues raised by the Tax Working Group in its background paper. These provide the foundation for our thinking and submissions herein.
- Income redistribution: The tax system should not be used as a device for further income redistribution. It is a myth that income inequality is rising in New Zealand just as it is that economic growth drives economic inequality everywhere. At present the top four deciles of the household income distribution fund government spending which benefits the bottom six deciles. The taxable income of top earners is very responsive to changes in the top tax rate. The sources of contemporary income inequality matter. Educational attainment, the proportion of the adult population not in paid work, the hours worked, and employment age are all relevant factors. Household formation and structure reflects perhaps up to half of disposable household income inequality while higher housing costs hit those on lower incomes hardest.
- Capital gains and wealth taxes: Capital gains and wealth taxes are not a recipe to solve the housing crisis. Only an increase in housing supply can achieve this. Matters other than wealth taxes should be investigated including boundary and density rules, local government funding, scalable construction models, building incentives and regulatory processes.
- GST as a housing incentive: Furthermore, the tax system can incentivise and facilitate increased housebuilding through GST equivalent payments from central government to local authorities on all new housing.
- Tax credit where it is due: In New Zealand 91% of government spending is done by central government with 9% done at sub-central (local government) level. The bulk of local government funding comes from rates (property taxes) and so we do not see much jurisdictional competition between councils. Whether a council is doing well or not, it will be always able to tax its property owners. However, councils doing a great job to attract businesses and create more housing are not automatically remunerated for their efforts. While central government typically benefits from economic growth local government typically funds most infrastructure which makes that growth possible. Through the trialling of special economic zones, incremental regulatory devolution, revenue and cost sharing for extractive industries, taxes could more closely mirror economic activity across New Zealand. Growth can be encouraged overall and especially in areas where it is efficient to do so.
- GST exemptions: No exemptions should be granted from GST. For the clear reasons which originally designed New Zealand’s GST system cost and efficiency are maintained with a no exemptions policy. If redistribution targets are to be pursued these are better achieved openly and through direct measures.
- Lifestyle taxes: The New Zealand Initiative is highly sceptical of lifestyle taxes (alcohol, tobacco and junk food). There is no strong evidence that such taxes will achieve the intended public health outcomes. We are concerned that these taxes regressively penalise those with the least ability or inclination to change their preferences. Furthermore, we are unconvinced that lifestyle taxes are required to address externalities.