Tax Watch, Edition 6, November 2017

Tax Working Group to lay the ground rules for reform

Labour has committed to setting up a Tax Working Group (“TWG”) to consider possible options for improvement in the structure, fairness and balance of the tax system. The TWG will focus primarily on measures to address the perceived imbalance in taxation on gains from speculation in property and income from other sources.

History of Tax Working Groups in New Zealand

TWGs can challenge existing frameworks and set out a pathway for reform. They have a lengthy history in New Zealand.

The Bob Buckle-chaired Victoria University Tax Working Group (2009) communicated its findings superbly and set the ground rules for 2010’s GST increase. The Tax Review 2001, chaired by recently retired EY Oceania Chief Executive, Rob McLeod, was a much tighter grouping which took a rigorous intellectual approach. The issues it put on the table, such as the non-taxation of housing, the need for international tax reform and the concept of taxing a risk-free rate of return on assets, were unpopular at the time but have been central to tax policy debates in recent years.

Tomorrow’s tax system

Labour wants its TWG to consider improving the structure, fairness and balance of the tax system. We think this should include:

• The impact technology and artificial intelligence will have on tax administration. Inland Revenue’s current Business Transformation is likely to be only the start.
• The power of data. Does today’s data lake open up new ways to measure fairness? To pick a New Zealand First inspired example, can we design a system that accurately links GST revenue from tourism spends to regions, or even towns?
• New Zealand’s place in the world. Australia, China and the United States are all major trade and investment partners. Each has a very different tax system. How will our tax system be influenced by overseas reforms?

What makes a good tax review?

Success factors include:

• A burning platform for reform – do housing affordability and fairness create that burning platform?
• Political championship – an able, reforming Minister of Finance with a secure parliamentary majority, strong colleagues and committed officials.
• External, independent expertise, with a willingness to appoint the best person for the job, regardless of political affiliation. GST is seen as the most successful part of our tax system – in the 1980s under a Labour Government Don Brash chaired the GST advisory panel. Conversely, rent-seeking by business, unions or other lobby groups is a sure route to reform failure.
• Sufficiently broad terms of reference to allow the group to think the unthinkable, even where the government has a preferred direction of reform.
• Clearly defined timeframes – otherwise there is a risk that tax policy will expand to fill the time available for its creation.

Success of Labour’s Tax Working Group remains to be seen

The ability to think the unthinkable will be essential to the TWG’s success in contributing to tax reform.

It’s disappointing that issues such as the top personal tax rate, corporate tax rate, GST rates and inheritance tax were taken off the table during the course of the election campaign. There is a risk the TWG will be captured by interest groups and concentrate unduly on capital gains tax design issues at the expense of radical blue skies thinking or economic efficiency.

Labour’s vaunted TWG is likely to be up and running before too long, although there will be no implementation of any changes arising from the TWG until after the next election.

Will the TWG ultimately result in the dawn of a new tax system for New Zealand? Only time will tell.