Tax Working Group’s interim report: The good, bad, and ugly




We have had our head down today trawling through the 194-page interim report of Sir Michael Cullen’s Tax Working Group, released on 20 Sep ‘18. The report narrows down options for the Government and gives a pretty clear indication of what the Working Group’s final recommendations will be in March ‘19.


With the Working Group essentially set up to come up with the Labour-led Coalition Government's tax policy, there is a good chance most proposals will pass into law. We're glad to see our comprehensive submissions to the Group are referenced throughout the submission summary document alongside those from the likes of Deloitte, the Council of Trade Unions, and Business New Zealand.


Here are our first impressions:


THE GOOD


Despite the best efforts of a range of political and special interest groups over the years, the Group has ruled out distortionary exemptions to the GST system. New Zealand’s GST is admired around the world for its simplicity – all goods and services are taxed at the same rate, keeping compliance costs and economic distortions low.


The Working Group looks to be taking seriously our suggestions on reforming ‘charitable status’ tax loopholes that give the likes of Sanitarium and Shotover Jet an unfair commercial edge over their competitors.


The Group has also ruled out recommending further increase in tobacco excise, echoing concerns about its lack of effectiveness and harm to low socio-economic groups raised in our report from January.


THE BAD


A capital income tax looks likely (in some form or another). The NZ Herald reports that Sir Michael Cullen “said the TWG could theoretically recommend against both options in its final report, but it was unlikely to do so.”


The Group has provided two options:


(1) either the Government could ‘extend the net’ of capital income taxation, and treat realized capital gains on shares, property, and other assets as taxable income; or


(2) it could introduce a risk-free rate of return method (RFRM) tax which would tax assets based on ‘implied’ income.


The first option is a capital gains tax in all but name, while the second option is effectively just a tax on equity or ‘wealth tax’.


In due course, we will be evaluating the two alternatives in much more detail.

The Group is supportive of a greater use of environmental taxes. This includes a desire to increase the waste disposal levy — something we have opposed on a number of occasions. Local councils regularly lobby for this hidden tax to increase – they, of course, get most of the revenue! 


The other environmental tax which found favour with the Group is a "strengthening" of the emissions trading scheme, i.e. making it bite households.

Strengthening the emissions trading scheme is one option to reduce New Zealand’s emissions, but has a direct effect on the cost of living — motorists, for example, are already being slammed at the petrol pump and won’t be pleased with the prospect of even higher prices.


Incredibly, despite the fall in business confidence, business tax cuts have been ruled out by the Group. That's bad news for economic growth. As we mentioned in our submission, corporate tax rates are falling across the developed world, and New Zealand is being left behind.


THE UGLY


Grant Robertson has written a letter to the Group instructing them to put a greater focus on making the tax system fix inequality. That means that even if we are able to force the Government to ensure that any changes are 'revenue neutral' – i.e. not increase or decrease the total revenue delivered to the Government – it is likely that high income or asset holders will be whacked twice.


Sir Michael Cullen was quoted by Newsroom arguing that “reduction of the lower rates and/or thresholds would be the most progressive means of assisting low-and middle-income earners through the tax system,” which could indicate a preference for reducing tax rates on low-income earners rather than the medium-to-high earners who will bear the brunt of a capital gains tax (or measures which have the same effect).


Over the coming weeks, we will be preparing our next submission, and will provide you with a template to have your say and participate in the second submission process (which has now opened).


*The content is sourced from an email we received from www.taxpayers.org.nz

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