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Dunne: Don’t just tinker with tax

A stronger case can be made than at any point in human history for moving our tax system away completely from a focus on what we earn, to a new focus on what we consume, but instead both National and Labour are just tinkering with the status quo, writes Peter Dunne.

National’s announcement last week that it will index tax brackets to inflation to prevent what is known as “bracket creep” when next in Government caught many people by surprise.

It was, after all, the very same National that derisively dismissed a similar move by Labour in 2005 as a “chewing gum tax cut”, and repealed the practice as unnecessary when more substantial tax cuts were made in 2010. But then consistency between things said in Opposition and things done in Government has never been a strong suit for either major party.

Indeed, the Government itself was indulging in its own version as well last week when the Minister of Health batted away the failure to as yet establish a national cancer centre, part of Labour’s 2017 policy, telling an interviewer “oh, but that when was when Andrew Little was leader.”

Anyway, back to tax. Despite the u-turn, National’s announcement is potentially a smart move.

At one level, it confirms Simon Bridges’ claim that National will be rolling out a series of major new ideas this year, a nice counterpoint in itself to the Prime Minister’s claim that 2019 will be the “year of delivery” (a phrase that could come back to haunt her). But, at another more practical level, it sets up a neat contrast – that now needs to built on through further tax policy announcements from National over the next few months – with likely announcements from the Government once its response to the report of its Tax Working Group is revealed in April.

The Tax Working Group is, of course, nothing more than a political charade, cobbled together to get Labour off the tax hook they impaled themselves upon in 2014 by promising to introduce a comprehensive capital gains tax, and looked likely to further imbed themselves upon in 2017 until the party’s then new leader intervened.

In 2014, that pledge had contributed to Labour’s worst modern time election result, and so, it needed to be parked for 2017, lest the same occur. Hence the idea of the working party, to review comprehensively the New Zealand tax system, including whether there should be a comprehensive capital gains tax.

But it was never intended to be a serious, impartial review. That was why it was headed by a former Labour Finance Minister, known to long favour the introduction of such a tax.  His role was not to review the tax system, per se, but to produce a report which gives the Government the political cover and justification to do what it has intended to do all along, and bring in the capital gains tax Labour could not persuade voters to plump for in 2014.

... those who oppose the capital gains tax, for whatever reason, will be branded as uncaring and selfish, and out of step with the kinder society the Prime Minister says she is all about.

Equally, the period between the handover of the report to Ministers a few days ago and the release of the Government’s formal response in April is not about allowing for careful consideration and reflection and weighing up of options by Ministers before a decision is reached by Cabinet, but rather about selling the capital gains tax to the public, and softening them up for the inevitability of it.

So, you have had the Minister of Finance already starting the process, claiming that capital “gains” is probably a misnomer: capital gains are really “income” and we should be thinking about the fair taxation of income, rather than capital gains.

Already, it is easy to see how this narrative fits into the themes of the “wellness” Budget planned for May, and how those who oppose the capital gains tax, for whatever reason, will be branded as uncaring and selfish, and out of step with the kinder society the Prime Minister says she is all about.

To avoid being swamped by this pending sea of unctuous mawkishness, National needs to not only make its opposition to any extension of the taxation of capital gains clear and irrevocable, but also its opposition to any potential wealth, estate or inheritance taxes, that may be next in Labour’s sights. And it will need to focus on the complexity, bureaucracy and confusion inherent in the introduction of a capital gains tax, and the fact that there is unlikely to be any appreciable revenue gains for the first few years of such a policy.

Already, at least one major accounting firm is talking about increasing its tax advisory staff by at least a third to cope with the new complexities a capital gains tax is likely to bring.

For both Labour and National this debate is critical to their credibility over the next year. National arguably has the easier task. It just has to pick as many holes as it can in Labour’s plans, and constantly raise the spectre of more tax bureaucracy for little revenue gain, alongside promoting its own policies to the reduce the tax burden on New Zealand small to medium sized businesses and households.

Labour, however, has to first get, and then keep New Zealand First on side, which will be no easy task, especially once the going gets tough. It also has to get what will certainly be a very intricate policy design process absolutely right, to avoid inadvertently creating more tax loopholes than it closes, that tends to be the story of tax policy in New Zealand.

With Kiwibuild steadily sinking, and many of its other policies looking more than a little tatty, the last thing Labour can afford now is for its next remaining cornerstone policy to be similarly derailed. And, unfortunately for them, by committing that the tax will not be introduced before 2021, they have already ensured that.

The abolition of all forms of corporate and personal income taxes, and their replacement by the comprehensive taxation of everything we consume or use would certainly be a radical shift ...

But, of course, neither Labour nor National is really offering radical tax reform.

Both are to a greater or lesser extent tinkering with the status quo. If either were really serious about major reform they would be far more questioning of the basis of current taxation.

After all, there is nothing concrete about taxing personal or corporate income – that has really only been the vogue for about the last century. Prior to that, taxes were based on other things – like, for example, the number of hearths or windows in a commercial building or dwelling – that seem frankly absurd by today’s lights, but serve to make the point.

Given the onslaught of man-made climate change, and the mass depletion of natural resources, a stronger case can be made than at any point in human history to date for moving our tax system away completely from a focus on what we earn, to a new focus on what we consume – both manufactured and processed goods and services, and natural resources, like energy, land, and all manner of infrastructure.

The abolition of all forms of corporate and personal income taxes, and their replacement by the comprehensive taxation of everything we consume or use would certainly be a radical shift, but as the world starts to contemplate the possibility of its own mortality over the coming decades, it is arguably a debate we need to start to take more seriously.

But do not expect the “wellness” Budget or National’s plans to go anywhere near that path! After all, endlessly redefining the status quo is so much easier.

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