Comment

Tread carefully if tax is back on the agenda

Comments by Labour MP Deborah Russell have set the tax hares running again, writes Peter Dunne

Taxes may well be one of life's two great certainties, but public debate about them is invariably fraught.

The experience of the Tax Working Group earlier this year is but the latest, but by no means only, example of the difficulty of sustaining a dispassionate consideration of complicated tax reform issues through to a rational conclusion. That Working Group’s primary purpose had been to lay the ground for the Government, as per its election promises, to introduce a comprehensive capital gains tax, a purpose it had fulfilled with some skill.

However, when the crunch came, the Government found it was all too difficult and that it did not even have the numbers within its own ranks to proceed further, so the carefully crafted proposal was abandoned abruptly.

But the division within the Government and the then mounting public opposition to the idea of extending the taxation of capital gains forced the Prime Minister to go well beyond that. She not only ruled out a more comprehensive capital gains tax for now, but also for as long as she is in office.

Given that the National Party has also ruled out such a move, the Prime Minister's commitment means that, unless she goes back on her word and thereby commits political suicide, it is likely to be the mid-2020s at least before the issue even reappears on the political agenda.

But, a little like rust, tax policy never sleeps, even if the capacity for considered debate remains limited. In that context, recent comments by the chair of Parliament's Finance and Expenditure Committee, Labour MP Dr Deborah Russell, are significant.

Speaking to a tax seminar, Russell, a tax expert in her own right, observed that the failure to proceed with the capital gains tax – something she admitted was a personal disappointment – meant that there were other issues now requiring attention to make New Zealand "the most equal country in the world – full stop" as she described it.

These appeared to include a possible lift in the personal income threshold at which the top tax rate currently cuts in, increasing the actual rate from its present 33 cents in the dollar, as well as other options that the Government has not ruled out.

Possibilities that have been floated are an inheritance tax, or other form of wealth tax, or possibly gradually extending the range of capital gains on which income tax is payable, for example by extending the "bright line" test on investment property and widening it to other asset classes. Russell did concede that the Labour Party was yet to finalise its position on any of these ideas, which would be determined within the party, and not through public debate.

That alone should be enough to provide National with a massive tax weapon with which to bludgeon Labour right through until the election.

The problem is, however, that even with these general statements, Russell, probably not intentionally, has set some tax hares running.

It can now be surmised that Labour is looking to increase the top personal tax rate again (as it did in 1999), as well as considering reinstating long-abandoned wealth and inheritance taxes. It might even tread into the largely uncharted territory of broadening the definition of what constitute taxable assets.

That alone should be enough to provide National with a massive tax weapon with which to bludgeon Labour right through until the election. (Is Labour planning to bring back death duties, for example, and precisely what assets is it now considering treating as taxable – is Labour about to bring art works, luxury cars and boats, into the tax net?)

National will recall that its successful harrying of Labour on the capital gains tax issue forced the hurried mid-campaign about-face, when Labour stopped advocating such a tax, and switched to promising to set up a working group to look at it, to take it off the immediate agenda. The party can surely hardly believe its luck that once again, going into an election campaign, it will be able to focus its attack on a Labour secret agenda to hike taxes to pay for its promises.

This is not to suggest that tax policy should never change, nor that it is impossible to have a reasonable public discourse about it. That clearly cannot be, but what is important, though, is the context in which such discussions occur. If a Government can lay out a comprehensive plan, and persuade the public of that, it is more likely to succeed. But if a Government’s moves are seen to be more about boosting revenue, or are too narrowly focused on particular groups, they are more than likely to fail.

Having been Minister of Revenue for almost a decade during my time in Parliament, I saw tax reform in many guises.

As a backbencher in the 1980s I worked closely with Sir Roger Douglas and the other Finance Ministers on the introduction of the Goods and Services Tax. My particular role related to working with the GST Information Office to make sure it was able to answer all the questions, technical and otherwise, the new tax was raising, and that credible and comprehensible explanations were available to the public.

I learnt early on that the GST Package would never succeed if the information provided was just about GST.

Governments do not win elections promising new taxes, so it had to be sold as a comprehensive tax and benefit package, with as much emphasis on the compensatory across-the-board tax cuts and benefit adjustments being introduced at the same time, as on the GST itself.

Similarly, the 2007 Business Tax Package that I developed with Sir Michael Cullen laid a heavy emphasis on the benefits that were expected to flow from it, in terms of opportunity and employment growth for the small to medium sized business sector especially, rather than just the actual company tax rate reduction. The 2010 tax and benefit reform package I worked on with Sir Bill English followed a similar path to the introduction of GST. As with GST, the 2010 package’s emphasis was on the “tax switch” whereby an increase in the GST rate was offset by reductions in all the personal tax rates, while leaving the overall package largely neutral in revenue terms.

The common threads of all these moves – which were successful – was that they were promoted as much more than just tax changes.

They recognised that at every level of the tax system – from the highest income earners to the lowest – there is a sense of aspiration. Everyone wants the opportunity to do better, and therefore everyone views tax changes from the primary perspective of whether they make the attainment of their aspiration easier or harder. Focusing on the tax numbers alone, or the impact they may have on someone else, does not achieve that.

“the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

The lesson for Labour from all this – and the capital gains tax debacle earlier in the year underscores this – should be that to achieve meaningful and sustainable tax reform it will need to be able to satisfy the public that there is likely to be a tangible benefit – in their pockets or purses – from the measures being proposed. Because New Zealanders are largely aspirers, it is not enough to be seen to be singling out particular targets or behaviours. The fact that someone else may be paying more means little if one’s own circumstances do not appear to have changed.

For example, although the prospect of the capital gains tax annoyed the owners of multiple properties, it frightened the living daylights out of those aspiring to own multiple properties. Similarly, while the numbers of people in the top personal tax bracket are not large enough to create a political problem if the rate is raised, the problem lies with the larger aspirational group below them that interprets such moves as an attack on their opportunities.

Labour will need to get the aspirers on side if it is to succeed with the types of reforms Russell speculated about. So, for a start, it will need to offer significant compensatory tax and benefit changes to them, and accord them equal publicity, if it is to have any chance of success.

Writing in the seventeenth century, French King Louis XIV’s Minister Jean-Baptiste Colbert famously observed that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

Today’s would-be tax reformers should take careful notice that almost four hundred years later, nothing much has really changed.    

Get it early – This article was first published on Newsroom Pro and included in Bernard Hickey’s ‘8 Things’ morning email of the latest in-depth business and political analysis. Get it early by subscribing now or starting a 28-day free trial.    

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