Do we need another tax working group?
Victoria University's Norman Gemmell discusses the mechanics of a tax working group, and asks why New Zealand might need one
The National Government was famously advised by the Victoria University of Wellington Tax Working Group in 2009, which recommended or influenced many of the tax changes introduced in the 2010 Budget. But why is Labour proposing another one? There are at least two reasons a government might seek such advice.
Firstly, technical. Designing taxes in practice, especially new ones, is tricky to get right. There are usually various objectives the tax is trying to achieve such as raising revenue in ways that are transparent, fair, efficient, aren’t easily avoided, and result in an overall coherent tax system. Tax economists, accountants and lawyers usually have detailed work to do to ensure a well-designed tax.
Secondly, policy. Given all those things politicians want to achieve with the tax system, high-level advice about how different tax combinations can best achieve their policy objectives is important. How would changing the top rate of income tax affect inequality? What interactions with welfare benefits would deliver most poverty reduction? What would a capital gains tax do to the property market? Are there unintended consequences of those changes? These are all questions addressed regularly by academic and other tax experts using both theory and evidence relevant to New Zealand to identify good policy options.
But do we need a TWG for this? Aren’t government officials equipped to do it? After all, if they can’t advise the Government on tax – one of the fundamentals of running the machinery of the state – what are we paying them for?
‘Tax technical’ or broad policy advice?
Actually, at the technical level, New Zealand is acknowledged internationally as having one of the best official processes for maintaining a good tax system – the so-called Generic Tax Policy Process (GTPP). This allows officials to share and seek feedback on their proposals at an early stage from the wider community of taxpayers and advisers. They then integrate that into official advice through a continued to-and-fro with tax professionals. Given a well-functioning GTPP, this was not the role of the 2009 TWG and it is hard to see why a Labour Government would want any new TWG to do this.
Instead, the 2009 TWG was set up to give the Government wide-ranging policy advice on the tax system as a whole. Remember, National went into government promising its ‘confidence and supply’ partner ACT a review of personal income tax – and in particular whether the top rate should be reduced to the corporate rate of 30 percent.
It is also often forgotten that the TWG was not set up by the Government. It was an initiative by officials in the Treasury and Inland Revenue who sought, and received, approval from the Finance and Revenue ministers to set up an independent panel that could give them robust advice, which would then be taken to ministers. Ministers Bill English and Peter Dunne made it clear to officials and to the TWG that they were free to examine any reforms to the tax system they thought would be helpful and could upload their deliberations to the internet in ‘real time’, but their advice might simply be ignored.
What makes a successful process?
I would argue those conditions were fundamental to the success of the 2009 TWG as a policy advice process – political independence (but Government support), transparency and a wide remit. This was different from the equivalent “Henry Review” in Australia that operated at around the same time. It was set up by Kevin Rudd’s Government, which then promptly dissociated itself from the final report when it didn’t like its recommendations. The Henry Review had a narrower remit – it was not allowed to consider GST reforms—and was widely perceived as a political failure despite a high quality economic approach to its brief.
So what of Labour’s proposed TWG?
Labour hasn’t given much detail on its intentions. But it would seem to be focused on getting advice on the merits of a capital gains tax and how it might change the tax system to achieve more equality (of wealth?) and improve housing affordability.
Arguably, it doesn’t need a ‘technical’ TWG for that for the same reasons as before – the GTPP should be capable of handling this. But it is quite legitimate to seek the kinds of high-level advice the wider tax community could give if Labour lacks confidence it can get that from officials. In 2009, there was a legitimate case that the current tax system was ‘broken’ and needed changing after careful review. Bringing in expertise from academics and others with tax policy experience made sense to ‘test’ officials’ reform ideas and contribute their own. Perhaps Labour feels the current system is ‘broken’ – by not tackling wealth inequalities and housing market problems adequately? If so, another TWG could potentially help.
But it would be essential as it is independent of Government, has a wide remit and is able to conduct its deliberations in full view of, and consulting with, the public. That means it must not be stacked with obvious Labour Party (or coalition partner) appointees, and is not prohibited from considering income tax, GST or other tax changes.
Recent announcements on the latter are not encouraging, with Labour apparently seeking an electoral mandate based on no change to personal or corporate income tax or GST. But what if a wider review could establish that the best way to achieve Labour’s equity objectives was to raise top income tax rates rather than (or as well as) introduce a capital gains tax? Should this be ‘out of scope’? And now Labour has promised no new capital gains tax or land tax would be introduced until after the 2020 election, it begs the question: would income tax or GST changes after 2020 still be off the agenda and also out of scope for a TWG?
In 2009, Professor Norman Gemmell was a Treasury official supporting the Victoria University of Wellington Tax Working Group.