Futurelearning

Time to tackle ‘incoherent’ tax policies

Tax Working Group must address tax rates that significantly disadvantage the poorer members of our community, writes Victoria University's Dr Simon Chapple 

With its public consultation completed, the Government’s working group on the future of tax is now reviewing the nearly 7000 submissions received, alongside other input, in order to release an interim report in September. Final recommendations are expected next February.

But what about the Government’s proposed review of Working for Families and how tax interacts with the welfare system? We’re still waiting to be told when that review will begin, who will be conducting it and what its terms of reference will be.

Nor do we know how it will tie in with the Tax Working Group (TWG), even though this will be critical if either is to fulfil its potential.

One review disengaged from the other doesn’t make sense — to the extent there really should have been only a single integrated review in the first place. Instead there’s a danger important issues will slip between the cracks or the two reviews will conclude at seriously cross-purposes.

This lack of clarity and coordination posed a problem for some of us making submissions to the TWG: was this the place for what we had to say or should we hold off for the other review?

We weren’t helped by the TWG’s own inconsistency. In its background documentation, it told us “the adequacy of the personal tax system and its interaction with the transfer [ie welfare] system is outside the scope of the Group’s review”. But it then went on to say an important criteria driving any conclusions of the tax review was fairness and “when thinking about the distribution of taxes, equity and fairness, it is best to think of the tax and transfer system overall, rather than individual taxes in isolation”. Go figure.

At Victoria University of Wellington’s Institute for Governance and Policy Studies, we adopted a belts-and-braces approach and made our points anyway. We can always make them again later. Hopefully other submissions did the same.

Because tax and welfare are indeed indivisible. Tax is a negative benefit and benefits are a negative tax. Being mirror images of each other, they need to be closely coordinated.

This is hardly a new idea. As far back as 1967, a previous tax review, the Ross Report, stated that “cash benefits received are, in effect, negative taxes and these must enter into the assessment of the criteria of equity and ability to pay”. Noted, mind—nothing more than that. The review didn’t actually integrate this fundamental insight in its final report.

If you’re on a benefit and you’re getting a regular cash gift, we take away some of your benefit and effectively that’s a tax. If I’m on $100,000 a year and I’m getting a regular cash gift, what tax do I pay on it? Nothing.

The 1982 McCaw Report made a similar point, and again didn’t act on it. And you get the feeling when you read the report of the 2010 Tax Working Group that it wanted to go there but was restrained by its terms of reference.

There are many issues at the intersection of tax and benefits that need reviewing.

These include the poverty trap of ‘Effective Marginal Tax Rates’, whereby, as earnings rise, poorer people not only pay extra income tax but also lose benefits and tax credits — i.e. are effectively taxed at a rate that can be much higher than their individual income tax rate.

There’s also the question of how negative taxes (benefits) such as the Jobseeker Support, Supported Living Payment, Accommodation Supplement, Sole Parent Support and Working for Families tax credits are based on family income, while positive taxes are based on individual income.

But I want to focus here on one issue in particular, because it represents such a massive inequity in the system.

If you consider taxes and benefits as mirror images of each other, it leads you to a logical conclusion: what we include as taxable income in this country differs for poorer and richer people in ways that significantly disadvantage the poorer members of our community.

If you’re on a benefit and you’re getting a regular cash gift, we take away some of your benefit and effectively that’s a tax. If I’m on $100,000 a year and I’m getting a regular cash gift, what tax do I pay on it? Nothing.

If you get an irregular cash gift, it doesn’t affect your eligibility in terms of first-tier benefits — such as the Supported Living Payment, Jobseeker Support, Sole Parent Support — but it does affect your right to the Accommodation Supplement, because that’s tested on the basis of liquid assets. If I’m on $100,000 and get an irregular gift, there’s effectively no tax (gift duty having been abolished in 2011).

If you’re receiving Child Support and you’re being paid a first-tier benefit, we effectively tax you on it – mostly at a rate of 100 percent. That’s to say, as you get a dollar of Child Support, your benefit is reduced by a dollar, up until your entire benefit is accounted for by Child Support payments (a rare occurrence). As long as you’re being paid a first-tier benefit, you never see a dollar of your Child Support. On the other hand, if you’re not on a benefit, you’ll see every single dollar of it fly into your bank account.

This difference in effective tax rates is inequitable, incoherent and almost certainly inefficient.

The TWG and welfare reviews need to address these sorts of issues and to do so in an integrated way.

The Government separating its reviews hasn’t helped here. And the narrow make-up of the TWG in terms of expertise — loaded as it is toward tax lawyers, tax advisers and accountants — doesn’t inspire confidence it will have a focus on broader questions of systemic equity.

But if, as it says, the TWG is about “examining the structure, fairness and balance of New Zealand’s tax system”, it can’t duck these issues like its 1967, 1982 and 2010 predecessors did.

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