Fixing a leaky tax system

The Centre for Independent Studies has published a short paper on how to fix NZ’s leaky tax system.

The paper focuses on the increased avoidance and evasion since the top tax rate was increased by Labour from 33% to 39%. This has seen the following:

* 50% increase needed in IRD funding over the last five years
* The number of loopholes is increasing, not decreasing
* Trustee Income grew 256% from 1999 to 2004 (it is taxed at 33%)
* Greater use of companies to avoid higher tax rate – 71% in company tax as against only 16% increase in non PAYE income tax
* A 6.3% decrease in the number of taxpayers earning over $1 million (they are going into tax shelters)
* A huge increase in the number of taxpayers who cap their income at $60,000

The IRD themselves have warned the IRD warned that they were at full capacity and that one of their key challenges was keeping up with ‘demonstrable shifts in customer behaviour in response to current policy setting.’

The CIS reminds us that a broad-based low-rate system with few loopholes is the most efficient. When the top tax rate was lowered in the 1980s from 66% to 33%, tax revenues actually increased!

The simple answer is to abolish the 39% tax rate. It is probably costing more in compliance costs, than the revenue it brings in.

The NZ Institute of Chartered Accountants has joined the debate, saying a complex system ultimately benefits few at the expense of all.