Colin James on tax

Colin James writes:

Three interlocking principles underlie the group’s approach: tax should be fair, efficient and sustainable. Taxpayers should feel they are paying a fair share and everyone else is, too. The tax system should cost no more to run than necessary and should contribute to productivity growth. And it should survive over time with limited need of repair.

To meet these principles the structure should be coherent, should have integrity – there should not be incentives to avoid or minimise tax, for instance, by channelling income through trusts, as large numbers have done this decade – and should be simple to administer and comply with.

During the past 10 years tax changes have chipped away at coherence, integrity and simplicity. The top income tax rate was raised, Working for Families added complexity and high marginal tax rates for some, special rates were set for some long-term saving and KiwiSaver added more complexity.

In addition, aggressive bracket creep lifted the proportion of income ordinary folk paid in income tax. Add that many other countries, including those we most compare ourselves with, have cut some tax rates, notably on personal and company income.

Australia cut tax rates every year for the last eight or so.

Next, note the global movement of people, capital and finance. There is a strong argument for taxing immobile factors, such as land and spending, and not internationally mobile ones, such as company and personal income and investment.

Yep. The challenge is how you do that, without significantly disadvantaging people who have made decisions based on the status quo.

There was a chorus of complaints last week that raising GST would disproportionately hurt the less-well-off. And it would. But over their lifetimes, many less-well-off people increase their incomes. And in any case, the group argues, it is better to compensate the less- well-off through spending measures than by manipulating the tax system. But is the group exploring all options for broadening the tax base?

This is key. The tax system should be as simple and efficient as possible. If that creates problems for those on low incomes, then the welfare system is the better option to use, than having an inefficient tax system.