Rutherford on Cullen

Hamish Rutherford writes:

Sir Michael Cullen, head of the Tax Working Group, seems to want to limit public debate over the possible extension of a capital gains tax.

After a critic raised concerns of the implications of proposals in the working group’s interim report, Cullen was dismissive.

Critics should wait for the tax working group’s final report in February, he said. The interim report may be the only thing the public has to work off, but Cullen said that the Tax Working Group’s own work had moved on and all the problems are being solved.

This Kafkaesque shutdown came after Wellington businessman Troy Bowker made alarming claims about the possible costs introducing a tax would have on small business, predicting the cost of compliance would be billions of dollars.

This shows why Sir Michael was the wrong choice to be chair. He is a politician and is driving a political agenda.

Trying to shut down debate until their final report, means the Government can consider the report in secret and decide upon it, before the public even get to see it.

Bowker claimed the tax working group’s preferred method for introducing the tax – creating a “valuation day” after which all assets captured by a new tax would immediately be taxable – would create huge compliance costs, with all businesses needing to be professionally valued on a given day.

Valuing things like commercial property is as easy as valuing your home – just look up the rateable value. But valuing businesses, especially small businesses, can be much harder. Much is tied up in the knowledge and contacts of the key employees, which is tough to put a price on.

Although Bowker’s assessment of the possible costs was guesswork, the tax working group’s own interim report appears to back up his argument.

Warning of substantial compliance costs, the report stated there would be a need to value all assets, as at a particular day. “This will impose a significant cost on many taxpayers for certain asset types”.

Cullen swiftly went on the attack, describing the warnings as “scaremongering”. Rather than defend the proposals that the working group has released to the public, Cullen pointed to solutions which exist, so far, only in the minds of the working group’s members.

The secret solutions!

Cullen has also floated the idea that while extending a capital gains tax in the way proposed may indeed require a mass valuation of businesses, it would not be nearly as onerous as imagined, because a degree of guesswork will be acceptable.

“Provided the valuation is reasonably fair, it doesn’t matter too much at that point of entry into the system. From the long term revenue perspective, whether it’s entirely accurate, as long as it’s reasonably fair, it doesn’t matter that much,” Cullen said on Friday.

This approach is both highly pragmatic and unusual.

Cullen saying the IRD will be okay with valuations that are “reasonably fair” is about as reassuring as Steven Joyce saying that the National Party’s campaign advertising was “pretty legal”.

The IRD is hardly known for taking a ‘close enough is good enough’ approach.

This is fantasy stuff. The thought the IRD will just accept good guesses as valuations is daft.

For those outside the working group though, we are supposed to simply sit and wait. Cullen has a solution to the problems, rendering the interim report of the working group meaningless.

For a process which is meant to be about improving the fairness of the tax system, this is a rather authoritarian approach to debate about how to achieve it.

Tax Working Groups can do very valuable work, when they are run by tax experts rather than politicians. A Tax Working Group run by the political mentor of the Minister of Finance has less credibility.16