Colin James on tax
August 24th, 2009 at 10:04 am by David FarrarColin 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.
Related posts:
- The final Colin James article in the Herald
- Colin James on the carbon plan
- Colin James on strategy
- Colin James gives Turia Politician of the Year
August 24th, 2009 at 10:05 am
Simple that a 16yr old should be able to understand it.
Vote:Low to encourage people to grow not hide stuff.
August 24th, 2009 at 10:33 am
A complex tax system is the stock and trade of socialist governments. The complexity will have a few dodge and duck, but the rest – the vast majority – don’t have the resources or commercial fortitude, so we just pay. And pay. And pay. And hold our hands out for some of it back.
Fixing our current system doesn’t require revised rules in the first instance. It requires an ideological re-alignment, and one of a scale that I think is highly unlikely without a 1930′s style depression and huge social unrest. However what we’ll continue to get from National is incremental change with immediate voter segment impact at the centre of the radar, rather than what’s best for the long term success of NZ.
Vote:August 24th, 2009 at 11:10 am
Wait, what?
Translation: We shouldn’t worry about taxing the poor more because some of them will escape the poverty trap. And the rest? Well, sucks to be them, I guess.
Advocating tax-and-spend — is this a first for Kiwiblog? Don’t worry, poor folks, we’ll take more of your money off you, filter it through the bureaucracy, and give some of it back. It’ll be just like WFF!
[DPF: You fail to pick up the difference. I advocate welfare for low income families - not those on $150,000. I actually support no taxation on the first $20K or so of income but that change is too major to happen]
Vote:August 24th, 2009 at 11:36 am
I don’t think that change is too major to happen, and I think it is very important. One of the biggest disincentives in the tax system is the very high marginal tax rates that some individuals face. The two highest groups are those moving off welfare into work, and those who have a WFF abatement. Both these issues need to be addresses:
– as you say, no taxation on first $20K or so
– remove WFF, replace with a carefully crafted tax reduction – of which the first 20K exemption may be a part
Unfortunately for some, that means that we wouldn’t have assistance targeted to “families” – where families seems to mean anyone with children. Instead, we would have assistance to those with lower income, and whether or not they have a family would be a personal choice. This makes sense to me – we already have plenty of people in NZ, there is no particular reason to further subsidise having more children (beyond the existing subsidies for education, health care and just about every other cost under the sun).
[DPF: The cost of no income on the first $20K of income is huge so it is a major thing to do - especially with a fiscal deficit close to $10 b a year]
Vote:August 24th, 2009 at 11:53 am
The article — which you quote approvingly — advocated raising taxes on the low-paid (through a GST increase), and then compensating them through increased welfare. Ok, it’s not quite “just like WFF”, but I’m still surprised to see you back the idea..
[DPF: It is about having a clean tax system and a clean welfare system. You should first design the most efficient tax system (broad based, flatish and low rate etc). Then after that you look at what welfare is needed to help those at the bottom of the pile have enough to live on. Ideally low income people would pay no income tax (best they save their own money before they get welfare) but an indirect tax like GST can't exempt low income people so welfare may be an appropriate response to an increase in GST]
Vote:August 24th, 2009 at 12:54 pm
PaulL
It can be done to help families.
You group family income (this effectively what WFF does now, children get IRD numbers and they are grouped with their carers) and split it over the individuals.
eg. First $15k tax free. Dad earns $45k, mum earns $15k they have 2 children.
The $60k is split over the 4 ie $15k each, therefore no tax.
Works the same for couples, solo parents, pensioners.
Could be used to pay tax credit if the split results in less than $15k each.
Simple, easy to administer (Group would be declared at begin of year) equitable
A two income family pays the same tax as a one income. (for same gross)
The present Tax system taxes ability to earn, while the benefits pays on need.
Vote:More kids, means more benefit, so there is an incentive to move to the benefit.
Spliting, as above, brings the balance back to working.
August 24th, 2009 at 1:00 pm
How about one starts working incrementally toward that then: start by raising GST and drop the lowest tax rate so someone on the low rate is completely compensated for the GST rise on the assumption that they spend all their income. No damage to the vunerable, no added welfare needed, and you’d still be able to flatten the top tax a bit.
Its also a good alternative to the “exempt xyz from GST mob”. The first x thousand that is earnt can be thought of as the amount to spend on the “basics”, so compensating that for the GST rise is more or less equivalent to tagging each “basic” for reduced GST. It also avoids increasing complexity and hence the chance to evade through bad classification.
Vote:August 24th, 2009 at 3:30 pm
How is GST a regressive tax? All income must eventually be spent therefore everybody gets an even share of the burden, more like a lfat tax. You can delay paying it, but you can’t avoid it in the long run.
Vote:August 24th, 2009 at 4:26 pm
If the poor spend proportionately more of their wage or benefit on rent or mortgage payments, which are exempt from GST, how can GST be said to affect them the most? How about 15% GST, company tax, income tax with 15k tax-free threshold?
Vote:August 24th, 2009 at 9:21 pm
Colin James: “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.”
As a lawyer I have to say that this is an unfair criticism of the tax system. It would be a relatively simple legislative matter to prohibit the formation of trusts where adults with legal capacity dispose of their assets to trusts which are for all practical intents and purposes shams. The law has been designed to allow the middle classes and above to reduce their tax burdens by the use of trusts. i.e. the system works exactly as intended.
DOF: “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.”
This raises the question why people think it is acceptable to shirk their tax obligations. Your average wage and income earner pays exactly the tax the system mandates that he should. So just make the penalties for avoidance positively crippling, widen the definition, and the tax take will increase a surprising amount.
Vote:August 25th, 2009 at 2:04 am
RossK, if there’s one thing New Zealanders should’ve learned under nine years of Labour, it’s when the tax take increases “a surprising amount”, so does the spending. Governments just can’t help themselves. Time to starve the beast.
Vote:August 25th, 2009 at 7:50 am
Good question. Philu will be along with an answer when today’s haze clears
Vote:August 25th, 2009 at 8:30 pm
Here’s one suggestion that will increase the tax take overnight. Make it harder for shonky business-types to hide behind the corporate veil. Case in point: one very (very, very) successful property developer has a different corporate entity for each of his mini-cities. When construction ends and the properties are sold (but before the income tax or GST are paid), the corporate entity is placed into voluntary liquidation. Result: (1) tax-man is stiffed out of significant amounts of revenue, (2) purchasers or dwellings have no come-back against developer when properties start leaking, (3) developer moves onto next mini-city. This is but one example of many dozens I came across in over a decade in the legal profession.
Vote: