They first cite three major problems with the current tax system:
- New Zealand relies heavily on the taxes most harmful to growth – particularly corporate and personal taxes on capital income.
- Differences in tax rates and the treatment of entities provide opportunities to divert income and reduce tax liability. This disparity means investment decisions can be about minimising tax rather than the best business investment.
- There are significant risks to the sustainability of the tax revenue base: Compliance is likely to be affected by perceptions that the system is unfair. International competition for capital and labour, especially from Australia, will impact on the sustainability of corporate and personal tax rates.
They have 13 recommendations, in order:
- The company, top personal and trust tax rates should be aligned to improve the system’s integrity.
- New Zealand’s company tax rate needs to be competitive with other countries’ company tax rates, particularly that in Australia.
- The imputation system should be retained.
- The top personal tax rates of 38% and 33% should be reduced as part of an alignment strategy and to better position the tax system for growth.
- Base-broadening is required to address some of the existing biases in the tax system and to improve its efficiency and sustainability
- Most members of the TWG have significant concerns over the practical challenges arising from a comprehensive CGT
- The majority of the TWG support detailed consideration of taxing returns from capital invested in residential rental properties on the basis of a deemed notional return calculated using a risk-free rate.
- Most members of the TWG support the introduction of a low-rate land tax as a means of funding other tax rate reductions.
- The following targeted options for base-broadening should be considered for introduction relatively quickly:
- Removing the 20% depreciation loading on new plant and equipment
- Removing tax depreciation on buildings (or certain categories of buildings) if empirical evidence shows that they do not depreciate in value
- Changing the thin capitalisation rules by lowering the safe harbour threshold to 60% or by reviewing the base for calculating this measure.
- GST should continue to apply broadly. There should be no exemptions.
- Most members of the Group consider that increasing the GST rate to 15% would have merit on efficiency grounds because it would result in reducing the taxation bias against saving and investment.
- There should be a comprehensive review of welfare policy and how it interacts with the tax system, with an objective being to reduce high effective marginal tax rates.
- Government should introduce institutional arrangements to ensure there is a stronger focus on achieving and sustaining efficiency, fairness, coherence and integrity of the tax system when tax changes are proposed.
There is little in these recommendations I disagree with, and I hope the Government implements most of them.
The removal of the ability to claim depreciation on buildings as a taxable expense is long overdue, considering almost all buildings actually appreciate in value.
Some of the other recommendations such as a deemed rate of return on investment properties and/or a land tax will help prevent future housing bubbles.
And dropping income tax rates is of course highly desirable.
While I would like to see GST increase, I am not sure that a net revenue gain of just $200 million (after compensating lower income families) from going to 15% makes it worthwhile.
The TWG make clear that they all agree that the status quo is unsustainable and not an option. The Government has pretty much said they agree. So the question is not whether there will be some reform, but how much.
Of course the tax side is half the equation. Maintaining discipline on the spending side is crucial also, and there is more there to be done also.