Crafting a tax system for the good of society

An election that heard a great deal about tax has delivered us a new coalition Government.

Various changes to the tax rules are now in motion. Although it was front and centre in the debate, the largest questions about tax were barely asked or answered.

We heard about reducing personal taxes, about removing GST on fresh food and about restoring interest deductibility on residential investment properties. And a controversial tax on foreign buyers was proposed.

But with the possible exception of that last item, these were all short-term tax reform measures. There was no long- term view offered by either party about ensuring our tax base remains sufficient to meet our needs.

Ignoring a problem doesn’t make it go away and this one only grows more pressing. We need to be asking some hard questions about what might be required to continue to fund the sort of society we expect ours to be.

Consider these demographic and fiscal challenges:

An ageing population: By 2030, one in five New Zealanders will be over the age of 65, according to Stats NZ. We will have a smaller workforce trying to support a larger retired population, perhaps only two workers to support each non-worker in the economy by the latter half of this century.

The ageing population is going to result in significantly increased costs for Government: Treasury’s most recent Long-Term Fiscal Model sees national Superannuation obligations lifting from four per cent of GDP to possibly eight per cent in 2060. The pressures that will be placed on the healthcare system may be equally heavy, rising from six per cent of GDP to possibly 10 per cent in 2060.

Government debt remains high: At the last fiscal update by Treasury, net debt was $71 billion and rising. We’re not projected to return to Budget surplus until 2026, which means we’re continuing to borrow.

We have a dilemma: In short, we’re going to be looking for other sources of revenue, but at the same time we need to remain a desirable place to do business. Merely adding new taxes or raising existing ones is not the answer.

People and businesses are more mobile than they have ever been. Young people continue to do the “big OE” and the length of time they spend away has been increasing. Our nearest and dearest neighbour (Australia) has opened its doors to increased immigration and has recently made the path to citizenship easier for New Zealanders.

We’re also a small country at the bottom of the world. Foreign talent and capital has no need to come here. While to some extent we represent a safe haven from escalating conflicts in Europe and the Middle East, this in itself is not enough.

What does all this mean in terms of tax system design? We need to be a place that is attractive to retain domestic talent and capital, to attract skilled foreign migrants and foreign investment, to grow the economy. But if we step outside international norms, or impose new taxes that near neighbours don’t have, we risk losing people and capital, and never attracting talented people and business who otherwise may have wanted to make New Zealand their home.

Ideas such as wealth taxes and significant increases in personal tax rates need to be viewed with great caution. It is all too easy for these to be avoided – people can simply leave or never come here in the first place.

We need a robust tax base, but one that is also internationally competitive. We seek, in other words, the kind of economy that attracts and retains talent, and promotes growth while still maintaining a robust tax base.

What kind of measures might satisfy this prescription? Some possibilities are:

Red carpet exemptions: What if we were to broaden the scope of tax exemptions for high net worth and highly skilled migrants – people bring skills, networks and capital? They create economic activity and innovation. Our current four-year tax holiday on foreign- sourced income is nowhere near as competitive as those offered by a wide range of other developed nations. If we are serious about being a desirable destination for wealthy and skilled migrants we need to roll out the red carpet for longer.

Capital gains tax: We remain an outlier in the OECD in not having a capital gains tax. Imposing one would be unlikely to frighten many horses. Capital gains tax doesn’t punish the earning of income. And given the ubiquity of taxing capital gains, it is unlikely to be seen by talent and capital as making us less competitive than other countries.

Inheritance taxes: Yes, we’ve been there before. But whatever objection might be raised, it can’t be said that inheritance taxes stifle innovation during a person’s lifetime.

Taxes on vacant properties: Australia has them. And the idea was proposed by Te Pāti Māori last election. Perhaps its time has come?

User Pays: Why not expand ‘user pays’ charges, including congestion fees and road tolls? Effectively you’re funding necessary infrastructure developments while fairly distributing the cost among those who benefit most from these services.

It’s a political reality that few taxes are easy to sell. But the foundation we have long taken for granted is now eroding. We need to be thinking about reconsolidating. The work is coming due.