Call for overhaul of unfair tax system
By GRAHAME ARMSTRONG - Sunday Star Times
Last updated 05:00 02/08/2009

Increasing GST to 15% and cutting income tax is among the proposals to be considered by a team of economic experts advising the government on tax reform.

Professor Norman Gemmell, who represents Treasury in the tax reform working group, told the Sunday Star-Times that New Zealand's 12.5% goods and services tax was low by international standards. An increase to 15% could balance reductions in the 38% and 33% tax rates down to 30% a target the government has committed to in the medium term.

"I don't want to get ahead of the group on this," Gemmell said, "[but] international evidence shows that [GST] could be higher. If it were to rise to 15%, for example, that would raise around $2 billion more revenue. So that's $2b that could be used to reduce income taxes."

Many countries have consumption tax rates of 15-20%. A 20% GST in New Zealand would raise an extra $4b.

In 2007 the average Kiwi household spent around $950 a week, including groceries, fuel, clothing and healthcare, around $106 of which was GST. Lifting the tax to 15% would add an extra $21.25 to the bill, and a 20% rate would add $63.75.

Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research, said GST was a fair tax in the sense that it was uniform and avoided the distortions often found in the different rates of income tax. Increasing GST and lowering income tax rates would be a "positive" move in principle.

"Before tinkering with tax rates, New Zealand needs to have a philosophical debate about the type of tax system it wants and what we fund with the tax revenue," Eaqub said. "For example, whether we have a flat income tax rate but pay more tax when we spend."

Gemmell, a former economics professor who has advised the UK government on tax reform, said New Zealand's system needed an overhaul. It relied too heavily on income and company tax, too many people on higher incomes were avoiding tax, and average families on one income paid the highest marginal tax rates in the OECD.

He said the tax system was inconsistent and unfair. Someone who earned $50,000 paid 33 cents in the dollar while someone who received the same amount by selling an investment property might pay no tax at all, because there was no capital gains tax in New Zealand. A self-employed person could easily become a "company" and pay a 30% tax rate instead of 38%.

When the government raised the highest marginal tax rate to 39% in 2000 for those earning more than $60,000 many taxpayers avoided the higher bracket by creating trusts or setting themselves up as companies.

Gemmell also said that marginal tax rates the tax paid on additional earnings were also high for people on low incomes. "Someone earning the average wage with a couple of children would only get to keep less than 50c out of every extra dollar. That's one of the highest internationally."

The Tax Working Group contains representatives from Treasury, Victoria University and Inland Revenue. The group, which had its first meeting on Friday, is to consider the future direction of the tax system, including assessing policy options. Rather than make recommendations to the government, the group will consider reform options and promote public debate. Its work will culminate in a public conference hosted by the university in December.

From here.