Mood of the Boardroom: Tax reform in state of limbo

Thomas Pippos says a capital gains tax seems to now be part of our past. Photo / Jason Oxenham

But there are worse places to be, says Thomas Pippos, and our tax system continues to be well respected.

Tax is an emotive topic, particularly when there is a policy vacuum. There are also as many opinions on tax as there are taxpayers. But outside of tinkering with rates and thresholds, which themselves raise challenges, substantive tax reform is never easy. This is especially true when it is politicised in an MMP environment.

Judging by business leaders' answers to the tax questions in this year's Mood of the Boardroom survey, the Government has found this out the hard way during the past year, with the Tax Working Group process leading to no reform in the one area that it was effectively established to consider — namely the taxation of capital gains.

A by-product of the tax working group process is that respondents' confidence in the Government, in particular their political management abilities in a coalition environment, has been noticeably impacted.

Sixty-two per cent of the respondents believe that the Prime Minister should have secured the support of New Zealand First for a capital gains tax before embarking on the tax working group process (22 per cent said "no" and 16 per cent remain "unsure"). And 68 per cent of respondents said the impact of dropping the capital gains tax was a significant loss in credibility for the Government (rating it 1 or 2 on a scale of 1-5, where 1 = major loss in credibility and 5 = major gain in credibility).

Though these results largely reflect the "new reality" that exists under a coalition government, it is still a material matter for respondents, painting a less than optimal picture of government coherence around what was meant to be a legacy policy initiative.

In saying that, the decision not to proceed with a capital gains tax has been met with a collective sigh of relief by most respondents, with 55 per cent supporting neither of the capital gains tax options presented. Just 11 per cent supported the broad regime proposed (excluding the family home). And only 34 per cent supported the narrower option targeted at rental property investment, which is somewhat surprising as targeted rules in problematic areas achieved widespread support in prior years' surveys.

A further irony with these results is that historically under a National government there was considerably more support from Mood of the Boardroom survey respondents for a capital gains tax.

From 2011 to 2017, the broad sentiment had actually been in favour of a capital gains tax including that not moving on one was a lost opportunity.

It wasn't until last year's survey when those against a capital gain tax outnumbered those for one. So have respondents changed their minds on the policy as a result of the current context or the tax working group process itself? Respondents may also simply be less comfortable with a capital gains tax under the current government.

Under any rationale, a capital gains tax seems to now be part of our past. Labour have tried, and visibly failed, multiple times to introduce one in recent memory.

So, where to from here then, from a tax policy perspective and substantive tax reform? It feels like we are in a state of limbo — which actually accords with survey respondents — 77 per cent of whom don't believe there is any opportunity for substantive tax reform under the current government (other than tinkering with rates and thresholds).

Such responses also call into question the public working group approach to tax reform.

Apart from being costly and long-winded, such approaches provide for a political battleground fought on soundbites rather than principle, which as in the present case stifled any reforms rather than actually facilitating them.

Juxtapose this approach with the manner in which the bright line test and loss quarantining rules — both targeted at the areas of most concern relating to residential property — were introduced relatively quickly (in the case of the former, by the previous National government).

It's one of those situations where you are damned if you do and damned if you don't.

The related additional context is one where tax still mystifies people.

Survey respondents consider that there is little awareness, or understanding, that a small percentage of the population pay the lion's share of personal tax, or that around half of all households pay no net tax.

Eighty-three per cent said the former is not well understood while 88 per cent indicate that the latter is not well understood.

Adding further to this sense of limbo around the state of tax reform is that the majority of respondents (52 per cent) do not believe inequality (wealth and/or income) should be addressed through the tax system.

Interestingly, of the 34 per cent who say inequality should be more overtly addressed by the tax system, there seems to be appetite for some form of redistributive taxation, with the majority of those (63 per cent) being in favour of increasing the top personal tax rate as a method to reduce the gap between "haves" and "have nots".

Additionally, 19 per cent said there should be some form of comprehensive death duties/inheritance tax, and 17 per cent liked the idea of some form of annual wealth tax.

Perhaps unsurprisingly, 86 per cent were against the idea that the corporate tax rate should be increased as a way to deal with inequality.

In terms of increasing the highest marginal tax rates, an issue is that the top 3 per cent of income earners are already paying almost a quarter of personal income tax revenues.

Turning to that group of people for more is not a magic bullet nor does it address inequality in any real way other than symbolically giving the impression that it does.

Where does this leave us then given the potential for a global economic downturn?

Well, while all of this does sound a little morose, the irony is that New Zealand is an exemplar for level-headed political management when compared to some of our main trading partners in the Northern Hemisphere.

In this context, there are worse outcomes than being stuck in limbo when our tax system continues to be well respected by international standards and when our economy continues to be the gift that keeps on giving for all politicians regardless of political stripes — irrespective of whether it is "nurtured and respected" or "used and abused".

For now, things are still reasonably positive at the end of the known world.

● Thomas Pippos is the CEO of Deloitte New Zealand