There are four further deaths linked to Covid-19 and Director General Health Ashley Bloomfield says it is a "sobering reminder" of what's at stake in the fight against the pandemic.
Opinion
Former Prime Minister Bill English predicts"all forms of taxes to be on the table" as part of a repair job for the country's COVID-19 hit balance sheet. Peter Vial, New Zealand country head of Chartered Accountants Australia and New Zealand, points out that New Zealand has a long-standinginherently wobbly reliance on a narrow tax base. He suggests it is now urgent that we re-look at the tax base.
COMMENT:
For a long time New Zealand's tax base has been inherently fragile.
Like a spinning top, it has (mostly) managed to stay upright despite its top heaviness, thanks to economic momentum.
Covid 19 has exposed its gravity defying trick. The economic momentum that has kept our tax system from falling over has all but disappeared in the last six weeks ...
A narrow tax base has contributed to making our economy more vulnerable to a shock than it should have been.
Ninety five percent of the nearly $80 billion in tax collected by Inland Revenue in 2019 came from just three sources – individual income tax (49 per cent or $38 billion), company tax (21 per cent or $16 billion) and GST (25 per cent or $19 billion).
Each of these three tax bases will be severely affected by the economic downturn caused by Covid 19. Each of them will head south – and significantly so – as wage and salary earners lose their jobs or take pay cuts, business profits fall and spending reduces. This at a time when Government expenditure on welfare (and presumably health and education) and support for businesses will soar.
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New Zealand's overall tax base is significantly narrower than that of most comparable countries. Many of those tax, for example, capital gains, inheritance, wealth, land, payroll, financial transactions and adverse environmental outcomes.
Former Prime Minister Sir Bill English has given a remarkably candid warning of the long-term problems New Zealand faces from Covid-19. Photo / Boris Jancic
Certainly each of our three primary bases (income tax, GST and company tax) are broad in themselves. Our GST base is the broadest and most efficient in the OECD.
Our income tax and corporate tax bases are not bedevilled with concessions and exemptions. This has served us well in times of economic growth. Our challenge is that we have chosen to rely almost exclusively on these three bases and now they are under real pressure.
Our individual income tax base is progressive – the more you earn the higher the tax impost on your income. As Kiwis we want it this way. Fairness and redistribution are widely supported.
But a progressive income tax comes with some risks – one being the risk of relying on a small group of taxpayers to pay the bulk of the tax. That risk is highlighted in stark relief in times of crisis.
Last year 48 per cent of adults paid 8 per cent of the income tax collected. At the other end of the income scale, 8 per cent of adults paid 42 per cent of the income tax and just 3 per cent of New Zealand's adult population paid 24 per cent of the 'gross' income tax (i.e. income tax before Working for Families and other transfers are made).
An economic downturn resulting in a decline in the incomes of even 20 per cent of the taxpayers in the highest earning groups will have a material effect on total income tax collected (and a flow on effect on GST on consumption by that group). Some businesses around the country are already shedding executives and other higher wage and salary earners or putting them on reduced pay.
Our company tax base is also vulnerable in a downturn. A sizeable chunk of the base is paid by a small number of large companies. With the tourism and education industries severely hit and pressure on almost every sector of the economy, the corporate tax base could be halved.
All of this at a time when the Government is having to spend tens of billions to support the economy.
Fortunately the Government's balance sheet is strong and it can borrow to fund the shortfall. The loans will have to be paid back eventually though, raising inevitable questions of inter-generational equity.
In the meantime we should take a long hard look at our tax base. There are no silver bullets. But if we are to weather this storm, and any others that may hit our economy down the track, now is the time to rethink the tax system. Crises are an impetus for new ideas and fresh thinking.
The Government should consider inviting the 2018 Tax Working Group back to the table to consider our options. There should be no limitations on the scope of the review this time. Everything needs to be on the table this time including the tax-welfare interface, alternative tax bases and tax rates. After all we are now in a very different place to where we were when Sir Michael Cullen and his team of experts made their recommendations just 14 months ago.
Let's ensure our tax base is fit for future shocks and for helping us overcome the current one.
