Dialogue: Taxing search for new ways to tax

Capital gains taxes and eco-levies are among ideas given to the tax review on ways of shifting the burden, says BRIAN FALLOW.

Two-thirds of the tax take in New Zealand comes from personal and company incomes.

That is higher than usual for developed countries, and raises the question of how sustainable it is because of the mobility of both capital and labour in the global economy.

Few of the 111 submissions to the McLeod tax review offer suggestions about how the tax base could be broadened, to allow a lowering of income tax rates.

One obvious suggestion would be a capital gains tax. Why should an increase in wealth from working be taxed, but not an increase in wealth from investing?

New Zealand is unique among OECD countries in not having a capital tax system.

The OECD recommends one. (It also suggests a tax on "imputed rentals" - the money people save by living under their own roof.)

But of the submissions to the McLeod committee, only the Alliance and the Greens have a good word to say for capital gains taxes.

"In our experience," says PricewaterhouseCoopers, "the absence of a tax on capital gains is regarded as a competitive advantage by international investors into New Zealand.

"If such gains are to be taxed, the cost of the gains will be built into the pretax return required before investments proceed."

Issues abound: Should capital gains be taxed as they accrue (which can raise valuation or cashflow problems) or only when they are realised (which can lock people in to investments)?

Should the family home be exempted? Like any exemption, that can raise boundary issues.

The most radical and detailed proposal for overhauling the tax system is from the Greens.

"Ecological tax reform" would shift the tax burden from desirable activities, such as earning income, to undesirable activities such as polluting the environment.

An axiom of this approach, the Greens explain, is that "all or most" of the new revenue is returned by way of of cuts in traditional taxes.

Eco-taxes, such as a tax on the carbon content of fossil fuels, score well as reliable tax bases, say the Greens, because the resources and activities taxed are fundamental to developed economies. They are physical, metered processes which make the taxes hard to evade.

They advance the economic argument that eco-taxes would in the long run boost economic efficiency by internalising environmental costs.

"One necessary condition of ensuring efficient economic outcomes is ensuring all costs incurred in delivery of a good or service are reflected in the price," they say.

"Traditionally, there has been little attempt to fully reflect costs imposed on the environment as a result of delivery of a good or service This in turn leads to higher demand than would otherwise be the case and thus greater demands on the environment."

A Ministry of Transport study five years ago gave a preliminary estimate of the environmental costs associated with road transport, including effects on local air quality, greenhouse gases, water quality and noise. It came up with a range of $1 billion to $4 billion for these items.

Similar studies in other developed countries, the Greens say, generally ranged from 3 to 5 per cent of GDP, or the equivalent of $3 billion to $5 billion in New Zealand's case.

Every 1c a litre increase in the tax on petrol would yield $15 million.

The Greens cite OECD research which said that "current environmental policies in member countries do not seem to have had a significant impact on competitiveness of either industrial sectors or economies as a whole, nor is there evidence of industrial relocation to 'pollution havens'."

But the same OECD study warns against going it alone:

"High international mobility of factors of production [capital and labour] can generate adjustment costs if small, open economies introduce policies that differ significantly from what other countries pursue."

The Coal Association considers a carbon tax is everything a good tax should not be.

It says that instead of providing a strong revenue base, such a tax would reduce the tax base by undermining New Zealand's international competitiveness, leading to the closure of several energy intensive industries.

The main evidence that the association cites for this is a study, commissioned by the Minerals Council of Australia, of the consequences in that country of meeting the greenhouse gas emission targets of the Kyoto Protocol.

The association says low-cost energy is one of the few competitive advantages New Zealand manufacturers have over their rivals in other countries.

Another suggested alternative tax is on financial transactions, which the Alliance favours as a replacement for GST.

The Manufacturers Federation opposes this.

It would impose a cost on manufactured exports, which are not subject to GST.

"And if the tax was applied to every financial transaction involved in manufacturing goods for the domestic market, the cumulative impact of the tax would be greater than for goods imported directly by a local retailer," said the federation.

The Business Roundtable says a financial transactions tax would discourage saving and investment, unlike GST, which applies only to consumption.

It would increase transaction costs, and thus the cost of capital.

And it would impose higher effective tax rates on the production, distribution and consumption of perishable basic foods such as bread, milk and vegetables.