Dialogue: Time for serious tax talk

SIR WILLIAM BIRCH says politicians must get down to serious debate on the tax system.

The Government should be commended for commissioning a stocktake report from recognised tax experts on the strengths and weaknesses of the tax system, as it is nearly 20 years since the last review.

The McLeod tax review committee should also be commended for having undertaken a thorough and comprehensive review in line with its terms of reference.

Some of the review's suggestions might be considered tough and radical. But that's the nature of tax - cuts aside, I can't recall any tax measure that attracted public acclaim.

Political leaders should not dismiss the report simply because it covers some meaty issues that might be difficult to manage politically. The design of the tax system plays an important part in our economic wellbeing.

Any tax system has a major influence on choices made by individual taxpayers and on overall saving and expenditure patterns. Poor tax design can lead to poor choices, to the detriment of the individual and the nation.

It is, therefore, important that ministers and MPs lead an intelligent debate to ensure the tax system contributes to New Zealand's future prosperity.

A tax system that does not take account of the rapidly changing world we live in will impede our future prosperity. The challenge for the Government is to design a system that minimises the costs of taxation in the face of a rapidly changing economic environment.

The economic environment has changed significantly since the last substantive review, in 1982. New Zealand is increasingly integrated into a world economy in which success is determined by access to knowledge rather than physical resources.

Economic integration brings important benefits and lifts incomes. The flow of ideas and people from overseas help New Zealanders become more skilled, educated and innovative, and help New Zealand businesses learn about and adopt leading-edge technology and management practices.

But greater openness also affects the nature and magnitude of the costs attributable to the tax system, in the process changing the nature of the constraints the Government faces in designing tax policy.

Skilled labour is increasingly mobile and international competition for such labour is increasing.

The growing international mobility of young, highly educated New Zealanders results in a loss to the nation in addition to the cost of their education. Their departure represents a loss of potential innovators, technicians, managers and leaders, and an obvious social loss.

Greater mobility of skilled labour means the economic costs of taxes are higher than they were previously for any given tax rate. It also makes it increasingly likely that taxes on skilled labour will be borne by people without internationally marketable skills.

In addition, New Zealand is a significant importer of capital. We rely on the savings of foreigners to finance much of our investment.

Without this capital, investment and wages in New Zealand would be lower. But the international mobility and competition for capital is also increasing.

Many countries actively pursue foreign direct investment and most have policies to reduce the impact of taxes on the cost of imported capital. The challenge for tax policy is to ensure the tax regime is not an impediment to foreign investment.

As well as relying on the savings of foreigners, it is important that New Zealanders' savings are used effectively. The truth is that any tax system has a major influence on choices made by individual taxpayers and on the overall savings and expenditure patterns.

Again, the challenge is to ensure that our system does not unnecessarily distort saving allocation away from productive investment.

The changes in the tax system since the last major review have been driven by the challenges of an increasingly global economy. New Zealand led the way internationally in terms of tax reform, using a broadly based low rate revenue-raising strategy as the appropriate way of minimising the increasing costs of taxation in an open economy, while maintaining and promoting fairness.

Many countries, including Australia, have emulated New Zealand's basic shift to a broad-based low-rate tax regime. But we cannot rest on our laurels because the rapid pace of global integration continues and other countries are responding to these challenges.

Developing tax policy requires an open and inclusive debate in which all options are considered on their merits. Tax policy debates are inevitably controversial and it takes time for consensus to emerge. Indeed, the most successful and enduring tax reforms generated significant controversy when they were introduced.

The McLeod review's dispassionate, rigorous and independent analysis of the complex issues faced in seeking ways to reduce the costs to the community of raising tax revenue provides a unique opportunity to continue the debate on how tax policy can best contribute to New Zealand's future prosperity.

The particular strength of this tax review committee is its detailed understanding of the shortcomings of our system and the implications of these on growth and jobs. We disregard their findings at our peril.

My own experience as both a Minister of Finance and of Revenue is that open public debate and comprehensive consultation on tax policy ensure the best possible economic outcomes.

Since the 1995 Richardson review of IRD, tax policy has developed in accordance with the generic tax policy process, which ensures all proposals are subject to much greater public scrutiny at all stages of policy development, from design through to implementation.

The process has ensured that tax policy proposals face rigorous analysis and debate from professional associations, tax practitioners and, most importantly, those affected by proposed changes.

While this public consultation process is often time-consuming and arduous, I believe it significantly improves tax policy and, in consequence, New Zealand's prosperity.

All MPs should apply the spirit of the generic tax policy process to the tax review's issues paper. All the options should be debated without fear or favour.

Foreclosing a much-needed debate on future tax policy can only impede our ability to lift our game in a competitive international market place.

* Sir William Birch, Minister of Finance from 1993 to 1999, is a consultant in public policy.