Gareth Morgan: Grab-bag ideas will not mend tax system

One service the Tax Working Group did provide was to emphasise that our tax system is broken and it would take substantive reform to fix it.

While the TWG's list of Band Aids was a bit disappointing, it was a great public service to see it clarify what we all know, that our tax system is an incoherent patchwork of tax regimes that amount to facilitating far too much tax avoidance activity, ensnare too many folk in poverty traps through poor integration of the tax and benefit systems, and exert undue influences on economic decisions by making some wealth-augmenting activities taxable and others not (property speculation).

The TWG didn't set out to design major reform and so under the constraint from that limitation on its brief, its recommendations were necessarily a series of patches with much of the fundamental weakness in our tax and benefit system not addressed at all. So its recommendations were a mix - some good stuff, such as:

Removing all loadings for depreciation - meaning not allowing depreciation deductions for income tax that are greater than the depreciation actually incurred. For investors in rental property particularly, this would be a major change in circumstance.

Alignment of top income tax rates across all entities - individuals, companies, trusts, PIEs.

And some weak, ad hoc stuff:

A selective tax on capital, applicable tax to land only, proposed on the weak theoretical grounds that because land can't dodge tax, we may as well slog it in order to broaden the tax base. A similarly facile rationale would be to levy tax on all labour that wasn't mobile.

Lowering the headline company tax rate because that rate in some overseas jurisdictions is lower than ours. Headline tax rates aren't even comparable, what matters is effective tax rates. On that basis New Zealand companies are not grossly over-taxed.

As a consequence of aligning at a lower rate (of 30 per cent or less), there is, of course, a tax shortfall so tax needs to be grabbed from somewhere - anywhere - hence the land tax and/or a rise in GST.

But low-income folk must be compensated for any rise in GST; just driving our poorly aligned tax and benefit system deeper into the mire, exacerbating already steep effective marginal tax rates on beneficiaries.

No recommendations whatsoever in terms of sorting out the abomination that Working for Families is with its steep rates of abatement or obscenely high marginal tax rates. The number of households on this benefit continues to rise year after year.

A selective tax on just the equity in rental properties. Such a measure would encourage a raft of tax dodging responses as investors used different entities to lend money to themselves, ensuring that their property-owning entity minimised equity in its properties.

It's because the partial, ad hoc nature of their recommendations leave largely intact the colander of tax leakages from our current broken tax system that the TWG deserves four out of 10. It failed to provide a roadmap to a more sustainable, fairer and efficient tax system.

While it deserves 10 out of 10 for highlighting the problems, it fell well short of offering sufficient sustainable and comprehensive solutions. The group would no doubt respond that its brief was just to serve up some choices for the politicians to decide on, but it would have made a far better contribution had it provided comprehensive tax and benefit reform that it could then dial back to meet any number of political constraints that might prevent such change.

At least then the public would be aware of what is possible and be totally au fait with precisely why we can't go there - solely because of political preferences. Also, and most appropriately, the politicians under that approach would have been put on the spot to justify compromises that smack solely of horse trading and would not have a modicum of justification for their preference on equity, efficiency, neutrality or simplicity grounds. That would have been fun.

Instead the TWG, as is so often the case with cumbersome committees, served up a grab-bag of half-cocked, fine-tunings of a system it acknowledged itself is simply broken. These king's horses and king's men certainly have left Humpty Dumpty still shattered in bits at the foot of the tax reform wall.

Gareth Morgan is a director of Gareth Morgan Investments, www.garethmorgan.com.
He was also one of the 19 members of the TWG.