Big idea has tax turkeys stuffed

A plethora of tax reform options were presented to the cream of New Zealand's tax advice community in Wellington this week at the Tax Working Group's final conference.

It was a mostly sombre affair full of dry discussion about tax structure that gets well-paid men (mostly) in grey suits very excited (sometimes) in a number-crunchy sort of way.

Until, at least, Gareth Morgan, pictured, stepped up to propose a simple and radical solution that would do them all out of jobs. Surprisingly for New Zealand's best-paid turkeys, they applauded Morgan's idea.

He described himself as an anarchist delivering a "Big Kahuna" of an idea that would transform New Zealand's economy, its social welfare system and the incentives for working and investing.

Also surprisingly, the idea went down a lot better with the public than Don Brash's 2025 Taskforce report the previous day, which appeared to be a tired retread of Act's manifesto and a coda to the Rogernomics era.

Morgan told the conference New Zealand's tax system was broken. High net worth individuals paid hardly any tax because they structured their affairs to avoid the 38 per cent rate in particular. They could do this because of the gaps between the corporate tax rate at 30 per cent, the trust rate at 33 per cent and the top income tax rate of 38 per cent.

They also did it because there was no effective capital gains tax on property and losses on rental properties could be offset against personal income. Morgan described PAYE earners as idiots if they didn't take advantage of the system by owning rental properties to reduce their income tax.

He also criticised the morass of benefits, exceptions and means-testing for benefits that employs thousands of bureaucrats. His solution seems frighteningly simple and elegant.

He proposed taxing all capital, which includes land, buildings and machinery, at a constant rate of 1.25 per cent using valuations compiled from various indices. Then replace all benefits, including New Zealand Superannuation, with a universal $10,000 payment to all New Zealand adults. A flat tax of 25 per cent on all corporate, trust and personal income would apply across all income, including from investments.

The $10,000 payment would effectively mean all income below $40,000 would be tax-free. GST would remain at its current rate and the changes would be revenue-neutral, meaning there would be no need for cuts in government spending on health, education and the like.

There was a stunned silence and very few questions. Either it was seen as so radical as to be worth ignoring, or they couldn't see any holes in it. As one grey suit pointed out, there would always be devil in the detail, but it was interesting to see how few holes there appeared at first blush.

That is the benefit of elegance and simplicity. It is an option worth considering, given it comes from an apolitical and popular source. Morgan pointed out it would put many tax lawyers, accountants and social welfare bureaucrats out of a job. "You might have to get a real job," he said. The grey suits laughed.

Wouldn't it be nice to see the turkeys vote for Christmas?

On the shortlist ...

No Cohones

Keep status quo. Unbalanced tax system heaps burden on PAYE earners without children. System unwieldy, unfair and biased against productive sector.

Little Kahuna

Cut top income and trust tax rate to match 30 per cent corporate rate. Increase GST to 15 per cent, compensate low-income earners. Tax rental property with the Risk Free Return Method (RFRM), which takes a house's value at the start of a year less debt owing and multiplies that by the inflation-adjusted return on a risk-free investment such as a one-year Government bond. This is taxed at the investor's tax rate. Ban deductions for interest, depreciation and repairs, ban offsetting of rental property losses against personal income.

Medium Kahuna

Align top income, corporate and trust tax rate at 25 per cent. Increase GST to 15 per cent and introduce a 0.5 per cent land tax on the rateable value of land worth more than $1 million per hectare. Tax rental property income via RFRM.

Big Kahuna

Introduce a flat income, corporate and trust tax rate at 25 per cent, introduce a guaranteed minimum income of $10,000 per person to replace all benefits and introduce a 1.25 per cent tax on all capital such as land, buildings and machinery.