Maintaining tax integrity
For any tax system to work effectively, a number of principles need to be present. The system must be simple and efficient, equitable, neutral, and able to generate adequate revenue.
The key focus in our current tax system has been on adequacy. But one has to wonder, will the Government be able to generate enough revenue from the current tax collection to fund its expenditure programme and bring our finances in line to meet the surplus target by 2014/15?
The simplest way to increase a government’s revenue is to increase taxpayer’s incomes: the more you earn, the more the government earns through taxation. However, there aren’t any direct actions a government can take to achieve this. The most it can do is pull a range of levers in the economy and hope (or pray) this has the right effect.
The alternative is direct intervention by determining new tax rules and ensuring they are complied with through strict enforcement. However, it’s generally accepted that any major revamp of the New Zealand tax system is off the agenda for this Budget. Instead, there has been a tinkering around the edges of the current tax policy and legislation.
New Zealand relies on a self-assessment regime to assess any changes to tax policy and proposals must go through a Generic Tax Policy Process, where consultation occurs prior to the enactment of any amendments. This is to ensure that taxpayers have confidence in the system and are happy to pay what is expected.
Unfortunately, recent forays to tweak the rules, namely the proposals to tax carparks and work related tools such as computers and cellphones, have resulted in a decline in the general public’s confidence in the integrity of our tax system.
The Government has backed down from the carpark tax and recent public statements from the Prime Minister have hinted that the proposed changes to the taxation of work tools look set for the same fate. The question remaining is, how did the Government think these proposals would ever achieve sound taxation outcomes?
These proposals were put forward on the principle of equity. The argument was, where a private benefit arises, a tax consequence should result. In the case of carparks, why should an employee obtain a carpark for free? However, it seems a step has been missed in the appropriate assessment of other principles.
Both proposals failed to meet the efficiency criteria. The calculations were complex, the principles muddied and compromises were made to try and make them work.
Their effect would not be neutrality as behaviours would change to make life simpler and complexities would be avoided by wholly withdrawing the offending expenditure.
Conversely, while the proposals sought to remedy the inequity of private expenditure, the equity principle also became offended, as the attempt to make things simpler meant tax would actually be paid on a business element as a compromise. It’s like the analogy of using a sledgehammer to crack a nut. While there may be some private benefits to these tax tweaks, they are insignificant in the bigger picture. And the negative perceptions created and additional compliance costs incurred in remedying these minor issues demonstrate they are not worth pursuing.
The increased use of work tools will also be a vital link to achieving an increase in this country’s productivity and effectiveness – a key Government concern. Businesses are using cellphones, smart phones and computers to respond quicker to customers, obtain market information and increase the efficiency of operations through various software applications.
The delineation between what is work and what is private is quickly becoming blurred. People are now available 24/7, operating outside their current time zone in an increasingly international marketplace.
Technology is certain to help drive the productivity gains this country so desperately needs, and in turn, drive the revenue the Government so desperately needs. Developing tax policy that rights some minor wrongs, collects a little revenue, but fundamentally changes the behaviours of employers and employees at the cost of productivity gains seems counter-intuitive.
Instead, a connection needs to be made between tax policy and business growth, and innovation and development. Then we may see the integrity of the tax system increase and the development of a more productive economy.