As a tax professional, I am occasionally asked what I would do as Minister of Revenue. I usually decline to answer as tax is just one part of the Government policy jigsaw. However, it’s a timely question, and with tax options likely to play a role in the COVID-19 fiscal response, it deserves an answer.
We have a good tax administration system due to the billion-dollar investment to make it fit-for-purpose. Inland Revenue and taxpayers operated successfully together throughout the lockdown because they were able to effectively engage electronically with each other. (You only need to Google how other revenue authorities have coped to confirm how good this has been).
And before COVID-19, Inland Revenue was starting to use this system to drive enforcement activity. It can collect and, importantly, match information from multiple sources, data which is also helpful for tax policy development and post-implementation review.
With this in mind, my thinking is first framed by two considerations:
We have time. It is increasingly likely that we will be cushioning the economic impact of COVID-19 for some time. Increasing taxes and introducing new taxes are likely to be counter-productive, meaning short-term tax changes should be focused on making sure the current system continues to work efficiently.
One lesson from COVID-19 is resilience relies on availability. A successful health response relies on PPE and ventilator stocks which normally won’t be used. Tax policy however, has tended to be done on an “in time” basis – when the decision is made to proceed, that is when the deeper thinking is done. The lesson for tax policy is that we should be prepared to invest in considering different options sooner. This does increase the cost of running the system but will mean that we are better prepared to respond. As an aside, the COVID tax response has shown that tax policy can move quickly albeit with trade-offs so that not everything can be done or done as well.
The next question is, where would I focus?
Tax thresholds are low hanging fruit. Income tax and GST are littered with them. Two questions. Do we still need them? If so, at what level? Commerciality should apply when setting thresholds with less focus on having a theoretically “pure” answer, particularly if there is little revenue impact. A good example is keeping the low-value asset write-off threshold at a minimum of $5,000 permanently.
The rest of my answer is less definitive.
I think there are several questions to ask. That does not mean that something should be done. Often, stating why we aren’t doing something is as important as actually doing something. The answers may simply confirm the status quo.
- Are capital and labour really separate in New Zealand? A lot of economic literature says that capital and labour should be taxed differently. COVID-19 has highlighted that for many New Zealand businesses, in particular SMEs, the business is the owner’s labour with low capital inputs. If the two can’t be separated, does that make a difference to tax policy?
- What is the real impact of tax on entrepreneurship? Bill Gates noted income tax rates were as high as 70% and capital gains taxes were 20% when Microsoft started, but this did not prevent its start up. However, tax is not just about rates. What is taxed, when, and how, is important. When New Zealand had personal tax rates of 66% in the 1970s and early 80s, there were myriad deductions and exemptions which meant the tax rate was not the effective tax rate. It is the combination of rates, timing and the base that is important.
- What are the benefits and costs of combining Inland Revenue and Customs? The UK has a combined Revenue and Customs. GST in New Zealand is an obvious overlap where there may be synergies. However, each in New Zealand also has quite different roles (border security and social policy are notable differences).
- How can high effective tax rates, when income tax and social policy measures are considered, be solved? If 33% tax is a disincentive, effective tax rates of 100% must be more so. However, this is a perennial problem with Working for Families (and other “in work” benefits), with no obvious solutions. Various tax reviews have had the issue scoped out of their brief. It can’t remain in the ‘too hard’ basket.
- Where can tax play a role in whole of Government responses and policy? The Tax Working Group noted that tax may not be a solution, but it can support a policy. Two areas for a whole of Government focus include infrastructure and the environment. Are there specific tax rules which can help, or be removed because they hinder desirable outcomes?
- Are tax incentives worth providing? The current Government has reintroduced R&D tax credits, a system set up so that the effect of the policy can be tested. Are there other incentives best delivered through the tax system? Inland Revenue’s new system should provide some flexibility as tax changes do not have to be programmed ‘forever’ and information to test the policy can be more readily gathered.
Finally, I would not rule out any tax changes. I appreciate this is a politically naive position. However, there are genuine tax policy questions that should be answered to properly inform good tax policy. The political question should be, is tax the right answer? If so, what is the right tax?
Unfortunately, the political debate is too often focused on not “scaring the horses” and making promises. This leads to sterile debates on the promise made, rather than focusing on what is the right answer.
KPMG’s Repairing Government Finances: Some taxing options? outlines several taxing options, and their pros and cons, as a possible response to the COVID-19 fiscal environment. The aim is to provoke thought and discussion about tax policy. The Government is spending to protect the economy from COVID-19. What do you think the tax response, if any, should be?
John Cantin is a Tax Partner at KPMG. His main focus is on corporate tax in both domestic and international sectors. He has clients in the broader financial services sector and has a particular interest in GST, and tax policy. He also serves as a member of the Institute of Chartered Accountants' National Tax Advisory Group and is heavily involved in submissions on proposed changes to New Zealand’s tax system. In 2019 John was awarded the Meritorious Service Award by Chartered Accountants Australia and New Zealand for his services to the tax profession.