Terms of Reference for Labour’s Tax Working Group

Post by Mefrostate:

Yesterday we discussed the members of Labour’s upcoming Tax Working Group (TWG). They have also released the terms of reference. This map of pathways and forbidden forests will guide the noble Sir Cullen and his merry band of experts as they pursue their quest.

It begins by outlining the government’s overall objectives for the tax system. Many of these are bog-standard principles of taxation: efficiency, simplicity, fairness, equity. While these have long been the basis for New Zealand’s broad-base-low-rate framework, there are a few twists to fit the goals of this government.

No surprises, the left-bloc endorses a progressive tax and transfer system. But they also target revenue and expenditure at 30% of GDP, which is toward the low end of the OECD. They specify that the system should promote productivity. Finally, sustainability gets a mention, hinting at an environmental element.

Based on these objectives, they direct the TWG to report on:

  • Whether the tax system operates fairly in relation to taxpayers, income, assets and wealth
  • Whether the tax system promotes the right balance between supporting the productive economy and the speculative economy
  • Whether there are changes to the tax system which would make it more fair, balanced and efficient, and
  • Whether there are other changes which would support the integrity of the income tax system, having regard to the interaction of the systems for taxing companies, trusts, and individuals.

While the final bullet suggests alignment between the company, trust and personal tax rates, this was already a key recommendation of the 2010 incarnation of the TWG, and was largely achieved by the former National government. The top income and tax rates are 33%; companies pay 28%.

Getting more specific, the TWG should consider in particular:

  • The economic environment that will apply over the next 5-10 years, taking into account demographic change, and the impact of changes in technology and employment practices, and how these are driving different business models,
  • Whether a system of taxing capital gains or land (not applying to the family home or the land under it), or other housing tax measures, would improve the tax system.
  • Whether a progressive company tax (with a lower rate for small companies) would improve the tax system and the business environment, and
  • What role the taxation system can play in delivering positive environmental and ecological outcomes, especially over the longer term.

All signs seem to point at the potential for a tax to stymie rising house prices. Grant Robertson confirmed this when announcing the TWG: “At the moment the tax system appears unfair – for example, it doesn’t treat income from speculation in housing as it does income from work “. It will be good to combine this with a consideration of the role of automation in workplaces, and capital’s increasing share of income.

The TWG are directed to report on the idea of having a progressive companies tax, with lower rates for smaller firms. SMEs enjoy exemptions in many countries, but I’m not aware of any with an explicit set of brackets which vary with company size. While this could boost competition, it would seem ripe for exploitation.

There is an explicit mention of using the tax system to deliver environmental outcomes, and one of the members is Marjan Van Den Belt, an ecological economist. We can expect some interaction with the upcoming Zero Carbon Act and the climate commission, which are being developed concurrently.

All-in-all this seems a pretty comprehensive set of issues for the TWG to grapple with. However, I’m more concerned by the laundry list of forbidden areas which are outside of the scope:

  • Increasing any income tax rate or the rate of GST
  • Inheritance tax
  • Taxation of the family home or the land under it, and
  • Interaction with the transfer system

In my view it is absolutely ridiculous have a full review of the tax system that completely excludes increases to tax on income, consumption, inheritance and owner-occupied property. What is the point in gathering a diverse set of experts if they can only work with their hands tied? This seems to stack the deck for Labour’s long-cherished capital gains tax, and will completely undermine the value of the final report.

This could be a big problem for Labour if they use this TWG to take a capital gains tax to the next election. I can just imagine English (or his replacement): “Labour have basically gathered some master chefs but only given them dough and tinned spaghetti, so I don’t think anyone’s surprised that they’ve cooked-up a capital gains tax.” And I’d have to agree.

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  1. PDB

     /  22nd December 2017

    In summary – a very long way for Labour to implement some form of CGT and/or land tax, which if to be done properly would need to include the family home which it wont.

  2. High Flying Duck

     /  22nd December 2017

    More info on the members of the TWG (From Rob Hosking at NBR):

    “Least surprising among those named is Auckland University professor Craig Elliffe who has been advising Labour on tax issues and is a strong proponent of a capital gains tax…

    The other foregone inclusion in the group was Bill Rosenberg, economist and director of policy at the Council of Trade Unions.

    Robin Oliver, former deputy commissioner at IRD has previously stated his opposition to a capital gains tax….

    While stopping short of being stacked in the Coalition government’s favour, the group appears likely to produce more palatable recommendations to it than the previous Rob McLeod-led tax working group whose recommendations did not go down that well with Labour at the time….

    Labour is likely to want the group to recommend something that is a little further to the right than the Coalition government would want, so it can tweak it back slightly and then sell to voters at the next election.”


    • Blazer

       /  22nd December 2017

      can’t please some people…’Robin Oliver, former deputy commissioner at IRD has previously stated his opposition to a capital gains tax….’.

  3. NOEL

     /  22nd December 2017

    Aw gee you didnt expect a Government Working Group to look at the broader picture?
    The DIA analysis of the Vietnam Veterans Joint Working Group identified that many of the window dressing recommendations were not supported by a majority of submitters.


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