Friday 1 September 2017

Tax Working Group?

Ardern is right not to be making up tax policy on the hoof - it's best thought through deliberately. Setting a Tax Working Group to come up with recommendations makes sense.

But I would expect that she might signal who would be on that group. There aren't that many serious tax people in New Zealand. Seeing some of those names show up on a list would signal something good; seeing none of them on that list would be worrying.

And a draft Terms of Reference might not be out of order either. Like, you wouldn't expect a fully finalised one, but it would give an indication of what sorts of things they'd be looking at.

Big questions I'd expect a reasonable Tax Working Group to be considering under an incoming Labour-Green government:
  1. Do current tax settings cause a distortion towards investment in housing as compared to other real assets, or towards real assets in general as compared to interest-bearing instruments? How much real world efficiency does a capital gains tax really get you as compared to just flipping to taxing real returns instead of nominal ones? The last Tax Working Group considered that while capital gains taxes sounded good in theory, there were big problems in any real world implementation. Any reason to believe that's changed? Plus, Seamus did have rather a few good questions about a CGT.

  2. What are the costs involved in flattening out the EMTR schedules that are generated by the combined clawbacks across different income-contingent benefits? It's always a trade-off: flattening things out for the small number of people stuck in terribly high EMTRs always means increasing the EMTRs for everyone else if you keep things budget-neutral. And at least some of the current high EMTR ranges can be hurdled by flipping to full time from part-time work depending on salaries. But how much would other income tax rates need to go up if we wanted to shave the peaks off those EMTRs? The last Tax Working Group asked for a comprehensive review of the interaction between tax and the welfare system. 

  3. Is the mix between central and local taxes right? I love the clear split between what's local government's tax base, and what's central's, but the current system seems to yield perversities where local councils don't see enough of the economic benefit of facilitating growth, particularly in housing, given the infrastructure costs - and this seems to be driving a lot of the scraps between central and local over housing. For local government, what would be the benefits and consequences of flipping from land plus capital valuations for rates to land-value only? I'm a fan of land taxes over land + capital - but anything looking at land taxes for central government would have to be careful of trodding on local toes. 

  4. The set of tradeoffs I have in my head is that the top marginal tax rate can't be too out of line with the company tax rate or you do too much to encourage folks to set up companies; the company tax rate can't be too out of line with international company tax rates or corporates want to put their revenues elsewhere; and, the dividend imputation regime means that mucking about with the company tax rate mostly affects foreign owners that don't benefit from imputation credits. Have we got the rough proportionalities right? How does that change if an incoming Labour/Green government wishes that overall tax revenues should increase?

  5. Taxation of multinationals would come up, but all of that's subject to what's going on in international negotiations that I know nothing about. 
Minor issues that could show up, but are probably well below the threshold for what a Tax Working Group should be thinking about:
  1. Is there any feasible way of collecting GST at the border on low-value imports that doesn't do more harm than good by introducing a barrier to trade because of the administrative hassles? We should weigh the importance of direct-to-consumer imports as part of overall market competitiveness: it would be very surprising if prices in thin NZ markets were not constrained by this competition, and it would be very disappointing if the pursuit of 'level playing fields' wound up having anti-competitive effect. 

  2. I see absolutely no basis for any new landfill tax - Councils should just be making sure that they're running the appropriate charging regime. Simplest way of thinking about it: if the landfill's capital costs were completely bond funded at the outset (buying the land, putting in all the clay lining and stuff), with annual payments to bondholders that expired at the end of the life of the tip, the tip fees should match the payments on the bonds plus the tip's operating costs. But I expect the Greens would want to see something on this. 
Things that should be thought through, but likely need prior work first:
  1. Are there important real environmental externalities that might be reasonably addressed through Pivovean taxes, and are taxes the best way of dealing with them? This one would likely need to be later down the track, after work looking at whether the ETS is up to scratch, if it isn't whether it should be modified, and whether a best-form ETS is preferable to a carbon tax (for example, on that front). Do water charges and nitrogen taxes make more sense, or should we be looking at a trading regime both for water drawing and for effluent? I expect that trading regimes make more sense in both cases. But there could be other Pigovean taxes that should be in there that I've not considered, and that wouldn't be as well handled by trading. 
Things that I would get worried about if they were in there:
  1. Tobin / financial transactions taxes are nutty enough not to be worth investigating. Like, maybe they could be in there just so that a tax working group could lay out the evidence on that they're not a good idea;

  2. Looking at putting in a new top income tax rate per se rather than looking at the most efficient means of getting higher overall government revenues, if that's the desired outcome. Higher top rates could be part of increasing overall government revenues, but shouldn't be done for their own sake. It increases the gap between the top marginal rate and the corporate rate (and so causes problems) or forces up the corporate rate too and so causes problems in the gap with other countries' corporate rates. 
Things I dream about that would never be in there:
  1. Desirability of abolishing or substantially curtailing Schedule 1 of the Local Government (Rating) Act;

  2. Appropriate mechanisms for inflation-adjusting tax rates. Currently, inflation causes fiscal drag as wages bump past income tax thresholds. Those thresholds are rarely adjusted. When they are, politicians pretend it's a tax cut instead of an inflation adjustment. The same parties that get mad if a department's budget doesn't keep up with inflation don't worry much about inflation's effects on taxes. What's the best way of running inflation-adjustment given menu costs? Set an automatic trigger for review for every new fiscal year, and provide an adjustment whenever fiscal drag has exceeded some threshold since the last adjustment? Should the adjustment push up the thresholds for the different tax rates, or provide small cuts to each tax rate.
Anything I'm missing in any category?

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