Briefing for the Incoming Minister of Revenue - 2008
Executive summary
A good tax system is not just about having good policy. Both tax policy and tax administration must be working well for us to have a good tax system, which will help business grow and to make New Zealand attractive to investors. Our key advice is that the tax system needs to be considered as a whole.
For example, individual tax policy changes cannot be considered in isolation. They need to be examined with a view to how they dovetail into building an overall coherent tax system. This involves coherence with both other policies and with our ability to operate the tax system in ways that are as low-cost and as helpful to taxpayers as possible.
The briefing is a stocktake on how we see the tax system is functioning. Overall, we see the tax system as operating well. We collect revenue to finance government spending using broad tax bases and mostly low rates. This is likely to minimise the economic costs of raising taxes. Despite recent downturns, our revenue collections from our three main tax bases - personal income, company income and expenditure on goods and services - have over time been robust. We collect significant amounts of revenue from these taxes. We believe that the tax system is mainly seen as fair. Compliance costs are relatively low by international standards. The money the government spends on Inland Revenue per $100 of revenue raised is moderate by international standards and is declining.
Nevertheless, there are some growing pressures. None of these should be viewed as a matter of alarm. The tax system is generally operating well. However, there are some growing problems which, if left untreated, have the potential to erode our ability to deliver a high quality tax system.
One concern is the overall coherence of the tax system. To an increasing extent, the tax paid by an individual depends on the way in which that income is earned. There is ample evidence that people are using different entities to structure their affairs in ways which reduce their tax liabilities. The scope that the current tax system provides for this to happen imposes costs that can lower the wellbeing of New Zealand as a whole. It can also create considerable business uncertainty around what is and what is not tax avoidance. It can create a mentality that rather than tax being something which is paid by all, tax is something for the smart, the able and the well-advised to avoid. Over time, this can erode confidence that the tax system is fair.
There are a number of possible ways of reforming the tax system to create greater coherence. We believe that an important priority for the government is to settle on a broad framework for reform and to take systematic steps over time to increase the coherence of the tax system.
A second concern is maintaining a robust company tax base as any substantial erosion of this base is likely to put upward pressure on other tax rates.
In charting a future path it is important for the government to be aware that governments around the world have been reducing their company tax rates. This creates pressure for New Zealand to do likewise. Despite New Zealand's recent reduction in its rate, the 30 percent company rate is still higher than average in the OECD. As other countries reduce their rate, this puts pressure on New Zealand to do likewise. But other things being equal, the lower the company tax rate is relative to higher rates of personal income tax, the greater will be the scope for taxpayers to structure their affairs in ways which shelter their income from higher rates of personal tax.
Another concern is the high effective marginal tax rates that many taxpayers face because of taxes and the abatement of social benefits that depend on income. High effective marginal rates can leave people with little real incentive to work harder or smarter or to undertake training to improve their productivity. It also creates scope for tax planning. This is not an easy problem to resolve. Reducing these effective marginal tax rates either requires providing less assistance, which could hurt many who are not well off, or involves abating social benefits more slowly, which can be costly. But these effective marginal rates need to be taken into account when considering future reform. It seems generally desirable to avoid adding to effective marginal rates and, where possible, to lower them.
These policy challenges are echoed on the delivery side. Problems with the coherence of policy settings flow through to the administration of the tax system. Our relatively high reliance on company tax, combined with the increasing integration of the world economy, makes it important that Inland Revenue has the skills necessary to protect our tax base. Those skills are also necessary to provide quick and accurate responses to give businesses and the public as much certainty as possible in applying the tax laws. New Zealand is unlikely to have the lowest tax rates in the world but we can contribute to the international competitiveness of the economy through high-quality tax administration.
New Zealand has the advantage of a history of strong tax administration, but we cannot afford to stand still. The world continues to change, with new technology being an obvious example. Moreover, over time, Inland Revenue has picked up a large number of additional tasks, including Working for Families tax credits, child support, student loans, paid parental leave and KiwiSaver. This has put pressure on key aspects of our system, in particular the payment and processing of employer tax obligations. Our systems need to work well and be able to handle inevitable government policy changes, including those in the National Party's Post-election action plan. As requests on the system have expanded, systems that were designed well for dealing with tax matters have been progressively modified and adapted to take on additional tasks. This has created a quite complicated administrative system that is becoming less agile and more costly in taking on urgent and important new tasks. A priority will be to consider both policy options and systems redesign options that will alleviate these concerns.
Inland Revenue is therefore undergoing a period of significant transformation. To manage the transformation, we are developing a programme of initiatives which will equip our infrastructure and our people to deliver better value for money, make it easier and less costly for individuals and businesses to comply with their obligations and receive their entitlements, and allow Inland Revenue to respond quickly and efficiently to changing government expectations.
Date published: 30 Jan 2009
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