4 September 2014

Tax seems to have become the first real issue of the election, following the distractions of recent weeks.

And, as usual with tax debates, the argument quickly has descended into the devil of the detail. The one certainty about tax policy is its inherent complexity, the fact there will always be winners and losers, and frequently unintended consequences.

The fundamental point of a tax system often gets overlooked – its primary purpose is to raise the revenue a government needs to carry out its functions. Income versus expenditure, if you like. When I was Minister of Revenue, I had prominently on my desk a copy of Canada’s first Income Tax Act passed in 1917 – a slim volume of just 11 pages. It made the point by its brevity that the collection of tax was a mechanical process which needed to be properly applied. As a standard for tax administration, it is probably as relevant as ever today.

However, tax policy has been distorted over the years and around the world by governments of all stripes who have sought to use the tax system for all range of other purposes – from encouraging and incentivising particular forms of behaviour in business, through to discouraging or severely penalising other forms of economic activity deemed socially, politically or economically undesirable. The more governments have sought to use the tax system in this way, the more complicated it has become, and the more uneven and prone to anomalies it has been seen to be. And a whole new industry of interpreting, devising ways around the system, exploiting the system for advantage, or just finding new activities to escape the tax net has sprung up the world over, with now dramatic implications in the digital era for international tax collection in particular.

This is the backdrop against which the current tax debate in New Zealand is being conducted. Like most tax debates, it is missing the point. The argument should not be about what new distortionary taxes can be introduced to skew behaviour one way or the other, but more about the basic point of ensuring that all the taxes levied are properly collected. The debate this week over the details of Labour’s proposed Capital Gains Tax simply presages more complexity, more issues with avoidance and boundary definitions, and overall, a less simple tax system, should the policy ever be implemented. Similar problems lie ahead with the tax free thresholds being proposed by the Greens and the Conservatives. For its part, National needs to be careful about grafting too much of the welfare system’s income support policies onto the tax system, for similar reasons.

From my vantage point, having been at the heart of and now outside the tax policy loop, the situation is clearer than ever. The key to good tax policy in the future is governments getting back to the basics – ensuring the system collects the revenue they need to do their job, and not trying to use taxes to re-organise the world the way their prejudices dictate.