JUST GOOD BUSINESS BUZZ – SUSTAINABILITY : Five Ways To Sell Tax Reform

It’s no surprise people don’t want tax rise. So opposition to increasing GST from 12.5 percent to 15 percent is strong. However, only 11 percent of New Zealanders think the current tax system is fair and eight out of 10 think it needs reform, according to ShapeNZ research covering representative national population sample of 2281 respondents. Respondents answered questions about proposals from the Tax Working Group.
It turns out that what Kiwis want includes:
• personal tax cuts across the board, for high, middle and low income earners;
• the 12.5 percent and 21 percent marginal tax rates reduced for those in the bottom two income groups (70 percent support);
• alignment of the top tax rates for personal incomes, companies and trusts (56 percent for, 11 percent oppose);
• company tax rates reduced from 30 percent to 27 percent (41 percent for, 26 percent oppose);
• removal of depreciation allowances on buildings that do not depreciate (67 percent support, seven percent oppose – though when later questioned on applying this to industrial and commercial buildings support fell to 37 percent);
• removing tax depreciation allowances on rental homes (46 percent support, 17 percent oppose);
• discontinuing the use of Loss Attributing Qualifying Companies (LAQCs) to split incomes to qualify for Working for Families payments (48 percent for discontinuing, 16 percent for continuing, 36 percent don’t know);
• an end to income splitting: stopping the self-employed distributing income to family members, through companies and trusts, to lower their household’s overall tax compared with other households with the same overall income from wages and salaries (48 percent support discontinuing, 22 percent want splitting to continue, 30 percent are not sure).
So everyone wants tax cut and no-one wants to pay?
Not completely. Nearly half think that if they get their wish and depreciation allowances on rental properties are removed, then rents will rise (70 percent of landlords agree). For one million living in rental homes, that is sacrifice, for what most agree will be the greater good. Some 56 percent say lowering top personal tax rates and more broadly based tax system will improve New Zealand’s attractiveness for people and investors.
The country does need broader tax base and to reduce the burden on personal income taxpayers. So, having ruled out land tax and comprehensive capital gain taxes, the Government has little option but to increase GST to provide the largest source of the revenue for any reform.
A study of what happened when GST was first introduced in 1986 reveals some valuable lessons.
A study by Clinton University of Exeter Business School, comparing the introduction of VAT in the UK and GST in New Zealand, quotes the 1986 Finance Minister, Sir Roger Douglas as saying that the success of GST can be traced to five key process elements.
These are:
• political will;
• the right people;
• the way in which the proposal was packaged;
• an effective consultative process; and
• an effective communication process.
While majority at first didn’t want GST in 1986 either, they would not now choose to go back to top personal tax rates of 66c in every dollar and wholesale taxes at widely varying rates.
The key to public acceptance of the 1986 reforms was that they were accompanied by across-the-board reductions in personal taxes as well as upfront increases in benefits. later GST increase to 12.5 percent was also accompanied by up-front adjustments to Working for Families payments.
The Government now needs to lead and explain, explain, explain. As in 1986, its reform needs to be based on sound principles, meet the country’s long-term needs and demonstrate the fairness of the changes.
For the politicians, lot hinges on doing this properly: 69 percent say tax policies proposed by each party will influence their vote at the next general election.

Peter Neilson is chief executive of the New Zealand Business Council for Sustainable Development. He was Minister of Revenue in the Lange Government soon after GST was first introduced. On the web: www.nzbcsd.org.nz

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