Federated Farmers is urging the Tax Working Group to keep taxes simple:
New Zealand enjoys a relatively neutral, non-distortionary tax system, with low compliance costs by international standards. Any changes should retain these hallmarks, Federated Farmers says.
I’ve said it many times but it needs to be repeated: simple taxes are better taxes.
Making it relatively easy to comply reduces the burden on both the Inland Revenue Department and taxpayers.
Simple taxes also reduce loop holes.
The Federation’s submission to the Tax Working Group, which was guided by 1,400 responses to a survey of its members, also argues money raised by any new taxes should be offset by reductions in other taxes.
Survey respondents strongly rejected some of the tax options that have been mooted: 81% opposed a capital gains tax (CGT) excluding the family home; 91% rejected a land tax and 82% opposed any form of environmental taxation.
Feds Economics and Commerce spokesperson Andrew Hoggard says it seems many proponents of a CGT hope it will crack down on property speculators.
A CGT hasn’t stopped runaway property price inflation in other countries.
“But that could be substantially achieved by an extension of the ‘bright-line test’ on sales to five years, making the need for a CGT largely redundant.
“The Federation didn’t oppose the two-year ‘bright-line’ when it was introduced, and our tax survey last month showed 47% supported this measure, with five years the most favoured period,” Andrew says.
A CGT would also have complications in terms of portfolio investment (PIE) rules, Livestock Herd Scheme gains and losses, farmhouse use changes and indexing the asset cost base so the inflation component is not taxed.
“There’s a lot to be said for the KISS (keep it simple…) principle and a CGT tramples all over that.”
A land tax would be “punitive and inequitable” on farmers, given the size of their properties. If it was introduced, highly geared enterprises could become equity negative, with potential flow-on effects to banks and financiers, Andrew says.
“What’s more developing businesses, or those with fluctuations in income typical of many farms, may not have sufficient cash flow in any one year to pay a land tax. Gross revenue can vary hugely for farmers due to the vagaries of international markets, exchange and interest rates, and the weather.”
It’s not just farmers who would be adversely affected by a land tax. It would add to costs for every business.
That includes service providers like doctors and other health professionals.
At least some of the extra cost would be passed on to consumers, fueling inflation and making life even more difficult for the poor.
As for environmental taxes, Federated Farmers believes there are more appropriate levers, such as regulation and industry-led initiatives, to spur gains.
“Those other levers are more efficient and more easily targeted.
“Taxpayers might decide it is cheaper to simply pay a new tax, particularly if they have limited ability to change/respond, and thus you don’t get the environmental gains we’re all looking for,” Andrew says.
Adding a tax would take away money that could be used for environmental improvements and wouldn’t discriminate between those whose environmental footprint is small and those whose isn’t.
The Federation’s survey showed 66% of farmers believed the current company tax rate of 28% is ‘about right’. There was limited appetite for a 26% rate for small to medium enterprise (SMEs) companies because savings would be relatively insignificant, because not all SMEs are companies, because it would significantly complicate the imputation regime and widening the gap between an SME company tax and the top marginal individual’s tax rate would likely cause even more inappropriate tax planning and avoidance.
Any reduction in tax rate should apply to all businesses.
How would you define a SME – by the number of employees, by income, by profit?
Discriminating by size would complicate the tax system and give some companies an advantage not available to their competitors.
It could also provide a perverse incentive for a business to stay small.
Any tax which incentivises businesses to spend more time on working out how to organise themselves to minimise the tax they pay than on running their businesses is a bad tax.
While on the topic of discrimination, I support the Taxpayers’ Union which is advocating for treating Maori Authorities and charitable companies the same as other businesses:
Keeping tax simple should be a major priority for the TWG.
It should aim to make any changes revenue neutral so that any increases in one area are offset by decreases in another too.
It should also take the opportunity to end fiscal drag, or bracket creep, which offsets gains from pay rises by subjecting them to a higher tax rate, by indexing tax threshold adjustments to inflation.
The government has restricted what the TWG can do by telling it what it can’t do.
But it still has the opportunity to make the tax system better by ensuring it’s simple.