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Monday, October 7, 2024

Dr Eric Crampton: For a better tax conversation


Every three years, Inland Revenue undertakes a long-term insights briefing on the tax system.

This year’s could spark a shift away from tedious and fruitless discussions of Capital Gains Taxes.

Inland Revenue proposes to investigate a range of alternatives. Some, like payroll taxes, make little sense. But IRD proposes examining progressive consumption taxes. And that is far more interesting.

All taxes are awful. But consumption taxes are among the least bad.

A consumption tax does not care whether your spending comes from wages, from investment dividends or capital gains, from inheritances, from borrowing against family wealth, or even from criminal activity. It does not care whether you consume today or decades from now in retirement. When income or wealth turns into consumption, it is taxed.

The more that a tax system can rely on consumption taxes, rather than taxes on earnings or on company net income, the better. Consumption taxes hit a very broad tax base while not distorting choices about investment and savings.

And New Zealand’s GST is the best in the world.

Unfortunately, voters generally want governments to spend far more than can be raised through a flat income or consumption tax. And it is not Inland Revenue’s job to tell voters to exhibit some restraint. Its job is to raise the revenue government asks for in the least awful way possible.

Progressive consumption taxes try to find ways of charging a higher consumption tax on those who spend more.

There are a few ways of doing it.

Some, like the X-tax or the Personal Expenditures Tax, would require a comprehensive re-write of the tax code – and are far too complicated to cover in a short column.

But a simple version is much easier to add to our current tax mix. And it is much easier to explain in a short column as it is close to the 2010 tax shift.

Canada provides a GST rebate as a tax credit to lower-income families, to a maximum of $680 for a couple, plus $179 for each child. The rebate scales down for families earning more than $44,000 per year and drops to zero by about $70,000.

In principle, a substantial increase in GST could be combined with a rebate based on overall household income. The combination would maintain progressivity while allowing a shift away from worse taxes.

And it is certainly more interesting than endless debates about CGTs.

Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE

1 comment:

Anonymous said...

I totally agree with you Dr Crampton.. GST was the best thing to happen in a long time. If someone has the disposable income to spend on a new BMW or similar, they pay for the privilege. It is a choice, whereas income tax is not. Lower income people can also choose to grow their own food to avoid paying some tax. Lots of other examples abound. Put GST up to 20% as its easier to work with (instead of the silly figure of 15%) Fraud is easier to detect too. But everyone will still pay some GST. Much better than CGT. Will introduce some much needed self discipline in peoples lives as they will have to keep receipts if they want to claim back their refund. A good reason to up the maths standards in schools!!