TAX REFORM - THE BIG ONE

Article by Tony Cook (New Zealand)

I suspect, the taxation system in most countries, over many years, has grown like topsy, as it has in New Zealand. As successive governments come and go, they introduce more and more varieties of taxation but rarely ever dispense with any. Consequently, the ensuing cost of collecting this incredible spectrum is now horrendous and, of course, continues to rise.

The original purpose of having separate taxes, I’m led to believe, was to instill the user pays principle as a fairer means of distributing the tax burden. It is interesting to note that now-a-days this principle is more often violated than not, with monies regularly being redirected to other more urgent needs.

But you get disincentive taxes too, like the tax on liquor and tobacco for example. The pressure groups mainly responsible for their original introductions still fondly imagine their disincentive schemes bear justified results. In fact, what mostly happens, is that the grog and cigarettes are purchased just the same while the kids get less expensive food, less health care, less clothes and so on. Often, the very people who can’t afford these items, buy them, and then turn up at the food parcel centres. But don’t get me wrong. I’m a firm believer in tax incentives, just not disincentives.

Indirect taxes are everywhere too. Often you don’t even realise that you’ve paid some. Some countries, including New Zealand, have a goods and services type of tax on pretty well all commodities and services with few exceptions. The system is extremely expensive for businesses, people and government to administer, and the instance of fraud is high, much of it remaining undetected.

The total effect of all this mega diversity of taxation, apart from its ridiculous administration cost, is to actually, (though probably unintentionally), conceal the true rate of taxation each individual contributes. I’m not suggesting that this was the original purpose. Only the result. It would be a mammoth task to actually work out what your exact rate of taxation was if you were to include all forms of taxation. I find this state of affairs to be distasteful at best, and bordering on misrepresentation at worst. I feel everyone is entitled to know (with relative ease of calculation) exactly what total taxes they pay.

The point of all this is what can possibly be gained by having a myriad of taxes? It’s simply not necessary. It costs a fortune to collect, the user pays principle is largely defeated, the disincentive taxes have never really worked, and because of the complexities, tax fraud and evasion are continual problems that necessitate very high staffing to deal with it. Simplicity has a tendency to minimise these problems.

My suggestion, therefore, is to amalgamate all taxation (including local body taxes) into one citizens/business tax, based on a ratio of income to estate, or, in the case of businesses, profits to assets as the major assessment criteria.

It will be immediately realised that I have introduced an estate/asset component to the tax assessment criteria.. The ensuing incentive is useful. The smaller the estate/assets the higher the tax rate. The incentive is aimed at encouraging the tax payer to resource himself/herself with a growing estate, and the business with a growing schedule of assets to provide substance and collateral. People of little estate are more likely to be a burden on the state, just as businesses with little asset backing are more likely to become business casualties. The two additional components serve to constantly ensure the rate of taxation is struck as fairly as possible. I believe taxation assessment based on income/profit alone is not sufficient declaration to establish and sustain fair assessments.

Instead of individuals declaring probate upon death, however, each person’s estate, or business assets would be declared at the outset of tax eligibility, and updated each year thereafter whether paying tax or not. Such requirement would only cease upon death/cessation of business unless special exemption was granted.

Now, it will immediately be realised that these suggestions represent a massive reorganisation of the tax system, as we know it. Obviously, it would have to be implemented over a lengthy period, say 5 to 10 years. But the tax administration savings would also be massive, together with a much needed simplification that would allow each tax payer to know exactly what his actual tax contribution was.

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