Inland Revenue are currently consulting on the scope of their second long-term insights briefing (LTIB). The proposed topic of the LTIB is the consideration of what a future tax system in New Zealand could look like to address fiscal pressures emerging from issues such as the aging population and climate change. The LTIB looks at the tax bases and regimes that form part of the current tax system, and explores options for change. See Inland Revenue’s initial consultation document, “Our tax system: bases and regimes”, 21 August 2024.
The LTIB offers some interesting insights into the state of the current New Zealand tax system and how it compares with the tax system of other OECD countries.
New Zealand, like other OECD countries, has 2 main tax bases: income and consumption (GST). The vast majority of core Crown tax revenue is funded through these tax bases, with direct taxation on individuals providing double the revenue from GST. Historically, a central government land tax, estate and gift duty and a social security tax also formed part of New Zealand’s tax base.
The LTIB identifies that New Zealand has relatively low taxes on some forms of labour income when compared to other OECD countries, however, corporate taxes are relatively high in comparison to the OECD average. Unsurprisingly, the document touches on the lack of a general capital gains tax in New Zealand, resulting in less revenue collection.
New Zealand collects more in consumption taxes through GST than the OECD average relative to GDP. However, less is raised relative to GDP when it comes to taxes on financial and capital transactions, and taxes in respect of estates, inheritances and gifts.
Income and capital derived by individuals are broadly taxed at the same rates in New Zealand. This can be compared to other OECD countries where labour income is taxed at progressive rates while capital income is taxed at a lower, flat tax rate (dual system).
The LTIB examines the interface between personal and corporate taxation and notes that New Zealand is only one of 6 countries in the OECD that offer an imputation system, where credit is given at the individual level for company tax paid. The majority of OECD countries operate under a classical system where no adjustment is made for corporate income tax on company profits.
Key motivators for examining the current tax system and options for change include New Zealand’s ageing population, a decline in labour force participation, climate change and decreasing levels of economic growth. These trends have an impact on revenue collection and the amount of expenditure future governments can spend on public services. Officials consider, in particular, that “the impact of an ageing population on the size and mix of tax revenues is an area that would benefit from more research”.
Officials note that a future tax system should incorporate a stable core structure of tax bases while allowing room for flexibility to adjust tax rates on the core tax bases. Distributional goals also have to be considered as different governments have different views on how the tax burden should be shared.
The initial consultation document identifies a number of areas that currently restrict flexibility in the tax system. The first is the integration of personal and entity taxes. In particular, there is a rate differential between the corporate and personal tax rates which allows income to be sheltered in companies and other entities. This is considered a barrier to raising additional tax revenue. The comprehensiveness of the tax base and the lack of taxation on capital gains are also seen as constraints.
Given these constraints, a key issue is to examine alternative design features or regimes that will allow flexibility in raising revenue while maintaining integrity, efficiency and equity objectives.
Officials propose looking at GST, which is a reliable way of raising revenue. However, as simply raising the rate of GST is likely to have an adverse impact on low-income households, measures such as low-income offsets alongside a rate increase will be considered.
Thought will also be given to what new tax bases could be added to the current core structure of the tax system. The advantages and disadvantages of alternative tax bases such as payroll taxes (including social security contributions), land taxes, wealth and inheritances taxes and taxes on transactions will be explored.
Inland Revenue invites feedback on the proposed topic of the next LTIB which should be provided by 4 October 2024.
