Comment from the Capital Tax changes sought

Press, 10 April 1978, Page 16

Comment from the Capital Tax changes sought

By

OLIVER RIDDELL

This week the Manufacturers’ Federation will present a major submission to the Minister of Finance (Mr Muldoon) on why New Zealand should switch to an alemative indirect taxation system to garner government revenue. This will be the culmination of months of preparation and heralds a new assault on the direct taxation system now operating.

Details of the submissions are still confidential, but they can he expected to follow on from a discussion paper preoared by the federation some time avo. This summarised the alternative svstems theoretically availab'e.

There are three forms of taxation of wealth, expenditure and income. Most of New Zealand’s taxes are collected from incomes because wealth and expenditure taxes, although having attractive aspects, have been found difficult to collect and administer. A wealth tax is a tax on accumulated assets. This has been suggested from time to time, but a satisfactory way of calculating fluctuating assets like land and share values which is not also enormously comnlex has eluded its proponents.

An expenditure tax- is a direct personal tax and would have the same structural features an inccrne tax. but its administrative problems are formidable. There are problems of definition over the annual calculation of returns, the treatment of specific items, avoidance .and evasion, and

exemptions and deductions. But the basic problem with an expenditure tax is that every taxpayer would need some form of personal balance sheet or at least the reporting of changes in assets and liabilities which affect the amount of funds available for spending.

Most Western countries now employ a retail sales tax. or its newer alternative, the value-added tax, to collect a large share of total public revenue and also limit the direct burden of taxation on companies and individuals.

In New Zealand, indirect taxes not only generate a smaller proportion of total tax revenue than overseas but generally are also levied at an earlier stage of the production and distribution process. Most products for the domestic market are not taxed except through the customs tariff.

This provides a form of protection but also drives costs upwards. Any duty ur tax imposed is added to the cost for normal profit markup, and a levy imposed in the early stages works right through the system. Twice during re t years the Customs Department has investigated the merits of value-added tax. The results have never been divulged but it is understood that the studies showed a huge increase in the administrative costs for collecting taxes. A retail tax should avoid distortions. If the tax on goods and services is uniform it will not discriminate between particular forms of expenditure, as would probably occur with a wholesale o r production tax. To some extent it would reduce the general level of consumption

and induce savings, if there were a offsetting reduction in income tax.

The Manufacturers’ Federation concluded that the large tax base offered by a general retail sales tax would mean that a low tax rate could provide large amounts of revenue. Small adjustments could have big revenue effects without undue economic disturbance for traders, and the retail tax could be a flexiblq and fast-acting fiscal instrument because it would operate directly on consumption. Experience in the United States shows that the major difficulties in administering retail sales taxes arise mainly where individual commodities are taxed at a different rate. This should not be necessary in New Zealand.

If the tax were to be introduced here the most straigh torward approach might be to maintain the present sf 1c excise duties and ."holesale taxes — since these influence consumption patterns and raise public revenue which is presumably universally considered to be desirable — and impose a uniform tax on the retail sales of all goods and services.

To go with indirect retail taxation, the federation has already suggested a threetier system of personal taxation similar to that now operating in Australia. This would reduce the gall p ; ng increases typical of the present system. In Australia, the first 53400 of taxable income is exempt: from 53400 to SI 6.000 the rate of tax is 32 per cent; from 516.000 to $' > 2.000 the -ate of tax is 46 per cent; above $32,000 the rate of tax is 60 per cent.