No easy options on taxation reform

Press, 4 February 1982, Page 16

No easy options on taxation reform

This is the! full text of a statement released yesterday by the Prime Minister, Mr | Muldoon, on taxation reform. ' .

Because oif the continuing widespread interest in the current' review ®f .taxation; I have decided to publish in summary, the most recent information made available to me. The objective of the studies is . to see whether there, are ways in wpich the present levels of direct taxation can be reduced. ; ... This meatns, however, that, there would have to be an increase in indirect taxation to sustain total over-all taxation, revenue, gfoen the present levels of government expenditure. This wijiuld? involve broadening the.tate base. Indirect taxation has several advantages: ’ln. general terms, where it is broadly based, it can be an effective tool to help regulate demapd in the economy. Changes can be introduced more rapidly than with direct tax. Indirect taxes are harder to awoid and.tend not to penalise tie efficient and profitable business. It has disadvantages. It may be I regressive unless offsetting aetiqn is taken. It has been -argued that indirect taxes hurt tjh<Yse on lower incomes more, than the taxpayer in the middle br upper brackets. • 1

This would create a tendency for producers to merge with suppliers only to reduce taxation and therefore reducing the element of competition. This form of tax • has been abandoned iri European countries recently for. this reason. The wholesale sales tax currently provides $775 million a year based on figures for the March, 1981, year. It is the second biggest source after personal income tax on wage arid salary earners. It is currently levied at eight rates on an ad valorem basis of between 10 per cent and 60 per cent,while six specific rates are applied at rates ranging from 0.5 c a litre for diesel and 60c a litre for fortified wines. It has a number of difficulties. The sales value on which the tax is levied can be difficult to establish, particularly where the wholesaler is cut out of the distribution chain by the manufacturer who sells directly to retailers. This means that the smaller retailer who does not have direct access to purchases from manufacturers is placed at a disadvantage by the taxation provisions applying to the wholesaler. Also, some . service charges may be deleted from consideration in valuation proceedings and would therefore not be subject to tax. It may create strains of liquidity in that the wholesaler would bear the cost of the tax until paid by the retailer. It may also have the secondary effect of “cascading” from taxes paid at various levels and the consequent effect on market prices, and distribution costs.

it is possible to tax capital goods, something not always possible with other forms such as a value-added tax or a retail sales tax. The value-added tax is based on the difference between the cost of inputs at each stage of production and receipts from the products at each stage. Among its advantages are flexibility from the Government's point of view as a fiscal and economic tool, enabling it to raise or reduce revenue and manipulate its impact on different sectors.

Its supporters say it tends to be self policing in. that traders wish to be invoiced properly at all levels so that credits on purchases can be correctly accounted for. On the other hand, it could be expensive to administer for both the Government and industry. It would involve a large number of taxpaying units as well as a complex administrative system.

Some indications of the size of a VAT system have been provided for me. An early study shows that if VAT were introduced on all goods and services, some 192,000 taxpayers would have to be registered. In some countries, farmers and builders are regarded as final consumers and if this were adopted here, the total would reduce to around 90,000.

In general. >. most indirect taxes ■ are simpler to collect than income tax and are less prone to evasion and avoidance. Fewer tax-paying units are-involved. The objective of any tax system'is that it should be administratively efficient and neutral; in its economic impact. ' - The GovertniAent has si number of optioas available in the field of indirect taxes. These include a tniVersal turnover tax, a wholesale tax, a retail tax and a vialue-added tax. The universal turnover tax involves taxing a product repeatedly ate it moves through the production and distribution system. It permits a very large base and therefore a lower rate. It woild be attractive if every product passed through the same number of stages but obviously this is not the case and it means that the tax would therefore be discriminatory. .■ ’

Each taxpayer would have to furnish returns on a regular basis, probably monthly, to a single department. It has been estimated that this would involve from 950 to 2140 staff. If it were adopted, the Government and the business community would face a greatly increased administrative work load.

Such a tax would, however, have advantages. The present system has worked quite well for 48 years with little change required. It is a useful economic regulator in such areas as dampening the demand for goods removed from import control, and in energy conservation moves by encouraging a shift to smaller and medium sized cars. It is economical in collection and from an administrative point of view it is straightforward: It is easily adjusted, and

A retail sales tax is also being studied. This is levied at the final, or consumer stage and is considered relatively open to evasion. It involves again, a large number of taxpaying units but does have the advantage of being economically neutral in its impact. A tax on selected services is also being considered as a complement to the existing wholesale tax system. This is used in many countries which

operate VAT or a retail sales tax. Among its advantages is that it removes discrimination between goods and services while broadening the tax base.

On the other hand, it involves a large number of tax. units, can be difficult; to enforce when payments are by way of cash and can impinge more heavily on smaller taxpayers such as firms which cannot provide their own A “in * house," services such as legal, accounting, cleaning. • The type of services which ' might be considered include accommodation, advertising, advisers and consultants, auctioneers, commission agents and buyers, beauty treatments, laundries, dry cleaning and dyeing, commercial and industrial cleaning, clubs, associations and lodges, entertainment and amusement, finance, ‘ food and drink, hiring and leasing of goods, insurance and assurance, land and property, legal services, news services, port and airport services, postal and communications, secretarial services, security and safe custody, travel and tourism, veterinary and animal care.

An extension of the wholesale sales tax is the quickest and most straight-forward option. It would yield, however, less revenue for the same rate than a retail sales tax on VAT. It is considered less compatible .with an extension to services and would create problems when there was a mixture of goods and services. A general retail sales tax and a VAT would take longer to implement and would be more costly to both taxpayers and the Government. Both would create difficulties of enforcement and these would increase with higher rates. The greater the coverage of a tax, the lower the rate. This in turn creates problems. A reduction of 20 per cent in personal income tax would cost $936 million. Around $2OO million could be raised if fringe benefits were taxed, while additional revenue could be raised by legislating against some of the present methods of avoiding tax. Evasion problems in the direct field, could be minimised by legislating to ensure that erri-

ployees’ Inland Revenue Department numbers were shown on tax returns. The company tax area has not yet been studied and some additional revenue could be had from this. The base for retail sales tax and a value-added tax covers all goods and services and this totals $9515 million. To, recover the existing wholesale tax as well as funding a 20 per cent reduction in personal income tax would require a 14 per cent tax across the board. If food were exempted, this would mean a rate of 21 per cent. To obtain the same revenue from wholesale sales tax, it would be necessary to tax all goods currently exempt at 10 per cent. If food were exempted: this would rise to 20 per cent.

The Retailers Federation has expressed opposition to VAT and a retail sales tax. Manufacturers who initially favoured a retail sales tax are now reconsidering their views. It would take around three years to introduce a retail sales tax or VAT. An extension of wholesale sales tax could be done next year and would involve an increase in taxpayers from 9000 to 17,000. It is interesting to note that faced with the same indirect tax options, the Australian Government recently selected an extension of wholesale sales tax. I have published these comments to illustrate the complexity of the study and to indicate that there are no soft nor easy options facing the country.