Indirect tax not necessarily tough on poor, says expert

Press, 12 July 1984, Page 32

Indirect tax not necessarily tough on poor, says expert

By

Neill Birss

The problems of indirect tax, compared with those of income tax, might not be as great as was widely assumed, Mr ‘ Malcolm McCaw, national president of the Society of Accountants, told the Canterbury Chamber of Commerce yesterday. Emphasising that he was giving his personal opinion rather than that of the Society, Mr McCaw, a wellknown authority on taxation, questioned whether direct taxes were as regressive as is commonly believed. (By regressive he meant whether they fell more on lower-income earners than on the wealthy.) For example, there was a widely held notion, he said, that to tax food and clothing would be regressive. The only useful information available to the 1981 task force on tax reform, which he headed, came from analyses by the Statistics Department and was based on information on income and spending from the 1979-1980 household survey. The survey seemed to indicate that spending on clothing and food expenditure remained about proportional to income over wide ranges, except for households with incomes of less than $BOOO a year.

“If these conclusions could be confirmed through further study, it would reveal that this problem of regressivity in consumption taxes is not as great as is widely assumed,” Mr McCaw said. He added that the particular problem of those with very low incomes could be tackled in another

way. Traditional standards of equity could be further preserved by changing the progressivity (rate of high incomes) on reduced income tax. The over-all degree of progressivity would depend on the combined effect of the income tax and the direct taxes. “What I am trying to point out is that the major arguments against indirect taxes, that they are unfair to low-income earners, may not be nearly as serious as we think, and where they are unfair there are other ways of dealing with the problem.” Mr McCaw said there was clearly need for further study of the effects of indirect taxation. He also said that two forms of direct taxes — wholesale sales tax and value-added tax (VAT) — could accommodate different tax rates for varying classes of items. There would be administrative difficulties, and considerable costs would be involved. However, there had also

been additional costs in the introduction of PAYE But without PAYE there would be more evasion and avoidance of tax. It was difficult to apply multiple rates under a retail sales tax. The 1981 task force had estimated that the cost of a new or extended form of consumption tax would be SIOM to SISM a year — “say S2OM today.”

“If extra revenue of more than $1 billion were raised this cost would not be excessive," Mr McCaw said. Describing himself as a strong protagonist of regular reviews of taxation structure and application, Mr McCaw said that taxes had traditionally been levied on three main sources: ® Incomes. $ Wealth. O Consumption. Each form of taxation could be related to ability to pay and to the notion of equity, and many had argued there would be a reasonable balance of all three sources. Mr McCaw said that the present income-tax system was unsatisfactory in many respects, “most of the problems being directly related to high marginal tax rates.” (The marginal rate is the tax rate on the last dollar earned during a tax period.) An advantage of a threeprong approach was that it provided a large base from which to derive revenues, and the rates applied could be kept lower. As New Zealand did not have a capital-gains tax, there was a strong case on the grounds of equity for substantial death duties in New Zealand, but these had fallen since the beginning of the century until now they supplied only 0.5 per cent of the total tax take. ‘ In an interview after his address, Mr McCaw said that death duties created severe problems for farmers in New Zealand, as the value of farms was very high in relation to the income they generated. But he agreed that there were ways in which such duties could be payable over a period, and other possibilities.

Capital-gains tax, which he described as a capital income tax, was administratively expensive because the gains would not provide a significant income source. In addition, there were considerable difficulties in assessing the true amount of capital gain in periods of high inflation.

He questioned an argument that was sometimes put up in opposition to a capital-gains tax. This was that people should be encouraged to build up assets and production. “I’m not sure the same argument would not apply to people who have got to pay income tax,” he said.

“A fairly substantial death-duty tax, rather than a capital-gains tax, is another way of getting at it,” Mr McCaw added. He told the chamber that the internal deficit, financed by borrowing in New Zealand, had increased steadily from about 3.6 per cent of gross domestic product in 1977 to 9 per cent at present. To most people, this was unsustainable. GDP could be increased, public expenditures as a proportion of GDP could be reduced, or taxation could be increased.

However, tax revenue was already rising. In the 1960 s it had been about 24 per cent of GDP. Last year it was more than 31 per cent.

It was significant, Mr McCaw said, that New Zea-

land was more dependent i upon income tax than any other comparable country. The proportion of taxation from income taxes had ; risen from about 67 per cent - in 1967 to about 72 per cent ' at present. These figures > included company tax, but this had declined from about 17 per cent of GDP in the early 19705, to about 8 per cent at present

Personal income tax had risen from about 47 per cent of Government revenue in 1971 to about 66 per cent at present

“This heavy dependence upon personal income taxes is the reason for the high rates which are necessary to derive the revenues required.” The high marginal tax rate provided a determined effort by those responsible for protecting the revenue. “The only real winners are professional tax advisers, perhaps our most rapidly growing industry,” Mr McCaw said.

He listed problems from alternative forms of taxation:

® The wholesale sales taxes, which now provided about 12 per cent of total tax revenue, could perhaps be extended to include certain services. (Restaurant meals were an example). But the extra revenue would be unlikely to be sufficient.

® A comprehensive retail ' tax would not, on overseas ' experiences, be able to sustain rates of more than ; about 10 per cent. £

However, VAT has shown ■ overseas that it could sus- : tain rates of up to 20 per cent, double that of retail { sales tax.

“The case for VAT there- ; fore rests upon the fact that ; it has the potential to in- ; crease revenues derived , from consumption sources _■ by about 10 to 15 per cent of total revenue, thereby pro- ’ viding room for a significant reduction in income ' taxes.”

Asked if a turnover tax - would be suitable, Mr , McCaw -said the European Economic Community had ' chosen VAT instead of a ; turnover tax. The problem ’ with a turnover tax was that goods which went ’ through stages of production incurred much higher tax, with a compounding effect. With VAT, there was taxation only on the previously untaxed values added.

“If it were agreed that a change to more consumption taxes, in order to take pressure off the income-tax system, were necessary, I suggest that the argument would rest between an extended wholesale tax system and the introduction of VAT,” Mr McCaw told the chamber.

“The implications of a major change through a greater reliance on consumption taxes as a means of reducing the burden of income taxes, are very considerable.

“The change should certainly not take place without a great deal more investigation and preceded by the provision of a great deal more information and instruction programmes in order that a proper understanding of the main features of a new tax are understood by the public,” Mr McCaw said.