Seminar told new tax might have to be 14 p.c.

Press, 8 February 1985, Page 4

Seminar told new tax might have to be 14 p.c.

By

MICHAEL HANNAH

in Wellington

The Government will have to consider a tax rate as high as 14 per cent for the goods and services tax, because of miscalculations of the tax base, according to a senior Auckland tax accountant.

Inland Revenue officials were having second thoughts about the 8 to 10 per cent rate referred to by the Government so far, Mr Peter Brannigan told the Institute of Policy Studies tax seminar in Wellington yesterday. Mr Brannigan also predicted that a new “piggyback” tax on financial services might be introduced at the same time as G.S.T. because they were perceived as “too hard” to include in G.S.T. Speaking to prominent accountants, lawyers and managers at the seminar, Mr Brannigan said the Government might have fooled the public and itself in believing a tax rate of 8 to 10 per cent was all that was needed to raise the 51200 million to $l3OO million it wanted from G.S.T. He considered the Treasury had miscalculated the tax base to which G.S.T. would apply. As well, an Inland Revenue official had told him this week that planners were “having

second thoughts” about the hypothetical 8 to 10 per cent rate referred to in the Government’s literature on the tax.

His comments were rejected by a Treasury official at the seminair. The official said that the (Government’s calculations ha'd taken account of experience overseas in the 40 countries where a Value Added Tax was collected. That experience had shown that the revenue from a V.A.T. was higher than the tax rates had at first suggested was likely, the official said. Mr Brannigan conceded that his figures were “rough and ready,” but said he relied on official statistics measuring income for his calculations. The 1984 Official Year Book showed the average household spent $287.14 a week. With about 1,005,000 households, private consumption could be r eckoned about $15,000 million at 1983 prices. As a second check, \the figures for individuals’ after-tax income showed this was $13,870 million iin 1981-82.

Even allowing for inflation of 33 per cent in the: intervening period, the 1983 figure would equate to only $20,000 million in 1986-87. Yet the Government had forecast a figure of $25,000 million as the taxable base,

Mr Brannigan noted. E le also questioned whe ither the Government had confused the difference betv reen the existing wholesale tax and a V.A.T. On a wholesale tax, business bore the i ndirect tax on its consumption. Under a V.A.T., it did nt 7t. If this was confused, the ( I.S.T. yield and the rates required on the tax might require revision, Mr Branm 'gan said. He t was not alone .at the semina rin his concern over the imi pact of G.S.T., which the Mir lister of Finance, Mr Douglas i, has promised for introduc lion on April 1, 1986.

Other speakers were pessimistic whether the inflationary effect of the tax could b e contained. Mr Bruce Co le, of L.D. Nathan, Ltd, warned that trade unions we ire unlikely to accept well : are benefits and tax cuts as compensation for rising inflation. Mr Cole also urged more consultatioi ns with traders before the tax was; introduced. Spea 'kers voiced concern about the shoirt time available to perfect the tax and to adju: st commerce to its requirements. Experienct J of V.A.T. in Britain show< ed also that the cost of comp dying ’with the tax was 30 tir nes greater for smaller businesses than for big business! JS, a British professor told the seminar.

Professor Cedric Sandford, of the University of Bath said that surveys he had done in Britain showed that G.S.T. should have as wide a coverage as possible, be at one rate, and have no exemptions, if it was to avoid the problems Britain had had with V.A.T.

This -may have pleased Mr Douglas, who has argued for a simple tax, with as few exemptions as possible. Professor Sandford had other news which would also have appealed to Mr Douglas. His surveys had also shown there were cash flow benefits for businesses and improvements to their management because of V.A.T. He suggested that making traders well aware of these effects before G.S.T. was introduced would make the tax more acceptable. However, some way was needed to avoid the heavy compliance costs faced by small businesses in Britain, he said. There it was found that 40 per cent of the compliance costs and 55 per cent of the administrative costs of V.A.T. were incurred by 69 per cent of traders who generated less than 5 per cent of revenue. He suggested three possible solutions, namely a high exemption limit; special retail schemes to make G.S.T. simpler for retailers to work; or differen-

tial payment periods for the tax.

Professor Sandford said he favoured requiring different sized companies to make their tax payments at different times; annually for small businesses, more frequently, possibly monthly for big businesses. He also echoed a point Mr Douglas has made, that food and clothing should not be exempted from the tax, as this would benefit the rich possibly more than it would favour the poor. Referring to statistics from Ireland, Professor Sandford noted that the bottom 10 per cent of earners spent 48 per cent of their income on food, and 3.3 per cent on clothing. The top 10 per cent of earners spent 10 per cent of income on food and 9.6 per cent on clothing. More significantly, however, it was found that, of every £lOO spent on food, £5.8 was spent by the bottom 10 per cent of earners, while £lO.B was spent by the top 10 per cent. The rich were therefore getting more benefit from the exemption of food from V.A.T., he concluded. The contrast was even greater in spending on clothing, where of every £lOO spent on clothing, £2 was spent by the bottom 20 per cent of earners, while £42 was spent by the top 20 per cent.