Assets tax off in meantime

Press, 8 February 1985, Page 4

Assets tax off in meantime

An assets tax has been ruled out for the present Parliamentary term by the Minister of Finance, Mr Douglas. Addressing a tax seminar in Wellington yesterday, Mr Douglas said it was unlikely an assets tax could be introduced in the present term. It could be introduced only after the fullest examination and public consideration, he said. Mr Douglas was addressing an Institute of Policy Studies seminar, attended by leading tax accountants, lawyers, and managers. The institute is reviewing various taxes with a view to putting the results of its reviews to the Government before it prepares this year’s Budget. Mr Douglas canvassed options for business tax reform, covering the need to remove double taxation of dividends, a cash flow tax, a capital gains tax, and an assets tax. Dwelling particularly on the assets lax option, he noted he had advocated this in the past as a replacement for corporate income tax. The advantage of the tax was that it put pressure on

the owner of that asset to use the asset productively, rather than to hold it in a less productive activity, he said.

If marginal tax rates were reduced at the same time and the double taxation of dividends reformed, this would give a “tremendous boost” to economic activity and employment growth, Mr Douglas said. He said he was not convinced that an assets tax could not sustain the revenue yield required, and asked for other points of view on this question. Mr Douglas said he believed insufficient attention had been paid to the potential incentives effects of an assets tax. A business had only to cover the cost of the tax and all excess income would then be taxed at a low rate.

He also considered insufficient attention had been paid to the opportunity lost in not investing wealth productively. Mr Douglas mentioned practical difficulties of an assets tax. The first was valuation where there was little or no market for the asset. Another problem was

dealing with i firms which had insufficient ■ immediate cash flow to p >ay the tax; and there wa: s also the difficulty of cal< culating the appropriate tax treatment of private compa inies, whose main assets mi; ?ht be the worth of their oi wners.

He suggested t! he institute could attempt to devise other tax syst ems that might also meet t! he goals of encouraging the ; productive use of assets. In the short run it might be necessary to retain a nomina I income base, but to make i it more comprehensive, Mr 1 Douglas said.

“This would req i.uire the removal of a nui mber of loopholes and a: nomalies which have becor ne evident,” he said. A more complex ’. option was to see whethe r there were simple and pra eticable steps to move tow 'ards a rear income tax bas e.

This would requirt s inflation adjustments ft w depreciation, inventorit ;s and interest so that bus; inesses were taxed on the real, rather than the inflationary, component of their inc some. Referring to person al tax reform, Mr Douglas c onsid-

ered the “major political issue” for the year would be whether people wanted a tax system which encouraged them to earn extra income while at the same time giving assistance to the low paid. The Government would introduce the goods and services tax in April, 1986, along with reforms of personal income tax. This would reduce high marginal tax rates, though Mr Douglas cautioned that it would not mean that high income earners would necessarily pay a lot less tax in total. “Average tax rates at the upper end of the income tax scale will probably not fall appreciably,” he commented. “However, high marginal tax rates must be reduced if we are to encourage investment to flow into productive areas of the economy, or encourage increased earnings by those already on high incomes." Second, the Government was looking to significantly lower the tax liability of low-income earners. “It should be possible to design a personal tax sys-

tern which does not tax a person more in the dollar on Saturday or Sunday than it did on Wednesday or Thursday,” he said. Third, the Government was examining ways to improve the interface between the personal income tax and social welfare benefit systems. As part of this exercise consideration was being given to rationalising the numerous instruments now used to deliver family assistance. “In essence we are looking towards a much simplified system of personal income tax with significantly lower marginal tax rates for those on higher incomes, with only slightly lower average tax rates; whereas for low-income earners the average tax rate should fall significantly, while marginal tax rates might not fall at all,” Mr Douglas said. He also advised companies analysing the impact of the fringe benefits tax to wait until later this year and to consider the impact of lower marginal tax rates before making major decisions on how to deal with the tax.