Call for indexation of tax rates

Press, 15 May 1985, Page 37

Call for indexation of tax rates

Inflation could erode many of the economic advantages which are being used to justify the introduction of a goods and services tax.

In a speech prepared for presentation to a meeting of the Auckland branch of the Bankers’ Institute, Mr Rex Anderson, the president of the New Zealand Society of Accountants, claims that inflation has the capacity to neutralise the benefits of any restructuring of the income tax scale, which is one of the promised results of GST.

Mr Anderson suggests that a form of indexation of marginal tax rates, so that the level at which they apply increases at the same rate as inflation, could overcome some of the effects on the taxpaver caused by fiscal drag, which he describes as a “financial pick-pocket.” As an example of the effect of inflation on the

taxpayer, Mr . Anderson looked back to 1979. At that time the maximum personal tax rate of 60c in the dollar applied at the $22,000 income level—about three times the national average income. It was estimated that around 30,000 taxpayers were in that tax bracket.

By 1981 the maximum rate still applied at the $22,000 level, but that was then only 1.8 times the national ’average income and an estimated 100,000 taxpayers found themselves in the maximum bracket. A form of indexation would ensure that the “real” income level, regardless of any apparent dollar increase. would be the basis for the application of the marginal tax rates. “Indexation is a sublimely simple procedure,” says Mr Anderson. Income levels and tax rebates and exemptions should be reviewed

and increased annually in line with the consumer price index. Mr Anderson also sug-

gested to the Bankers’ Institute that, as a certain level of inflation was inevitable, doubts must be cast on the usefulness of financial information prepared on the historical cost basis. The New Zealand Society of Accountants has promoted the system of “current cost accounting,” which has regard to the implications of changing prices. Mr Anderson said that one of the reasons why only a minority of companies had adopted the system was the unwillingness of the Government to accept, for tax purposes, accounts prepared under this system. “Nevertheless,” Mr Anderson said, “The underlying logic behind CCA will become increasingly valid with the degree of inflation now contemplated.”