Democrats’ proposal greeted with scepticism

Press, 4 December 1985, Page 6

Democrats’ proposal greeted with scepticism

By

MARTIN FREETH

in Wellington

The Democrats’ new taxation policy, billed as a better alternative to the goods and services tax, has been widely received with scepticism. Independent tax experts seriously doubt the viability of a transfer tax that would raise $2.7 billion, and the Government has condemned it as no alternative to GST. Th transfer tax has been unveiled as the first of a number of new financial policies from Social Credit after its name change to the Democratic Party. The tax would be charged on all withdrawals from all hank accounts and collected by using the central Data Rank system which handles all transactions between trading banks.

The Democrats say transfer tax would be imposed at a rate of 0.5 per cent on the total amount of money withdrawn from a bank account during the course of a month. The party claims that the tax at that rate would be sufficient to raise $2.7 billion, the same amount that GST will bring in, and without the costs of collecting revenue which GST will involve.

The party’s tax spokesman, Mr Alasdair Thompson, says the amount of tax payable by an individual making personal withdrawals would be so small as to make avoidance, by operating outside the banking system and reverting to cash transactions, not worth while.

With regard to businesses Mr Thompson says they have to use banks to keep

financial records for accounting purposes and would anyway have no need to avoid a transfer tax because they would pass it on in higher prices, as happens with indirect tax. The scope for avoidance has been the main ground for criticism of the transfer tax proposal. Mr Malcolm McCaw, the Wellington accountant who led the 1982 task force study of tax reform options, yesterday dismissed as a dream the idea that a transfer tax would not cause changes in how transactions were made. Businesses and individuals would move to find ways of making payments outside the banking system to avoid the tax.

Mr McCaw suggested companies would run their .own accounts with other

companies with which they regularly did business and a transfer tax would also act as a force for company aggregation to create only one taxable turnover, at the end of a production process.

Mr McCaw also questioned how the tax could raise the $2.7 million claimed by the Democrats. It would certainly fall more heavily on business and could not be seen as a tax paid by consumers, ‘as GST will be.

Mr McCaw said that strong representations had been made to the task force in favour of a transaction tax but these had been rejected because it would amount to a tax-on-a-tax whereby a producer could attract tax at successive stages of one production process.

He said that by comparison GST was “very clean,” ensuring tax hit only once — at the stage of consumption.

Mr McCaw said he would have to see a lot more research on transfer tax before he could be convinced to support it. Mr Paul Bevin, an economist and author of a recent study on company tax, dismissed the proposal, saying it would do no more than clog up the system for making payments in the economy.

He suggested that a transfer tax of this kind would breach all the principles of a good tax, and had been disgardd for this reason overseas.

Mr Bevin noted that cheque duty which still existed in New Zealand was a form of transfer tax but

said it was a very minor tax and earned little revenue.

The Minister of Finance, Mr Douglas, yesterday dismissed the Democrats’ criticism of GST collection costs.

A statement from the Minister said that the annual administration costs would be $2O million, well below the $54 million claimed by the Democrats.

“Their claims that compliance costs for business would run to $7OO million annually are also just as far, if not further, astray,” he said. The cost to the Government of GST would be about 0.7 per cent of the revenue collected which was less than the a comparable figure of 0.85 per cent for the personal income tax system, said Mr Douglas.

He also pointed to the prospect of people staying outside the banlung system to avoid transfer tax. This would lead to inefficiency in the banking system that in turn would hit most those institutions which offered the most competitively priced services, he said. Mr Douglas, suggested that the real purpose of the tax might be to “repress the financial sector in line with Democratic Party philosophy.” “In earlier statements, the party has said it expected the annual take from the tax would diminish over time as its ‘underlying economic purpose’ took effect.”

The Minister said that avoidance through bypassing the banking system would penalise those not

able to do that. He said it was also wrong to claim that transfer tax would be similar and less costly than GST. The former would involve far more transactions that the latter and it would also require some way of defining who was eligible to be taxed. “Both these factors would mean extra compliance costs,” Mr Douglas said. The Democratic Party leader, Mr Beetham has told “The Press,” that the party will release “about six” new policies “mostly in the financial area” between now and the next election. The transfer tax had been thought up by the party’s former finance spokesman Les Hunter, in 1981, and was then included in broad outline in Social Credit’s alternative budget earlier this year, Mr Beetham said.