An alternative progressive tax policy

Your correspondent is having a lovely Friday. Thanks for asking.

Started the day chatting to Terry Baucher on tax stuff and then Wellington is having one of its beautiful days.

Had lunch with a friend setting the world to rights which included me riffing on what a progressive tax policy could look like that was a bit radical but not completely nuts.

I have very tolerant friends.

Anyway given the relational being that I am – I thought I’d share it with you.

It starts from a place of Jacinda saying that while a CGT is off the table – nothing else is. And having spent the last 16 months or so thinking about tax stuff from a heavily constrained perspective – it is all a bit exciting to get off the leash.

So it goes!

Inheritance tax

This would apply to all estates over a (tbd) threshold. It has the advantage of involving one of life’s certainties so wouldn’t be affecting behaviour at all. Now it might mean people pass on assets before they die and they might use trusts to avoid it.

The former strikes me as a collateral benefit of the tax and the latter would need to involve rules involving death of settlors and/or beneficiaries. Next.

Closely held companies

They would become taxed at the top marginal tax rate to stop all the $70k and overdrawn current account stuff. There would be the option though of the look through company rules applying when incomes of shareholders are actually below $70k.

Very small companies

Consistent with a submission from Chartered Accountants of Australia and New Zealand (1) very small companies – tbd – would be taxed on turnover. Yes there are issues with it but it would reduce compliance costs for them and stop the revenue risk of oh gosh how did that personal expenditure get into my tax return.

Property ownership

The CPAG submission of a net equity tax would apply here. Yes it is similar to the TOP proposal but has the advantage of only applying to property so none of the valuation issues. Also I am not too stressed about partial family home exemptions so the types thresholds Susan St John proposes seem very pragmatic.

Personal tax thresholds

Any money collected – and quite frankly there may not be any when your focus is fairness rather than revenue raising – would go into raising the bottom threshold as per the TWG proposal.

Then either this could flow through to everyone or get clawed back by raising the tax rate for the next threshold. Also a possibility raised by the TWG.

Options not considered

Raising the top personal tax rate

Now I know this is a darling of the left and I accept I could be heavily coloured by having paid the higher rate for many years. But here’s the thing:

It is taxing the top income earners who are already in the tax system paying tax on their income. It doesn’t touch income that isn’t taxed already in a way a number of the measures above do.

Also the mismatch thing between different entities is a nightmare and to do properly would involve also an increase in the trust rate or face the use of trusts that were prolific previously.

There is already an issue with a mismatch between the company rate and top personal rate which I am hoping the proposal for closely held companies would fix.

Lowering the GST rate

Now I get that GST is regressive. Totes. No argument. But as rich people spend more in absolute terms, they pay more GST in absolute terms. And if they are not paying income tax for whatever reason – if they want to eat they have to pay GST.

So can’t recommend this I’m afraid.

However also not a fan of raising it either. See comment on regressivity.

Anyway that’s enough from me.

So would this all make the tax system fairer. Totes. Could anyone get elected on this? No idea. Well beyond my skill set.

Enjoy your weekend.

Andrea


(1) Pages 28-29

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