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Tax System Encourages Avoidance

EMBARGOED UNTIL 1.00am THURSDAY 14 SEPTEMBER 2006

Tax System Encourages Avoidance

The New Zealand tax system has become complicated and unfair, with tax evasion and avoidance widespread.

In a paper to be released on Thursday 14 September 2006, How to Fix a Leaky Tax System, Phil Rennie examines how the integrity of New Zealand’s tax system has been corroded by the introduction of a 39% tax rate for income over $60,000.

Large numbers of people are using loopholes to avoid the top rate of personal tax by using trusts, splitting or under-reporting their income, and using the lower corporate rate. This is an inevitable outcome of having too many different income brackets in a tax system.

“By and large it is wealthier taxpayers who can arrange their affairs to avoid the tax. Most workers on a set wage or salary have no such luxury and end up carrying a heavier load than would otherwise be necessary.”

Flatter and lower taxes are the answer: “Trying to close the various loopholes would be expensive, difficult and unfair. The best solution is to have lower and flatter taxes that would make for a simpler system.”

“The government could start by scrapping the top rate of 39%. In terms of money raised, the 39% rate has proven to be completely unnecessary. The government has received billions of dollars more revenue than it needed to implement its election promises. In fact, taxes could have been cut and revenue would still be higher than expected.”

Rennie argues against the Business Tax Review’s proposal for targeted tax concessions, saying this would only make things worse.

“Governments have the right to raise revenue as they see fit, but they also have a responsibility to do so in the most efficient manner. The level of avoidance in New Zealand means the government is not only failing to achieve its goals, but that the failure is imposing a substantial cost.

Taxes are a necessity for a modern, civilised society. But the cost of raising tax in New Zealand is far higher than it has to be.

Up until the 1990s, New Zealand had one of the least distortionary tax systems in the world. But since 2000 changes to the tax system have allowed tax avoidance and evasion to flourish.

“New Zealand’s tax experience over the last six years illustrates the danger of politics superseding good policy.”

“Symbolic gestures such as raising the top rate of tax and providing concessions are easy for politicians to sell, but they can have a devastating impact on the integrity of the system.”

Phil Rennie is a Policy Analyst working in the New Zealand Policy Unit at The Centre for Independent Studies.

He is available for comment.

Embargoed copies of the report How to Fix a Leaky Tax System are available on request or from the CIS website:

READ IT ONLINE HERE http://www.cis.org.au/IssueAnalysis/ia74/ia74.pdf

ENDS

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