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Coalition Talks – Tinkering With Taxes Fraught With Peril

02 October, 2017

Any tax changes should be carefully worked out.

Coalition Talks – Tinkering With Taxes Fraught With Peril

INSIGHTS ABOUT THE NEWS - Tax issues inevitably will be entangled in NZ First coalition negotiations with either National or Labour and/or the Greens. Whatever we thought we were voting for (or against) is not necessarily what will come out in the wash. NZ First is pledged to reduce GST on food, for example. This gels with Labour’s position but not National’s. Labour wants commercial users to pay a water tax; NZ First would slap a tax on water only when the water is exported.

As reported in Trans Tasman, National income-tax cuts will kick in next April, enabling workers on more than $14,000 a year to keep a bit more money. NZ First wants high-income earners to pay more tax and the minimum wage to rise but it has also called for a review of Working for Families if wages go up, complaining about it discriminating against childless people and being used by some employers to keep wages lower.

Whatever emerges, it would be comforting to think someone takes a hard look at the tax system before tinkering. If so, some advice from Forbes is worth taking on board. An article by Gene Steuerle, musing on the pressure for tax reform in the US, says the options extend almost infinitely, as do amendments to any set of options.

Steuerle has identified eight lessons from a US Treasury study which led to the Tax Reform Act of 1986, the only comprehensive base-broadening tax reform in more than 100 years of taxing US incomes. One lesson is to not try to build reform out of a stack of wants.

The more politicians try to organise reform by supporting a bunch of giveaways, the more their suggestions won’t add up, are inconsistent, fail to meet stated objectives, can’t be administered, or cause other unintended consequences. Another is to always keep in mind the balance sheet within both the tax system and the broader budget.

Nothing deters a reform process more than trying to give away money without immediately calculating who will pay the bill — whether through tax increases to offset the tax cuts, spending decreases, or rising debt and interest costs to be paid by future generations.

The article concludes with a teasing question: Want to predict the probability of reform? Its advice then is to go through the list and ask yourself the extent to which those in charge at any stage understand and have a plan for dealing with the types of issues identified.

While NZ political parties have short-term ambitions - being in power and positioning themselves for the next election - they must also consider what is in NZ’s best long-term interests. Sometimes doing what is right will hurt them in the short term. It will nevertheless give them a good legacy and credibility which is likely to win voters over to them for many years ahead.

For analysis and further updates see this week’s edition of the Trans Tasman Political Alert


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