Published in The Post, 26 September 2024

It is evident from the public sector cuts and the cost reductions in the health sector that a major policy shift is in progress. As the departing Secretary of the Treasury, Dr. Caralee McLiesh noted, there is a “structural deficit” in our fiscal settings. In other words, we do not bring in enough revenue to cover our outgoings. Aside from traditional public services and health the defence force is at a low ebb, National Superannuation is not viable in its current form, and we have major infrastructure shortcomings.

The current government is seeking to redress this deficit by cutting public expenditure, increasing debt and shifting to private financing. But what about the other side of the ledger – revenue generation?

What Dr. McLiesh also said was that New Zealand needs to introduce a Capital Gains Tax (CGT) and attend to its superannuation scheme. In both these areas New Zealand is an outlier in the OECD since almost every country has CGT as well as a superannuation scheme based on some kind of enforced savings system (rather than pay-as-you-go). But that’s not the end of it. We are also unusual in scarcely using social insurance/social security, in not having unemployment insurance, in permitting negative gearing on investment properties, in the way we tax retirement schemes, and in exempting wealth and/or land from tax.

If New Zealand was to enter the mainstream of tax design in the OECD, what would it look like?

1. Income tax does too much of the heavy lifting; in particular, it must carry our pay-as-you-go national retirement scheme which in other countries is more usually save-as-you go. For example, income tax in Singapore is on average about 10%, but on top of that is a compulsory salary pension impost of 37% shared between employer and employee.
2. Most other countries use social insurance or social security taxes. These account for about a quarter of the tax take across the OECD, while in New Zealand it is less than five per cent (the Accident Compensation Corporation (ACC) scheme). Pressure could be taken off income tax by drawing on such contributory schemes for pensions and health.
3. Many other countries have transitioned from traditional pay-as-you-go public pension schemes to ones that are funded by savings. With the Super Fund and KiwiSaver New Zealand has the makings of such a transition with National Superannuation remaining a basic default as the other two pillars grow to incrementally fill the gap, say, from 2030.
4. KiwiSaver would need reform to ensure that it efficiently transitions citizens to an agreed retirement target income – with low fees, an accepted benchmark return, top-ups for non-wage earners, and increasing rates of levy with matching employer contributions. The retirement income should be taxable, but the contribution tax-exempt.
5. Almost all other countries have some kind of unemployment insurance. This was proposed by the previous government but was never implemented. This could also be a key tool in active labour market policy to raise skill levels, mobility and productivity.
6. Capital income – interest, capital gains, rents – is taxed inconsistently. A uniform tax could be applied after adjusting for inflation, thus equalising a fair return on capital across different income sources, assuming removal of full negative gearing deductions on investment properties. A standard rate could be 20%.
7.  Many countries index their income tax brackets and ensure that taxes on interest and capital gains only affect real rather than nominal returns. In the case of income tax, the lowest bracket could be set at the minimum wage, with wage earners below that rate paying only for their save-as-you-go pensions, integrated with a family tax credit.
8. New Zealand has a poor track record on innovation and investment. Among other factors New Zealand businesses have the lowest rate of recouping capital investments in the OECD. Full expensing would allow businesses to write off longer-term capital investments with immediate effect and would rapidly grow productivity.
9. Although the previous government investigated a wealth tax, a more frequently suggested levy has been on land. This would be a broad-based annual levy on the unimproved value of land. The Australian Capital Territory has such levy at 1%. This would raise about $5 billion and could fund infrastructure and offset full expensing.
10. Tracking public expenditure. Taxpayers often wonder whether their contributions are well spent. Without confidence on this matter, they will want to avoid paying tax and vote for tax cuts. We should introduce a tracker of public expenditure in the main areas of the public sector. The UK’s Institute of Government runs such a scheme.

New Zealand faces an ageing population, a dysfunctional housing market, shortage of innovation and investment, and low productivity. These ten “fixes” to the tax system should help address these concerns by setting aside funds for pensions and health, taxing capital income fairly, and encouraging investment returns in the productive economy. On almost every aspect our tax system is an outlier in the OECD. It is about time we joined the mainstream, with consequent benefits for social and economic policy.

Peter Davis, Emeritus Professor of Population Health and Social Science, University of Auckland.

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