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Play fair with tax  

Another heavy-weight tabled its thoughts on our economy recently, when the OECD released its latest Economic Survey of New Zealand. The survey points out that as a country we need to produce more and do it more efficiently. It made several recommendations to help us do that, including some straightforward advice about reforming the tax system—reducing and aligning personal and corporate tax rates at “internationally competitive levels.” The Government should act on this part of the OECD’s advice, not only to make the tax system more efficient but also to make it fairer.

In New Zealand we speak a lot about “fairness” but not often do we say what we mean by that—we don’t talk about the concept of justice that it rests on. There are two broad ways of understanding justice. One is ensuring that people’s outcomes fit our idea of what is fair. Usually this means trying to make people as equal as possible, so that all people have the same material wealth and the same opportunities, regardless of their circumstances. This involves collecting more tax from people who have greater incomes and redistributing it to those who have less to bring about a certain wealth distribution.

A major problem with thinking about fairness this way is that it means constantly rearranging people’s outcomes to uphold the selected idea of “fairness.” People’s circumstances differ and they change constantly. To try to ensure equality of everyone’s outcomes requires someone, in this case the government, to always bring some people up to a certain level while taking others down. This means having different rules for different groups of people and at the same time, interfering in people’s lives to adjust the outcomes of their decisions.

The previous Government seemed to take this approach to justice. In a speech to the Auckland Chamber of Commerce in 2008, the then Minister of Finance, Michael Cullen, defended his Government’s approach to the economy, on the basis of fairness and equality. He criticised others who “minimise the significance of our economic imbalances.” This approach is what led to the Government deciding what the outcomes for society should be and spending lots to achieve these outcomes, financed by what the OECD describes as “booming taxes.”

We need to put aside our costly concern for equalising outcomes and consider relying more on taxes which fit better with the second way of understanding justice—treating people the same according to fair processes. This is a lot like how we enjoy equal treatment before the law, where everyone is treated the same way and subject to the same standards and the same rules. The kinds of taxes which do this best are consumption taxes, like GST, and property taxes. Consumption taxes set a standard rate on all products and services. Over our lifetime they collect the same proportion of tax from the vast majority of us. Property tax would also help to broaden the tax base and tap into a more stable revenue source than personal income or corporate tax, which the savviest tend to be good at negotiating their way around paying, through diverting income. A “flatter” tax rate for all sources of income would also treat people more equally and fairly, by requiring us to pay more similar proportions of tax.

Moving our tax balance more towards consumption and property taxes and away from personal and corporate tax would be an excellent way to reduce the barriers which higher marginal taxes pose to people earning more and enjoying better life opportunities. Cutting personal taxes would encourage more people to work here in higher paying jobs, adding value to the economy. We have to acknowledge that in a world of easy travel, our economy is competing with the economies of other countries. When corporate taxes are high, businesses are discouraged from remaining here, as it can be cheaper for them to operate in places that don’t take such a big part of their profit in tax. Our tax system must be competitive in order for firms to locate and expand their businesses here and for entrepreneurs to start their business in New Zealand—resulting in the creation of more jobs for the country.

New Zealand is a nation that cares about “fairness.” In this spirit we should take the OECD’s advice and modify the structure of our tax system by putting more emphasis on the taxes which treat more people equally—reducing personal income and corporate tax and picking up the missing revenue from GST and property taxes instead. These policies would contribute to a more prosperous economy and a fairer tax system for New Zealanders, as we move out of the recession.

Published in the National Business Review, 8 May 2009

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