New Zealand had preceded us down the path of tax reform. We can learn from its experience.
OVER a decade ago, New Zealand undertook many of the tax reforms that Australia is currently contemplating. As a result, it gives us first-hand evidence of the benefits of lasting tax reform, the strategies that can be employed to deliver an efficient, fair and simple system, and the problems that can be solved by good reform.
In the late 1970s, tax was a very controversial political issue in New Zealand, reflecting a poorly-constructed tax system. Tax collections were failing to meet government revenue requirements and the system overall was highly distortionary with numerous concessions and high rates of tax.
THE TAX REFORM PACKAGE
The package approach to tax reform adopted by the Labour government elected in 1984 reflected the view of New Zealand's then Finance Minister that rapid reform on a broad front spreads the burden of reform equitably, thus enhancing the legitimacy and acceptability of the programme.
The reforms that made up the tax reform package have stood the test of time because they were linked together by a common theme. That theme was the need to have broad bases (so that if you are taxing income, you want to tax all kinds of income, or if you are taxing goods and services you tax all goods and services) and low rates. This `broad base/ low rate' strategy was not mere political rhetoric, it was reflected in all aspects of the package.
Such an approach recognized that genuine tax reform would allow resources to be used more efficiently because deadweight costs of taxation would be reduced and business would be able to compete on a genuinely equal footing. It meant that New Zealand's national income would be higher, and New Zealand businesses would be better able to compete in the world and at home.
As a result, tax reform was tackled on a wide front with the key elements being:
reduced reliance on income tax through the introduction of a broadbased. value added tax-a GST, including items typically not taxed in Europe such as food, clothing, health and education;
the removal of tax concessions and the closing of tax loopholes in the income tax; and
the reduction of personal rates of tax (the top marginal tax rate was cut from 66 per cent to 33 per cent, and was aligned with the company tax rate).
The catch cry of reform was broad-- tax bases, levied at lower and less variable rates of tax. This approach was adopted as the best means to:
raise sufficient revenue to correct New Zealand's fiscal imbalances;
increase efficiency by reducing tax differentials that distorted economic behaviour; and
reduce the tax burden on wages and salaries and thus be seen as fairer.
The GST rate in 1986 was 10 per cent but it was raised to 12.5 per cent in 1989, when further income tax cuts were introduced. Unlike most VAT systems, only one tax rate applies. At 10 per cent, tax may be quickly and easily calculated based on GST inclusive turnover (this is equal to one-eleventh) or on tax-exclusive turnover (the tax is one-tenth). Similarly, at 12.5 per cent the tax fraction is one-ninth or one-eighth. The next rate at which tax fractions can be used is at 20 per cent, where the fractions would be one-sixth and one-fifth.
On its own, the GST can be described as regressive. The revenue from the GST was, however, used to finance substantial reductions in personal income tax as well as financing a compensation package that saw social welfare benefits increased across the board by 5 per cent (overall, at a 10 per cent GST, Treasury calculated that prices would rise by only five per cent because of the elimination of sales tax and the range of goods not subject to GST). In New Zealand, people accepted the GST on the basis that it was part of a system that was fairer than the …