ECONOMICS: Taxation Reform Shouldna[euro][TM]t Be So Taxing

Article excerpt

Byline: Bob Edlin

Ita[euro]s (probably) impossible to come up with a tax system that will please everybody. Not surprisingly, therefore, fault was quickly found with a raft of options and proposals contained in the Taxation Working Groupa[euro]s report to the Government two months back.

Property investors bridled at the prospect of being stung by property taxes; farmers baulked at proposals for a land tax; and, retailers predicted a customer backlash if GST was raised to 15 percent. Not surprisingly, most everyone welcomed proposals to cut personal and company tax rates.

But the fundamental findings of the TWG are indisputable and cry out for adoption as policy. Our tax system is not designed to minimise impediments to economic growth; it is grossly unfair to many people; it is not sustainable. The report suggested a systematic framework for tackling these issues.

Because international literature considers high personal and corporate tax rates damaging to economic growth, it proffered a portfolio of options aimed at reducing the statea[euro]s reliance on them. The balance should be shifted towards more taxation of spending (GST), accompanied by appropriate compensatory measures, particularly for those on lower incomes. The tax base should be broadened by more appropriate property taxes. The Group suggested a range of possibilities including capital gains taxes, more targeted measures such as a risk-free return method on rental property, a land tax and, more effective tax treatment of depreciation rules.

A land tax obviously would discriminate against those wealthy in land assets and also against industries that use land extensively, such as farmers and horticulturists. The report did, however, suggest ways of ameliorating economically helpful income-generating anomalies. For example, a value-per-hectare threshold could be introduced, below which productive landowners would not be taxed.

A capital gains tax is a more comprehensive instrument. Some members of the TWG favoured this approach while others favoured targeting. Several were concerned about the transaction costs of a capital gains tax.

But the package should be considered as a whole, and the debate should not focus on any one element. Farmers or orchardists hit by the land tax might be better off overall because of the reductions in personal and corporate tax rates. …