Inland Revenue's Long Term Insights Briefing
Inland Revenue has commenced consultation on what topic should be covered in its next Long-Term Insights Briefing (LTIB). Inland Revenue, like other government departments, is required to produce a LTIB once every three years. The purpose of an LTIB is to identify and explore long-term issues to help plan for the future.
Initial work has noted that New Zealand’s tax revenue is just below the OECD average – 33.3% of GDP compared to the OECD’s 34.2%. New Zealand’s tax differs from other OECD countries as follows:
• no compulsory social security contributions,
• no tax on capital gains,
• higher comparative tax revenue generated through GST,
• higher company tax rate,
• high effective tax rates on investments, and
• higher than normal revenue from local government rates.
The proposed topic is “Our tax system: Bases and regimes”. This will focus on two key aspects:
1. How to maintain a tax system that can flex to changing revenue needs (such as due to an aging population).
2. How to address integrity versus efficiency versus equity within the tax system.
Both aspects become important if there is the need to increase revenue. Income tax is New Zealand’s largest revenue source and increasing income tax rates could generate substantial revenue. However, raising income tax, could discourage investment and economic activity. It may also prompt tax avoidance and reduce foreign investment.
Increasing the GST rate is another possibility. Raising GST further would disproportionately impact lower-income households, as they spend a larger share of income on goods and services. Both options, raising income tax and GST, could provide immediate revenue boosts, but they can come with challenges.
Another option is to introduce new tax policies, with a comprehensive Capital Gains Tax (CGT) being the most discussed. Currently, New Zealand does not tax capital gains on asset sales, except in specific cases like the bright-line test on property sales.
As fiscal pressures grow, New Zealand needs to decide whether to raise existing tax rates or introduce new tax policies to meet its future needs. The LTIB’s exploration of these issues provides opportunity for public debate, as New Zealand looks to ensure that its tax system is fit for the future while maintaining fairness and economic efficiency.
