Parts of New Zealand's tax system are unfair "by design", but the Government is unlikely to use its political capital to introduce a capital gains tax before this year's election, one expert said.
Geof Nightingale is a tax partner at PWC and was a member of the Government's last two Tax Working Groups.
He told Q+A parts of the tax system were designed in a way to unfairly advantage different groups.
He said, for example, a low-income household with children may have an effective tax rate that is nil or a net positive thanks to the likes of Working for Families tax credit payments.
In contrast, a household with no children may have an effective tax rate that is higher at the same level of income.
On the other end of the scale, wealthier individuals won’t have their capital taxed in the same way as people who work for wages, Nightingale said.
“New Zealand’s tax system is broadly fair. There are some unfair parts of it. Those are by design,” he said.
“We make a choice, through voters at the moment, not to tax a significant chunk of capital gains. That gives rise to the effect for the wealthy.”
Nightingale spoke to Q+A ahead of an anticipated speech by Revenue Minister David Parker on Wednesday, with the Government signalling a big change to tax.
He said that announcement is unlikely to be a tax on capital gains.
“The most powerful reason is I just don't think they want to spend the political capital on it.”
Nightingale also didn’t think the announcement will be for a wealth, land, or marginal 45% tax rate for the highest income earners.
He said a change to tax rates on family trusts is more likely.
From April 2021, the top tax rate increased from 33% to 39%. However, the tax rate on family trusts was left unchanged at 33%. That left the IRD concerned some individuals were using trusts to try and pay less tax.
Are the wealthiest Kiwis paying enough tax?
Also expected Wednesday is the IRD’s report examining the tax paid by some of the country’s wealthiest people.
Nightingale said he expects the IRD will find those individuals “by and large” are paying their legal requirement for tax.
“But if you compare that against their economic income - not their legal income but their broader economic income - that may give it an effective tax rate lower than the statutory tax rate,” he said.
“There’s the legal obligation for tax, and it’s important we all comply with that, and then there whether or not that produces a fair outcome.
“Once you start talking about fairness in tax systems, you’re bringing value judgments to play. Those are political value judgments.”
He added: “The policy wonks like me and others, we can design everything perfectly. But someone’s got to sell it to the public.
"In the end, tax policy ends up… a value judgment. That value judgment is what we elect our politicians to do. And that’s hard.”
Q+A is Public Interest Journalism funded through NZ On Air
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