A visiting tax expert has lavished praise on a key revenue raiser in the New Zealand tax system, saying it is world-leading.
Professor Michael Keen is a former head of tax policy for the International Monetary Fund, and was in New Zealand as a guest of the Tax Policy Charitable Trust.
He said that good tax policy is based on a few key principles, including efficiency, fairness, and simplicity.
On these grounds, Keen lauded New Zealand’s system of GST, which is applied as a 15% tax on top of the price of the vast majority of goods and services.
“New Zealand has a great GST. People seem here to accept that taxing consumption is a fair thing to do, and tax all consumption at pretty much the same rate,” said Keen.
In many European countries, taxes similar to GST are described as VATs – Value Added Taxes.
Keen said New Zealand’s GST rate is actually lower than that of many countries that set their VATs, but GST brings in relatively higher rates of revenue because it gets applied across the board.
“When I say great, it’s because it has a very broad base. When we look around the world, and we say which country has the broadest VAT base, it’s basically New Zealand.”
He said: “Which means you get a lot of money from a rate that by some European standards is a modest kind of rate,” noting that the European average rate is around 22%.
“Even with a higher rate, they often don’t raise as much revenue as New Zealand, because they have so many exclusions from the base.”
“In my former job at the IMF, when people asked which country has the best VAT – well, we know the answer to that one, it’s New Zealand.”
Keen said that it was likely New Zealand would need to raise additional revenue in the future through taxation if current service levels are to be maintained, outlining various advantages and pitfalls that could come with those decisions.
However, he said, “for a technical guy like me”, simply raising the rate of GST might be the simplest approach.
Professor on capital gains tax
On capital gains taxes, Keen said “you kind of do tax capital gains, but you have kind of a list of things you’ll tax as capital gains and everything else is out, whereas the normal approach – and I think the approach more consistent with New Zealand’s approach to tax – is that everything is in, unless we say they’re out.”
“It looks strange given the coherence of a lot of New Zealand’s tax system, that the principle isn’t taken to its logical point,” comparing it to the comprehensiveness of New Zealand’s GST.
Keen said a capital gains tax attracts a lot of attention because “the appeal of New Zealand’s tax system is that it has these clear principles,” and that it is unusual for income from some sources to be taxed in the form of PAYE, while income sourced from capital gains often isn’t taxed.
“The current approach just doesn’t fit with the comprehensive approach to taxation New Zealand currently takes,” he said.
Among the current fiscal risks facing New Zealand, the Treasury has warned that an ageing population will lead to increasing pressure on public finances and debt, particularly when the increasing costs of superannuation are set against a lower proportion of the population being working-age.
For the full interview, watch the video above
Q+A with Jack Tame is made with the support of New Zealand On Air
