The Investment Savings and Insurance Association (ISI), in an effort to broaden the debate, commissioned Infometrics to prepare a report on the taxation system. It says the debate needs to be expanded out from the simple "more versus less" and "left versus right" arguments to something more comprehensive.
The discussion document produced, Towards an Ideal Taxation Regime, is the ISI's second "determined foray" into issues affecting retirement incomes.
Infometrics says the tax system is predominantly well designed and avoids many of the complexities that exist in other countries, however "imperfections remain" that are "detrimental to the well-being of New Zealanders."
The five major problems with the current taxation system include:
1. The playing field is not level
It says because of these problems money and resources don't necessarily flow into the areas that can best use them, but to areas that happen to be tax-favoured.
Investors don't necessarily get the best returns under this regime and the economy is slowed because money is channelled into tax-favoured investments such as housing, rather than productive assets.
The report says that all capital gains should be taxed.
"In the interests of simplicity, efficiency and fairness, it is in the country's best interest to either tax all capital gains, or not tax any capital gains."
2. Tax rates vary
The report says although New Zealand has three personal tax rates, its regime is better than many other countries.
However, there are complications in the system because it has different levels of personal tax rates, for instance;
3. The tax system is poorly integrated with the welfare system
Thousands of people are caught in "poverty traps" and pay effective marginal tax rates of more than 100 per cent.
Proposed solutions tend to solve one problem but create another. The Government could, for example, reduce high effective marginal tax rates by phasing out a benefit over a wider range of income. But that would mean more people would be caught with tax rates which are still high. As a result there is a disincentive for those who receive benefits to take on additional paid work.
4. Unit trusts remain tax disadvantaged
Treating unit trusts under the company taxation regime is looking increasingly unsustainable and creating major technical and compliance difficulties for managers.
5. Taxation is complex
Each of the above flaws in the system contribute to its complexity. Combined, they can make corporate and individual decisions on savings, investment and employment extremely difficult.
The ISI says people put off retirement savings decisions because it is all seen as being too complex. On the other hand those who can afford it take professional tax advice.
The association says that people should be doing something "economically productive" rather than spending their time trying to comply with or extract benefits from the system.
"One can assume that there would be considerable gains in economic productivity if savings and investment decisions were based on maximising returns, rather than minimising tax liabilities."
The association concedes solving the problems won't be easy, and it will take some hard political decisions.
The five policy recommendations presented in the report are:
Some of the ideas proposed "may be seen as radical", the ISI says. "Some will undoubtedly view a capital gains tax as unacceptable. Others will oppose the concept of a universal benefit."
The next article in this series will look at the proposals in more detail
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