Enhancing Crown Revenue: A Strategic Review of New Zealand Taxation

This report analyzes strategies for enhancing revenue collection in New Zealand's taxation system. It proposes six key measures: raising tax rates for high-end taxpayers, taxing all types of income equally, raising estate tax, ending the step-up basis, implementing a financial transaction tax (FTT), and introducing a carbon tax. The report discusses the potential economic and social impacts of each measure, referencing various sources and comparing New Zealand's tax policies with those of other developed countries. It emphasizes the importance of sustainable, productive, and inclusive growth, and suggests that these measures can contribute to long-term fiscal sustainability by increasing Crown revenue and reducing net debt.

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NEW ZEALAND TAXATION
Introduction
Apart from the most commonly used sources of revenue such as excise duty, estate tax,
several other taxes and fees, governments, especially in the developed world, use three
main sources of tax revenue, and these are Individual Income Taxes, Payroll Taxes and
Corporate Income Taxes. Every government prefers to change these Direct Taxes as
compared to the Indirect Taxes. In New Zealand, the total Crown revenue during the
concluded financial year was $76.1 billion. Tax revenue, which is one of the major
source of the Crown revenue totalled $70.4 billion during this period (CCH New
Zealand (ed), 2013).
Economic Strategy
The New Zealand government understands that for improving the living standards and
to maintain the well-bring of its citizens, it has to maintain sustainable, productive and
inclusive growth. This is possible through better productivity and wages.
Fiscal Strategy
Long-term sustainability of the economy can be ensured if revenue collection is raised
sufficiently to achieve the fiscal objectives. This should also ensure that net debt comes
down to below the current level of 20% of GDP within next five fiscal years (CCH New
Zealand (ed), 2013).
In this context, this paper proposes the following six measures for increasing the
revenue collection of the Crown.
1. Raising Tax Rates for High-end Taxpayer
Top personal tax rate is 33% for high-end taxpayers and the basic tax rate is 10.5%.
Corporates are taxed at flat rate of 28%. The table below shows the contribution of the
high-end taxpayers to Crown receipts.
High-end Taxpayers in New Zealand Top 1% Top 10%
Share of Total Income Tax Paid 39.48% 70.88%
Income Split Point $465,626 $133,445
Average Tax Rate 27.16% 21.25%

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This paper is of the opinion that raising rates by 12 percentage point for the top 1%
taxpayers in the tax bracket will give, on a conservative estimate, an additional revenue
per year of $50 million. Tax Revenue in 2016 from Individuals was 3 billion per year,
of which 40% share of the top 1% was 1.2 billion. 12% increase in tax rate, from 27%
to 39%, will bring additional $50 million per year. Although wealthy taxpayers find
ways of reducing their liabilities to avoid higher rates, in my opinion, an increase of 12
percentage points can be a feasible increase which will not be circumvented by the high-
end taxpayers (CCH New Zealand Ltd (ed), 2013).
2. Do not Favour any one Type of Income
This paper believes the next recommendation for raising more revenue, in a transparent
and progressive way is to tax both, the individual and the corporate. Having already
touched individual taxpayers in step-1, this paper now discusses corporates. In this
segment, the most secretive and elusive segment is ‘Investment Income’, often referred
to as Capital Income (Scully & CAragata (ed), 2012). Highest tax bracket for Capital
Income is 20% (lowest being 0%) which is nearly half of the highest individual tax
bracket of 33%. Hence, it is not uncommon to expect the wealthy people adopting all
possible ways to define majority of what they earn as being earned from investments
and not as ordinary earnings (Littlewood & Elliffe (ed), 2017).
This is what Warren Buffett, world’s richest investor, has to say in support of this
measure: “I have worked with investors for 60 years and I have yet to see anyone—not
even when capital gains rates were 39.9 percent in 1976-77—shy away from a sensible
investment because of the tax rate on the potential gain. People invest to make money,
and potential taxes have never scared them off.”
Since the investment segment is concentrated largely among the wealthy, this measure
cannot propagate inequality among various segments of taxpayers. The most plausible
justification for this is that although investments are highly responsive to tax changes,
experts have not been able to provide evidence in support of their claim, as also has
been expressed by Mr. Buffett. Hence, it can be safely recommended that a small
change of a few percentage points would not make a noticeable effect on the investors
investing pattern (CCH New Zealand Ltd (ed), 2013).

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3. Raise Estate Tax
A common phrase with regard to wealth and death is that one cannot take them when
departing from this mortal world. When one considers hard economic facts of a country,
it is not difficult to understand that the current estate-tax base in most of the developed
countries is so narrow that in New Zealand the IRS gets hardly any substantial revenue
from Estate Tax (Lymer & Hasseldine (ed), 2012). Thus, this paper has recommended
that New Zealand’s IRS should start broadening its base of Estate Tax. Currently not
more than 0.2 percent of the estates in New Zealand are covered under the Estate Tax
and that amounts to about 2 out of every 1,000 people who die and become eligible for
Estate Tax. However, say(James, Sawyer & Budak (ed), 2016), it is worth noting that
this tax has not only proven as a progressive revenue-raiser, it can also help in pushing
back immobility in economic matters. There are a large number of New Zealand
resident taxpayers who are born with the advantage doled to them because of laxity of
IRS in broadening the base of Estate Tax (Ganghof, 2006).
4. Ending the Step-up Basis
In line with the recommendation given in Step-3 for enhancing the base of Estate Tax, it
is worth noting that IRS is targeting the heirs very narrowly because of the loopholes in
the Tax Avoidance measures and this allows the wealthy in passing on the taxable
capital gains, without paying any Capital Gains Tax on the Capital Assets, to their heirs.
A simple calculation process can explain this economic anomaly (Ganghof, 2006).
Suppose John, on his death, leaves a property to one of his sons that he had bought a
decade ago for $10,000. The Capital Asset has a worth of $100,000 at the time of John’s
death. If John had sold this capital Asset before his death, he would have paid Capital
Gains Taxes, at the prevailing rates, on the Capital Gain of $90,000 which he would
have made because of the appreciation in the value of the property (Scully & Caragata
(ed), 2012). Since John had passed the Capital Asset on to his son, his heir, the
appreciation of $90,000 is also passed on untaxed. Under the taxation laws, the Capital
Asset shall be treated as if John’s son had bought it for $100,000. This paper is of the
opinion that the transaction does not have an economic rationale to explain this
loophole. Rather, because of this loophole, such Capital Assets enjoy a lock-in effect.
The owner finds an incentive in holding onto the Capital Asset till death, before
bequeathing it to an heir (Ganghof, 2006).

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5. Financial Transaction Tax
Closing loopholes to control Tax Avoidance is a tedious task for IRS and the next
recommendation can be cake-walk for the authorities: Imposing a very small tax on all
the securities traded. Already being enforced in many countries, Financial Transaction
Tax (FTT) has a very large base, much bigger than GST but comparatively simpler than
GST (CCH New Zealand Ltd (ed), 2013). Trillions worth of securities are being traded
every year and a small FTT, can raise millions for the Treasury. A one-basis-point of
tax on just $1,000 worth of stock traded will cost the stock trader $1; a $100,000 of
trade will generate a tax of just $10. But the magnitude of transactions being done will
raise $2 billion in a year (CCH New Zealand Ltd (ed), 2013).
GST effects those taxpayers who are in the low and middle income brackets. In
comparison, FTT will impact only those who are currency speculators and other
financial wheeler-dealers who gamble with the wealth created by others. Because of its
broad base, FTT can collect more revenue for the government and will not hurt the low
and middle income earners(CCH New Zealand Ltd (ed), 2013). GST collects 31.4% of
the total tax revenue and has made New Zealand the highest taxed country in OECD if
sales tax revenue is taken as a proportion of the country’s GDP. GST, effective in New
Zealand since 1 October 2010 is levied at the rate of 15%. Compared to this, the
proposed FTT will not be more than 0.01% without altering the final price of the
products or services being traded in the markets (CCH New Zealand Ltd (ed), 2013).
6. Carbon Tax
This recommendation is both essential and obvious. Essential because the planet is
deteriorating day-by-day and obvious because the coming generations will not be able
to survive in this dying planet (Littlewood & Elliffe (ed), 2017). It may raise cost of
living for the non-rich people, but it will make their life more comfortable. Many of
these taxes come with a rebate for the low-income taxpayers who spend major portion
of their income on buying energy. Carbon Tax in fact is a tax on pollution. It is levied
as a fee on the distribution and production, as well as use of fossil fuels and is levied on
the quantum of carbon emitted by their combustion (James, Sawyer & Budak (ed),
2016).

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New Zealand needs a strategy for this tax. 46% of New Zealand’s current population of
4.8 million people is urban. Co2 emissions per capita for New Zealand is 7.14 metric
tons. At $15, Carbon Tax collections can be 50 million per year. New Zealand has two
main options to help both businesses and consumers in reducing the emissions. First
option is an Emissions Trading Scheme and New Zealand is currently promoting this.
The second option is the 'Carbon Tax' which should be promoted by taxing Carbon
Dioxide and other greenhouse gas emissions (CCH New Zealand (ed), 2013).
LIST OF REFERENCES
CCH New Zealand Ltd (ed). (2013) New Zealand Goods and Services Tax Legislation
(2013 edition). Auckland: CCH New Zealand Limited.
CCH New Zealand Ltd (ed). (2013) New Zealand Income Tax Act 2007 (2013 edition).
Auckland: CCH New Zealand Limited.
CCH New Zealand (ed). (2013) New Zealand Master Tax Guide (2013 edition).
Auckland: CCH New Zealand Limited.
CCH New Zealand Ltd (ed). (2013) New Zealand Tax Regulations and Determinations
(2013 edition). Auckland: CCH New Zealand Limited.
Ganghof, S. (2006) The Politics of Income Taxation: A Comparative Analysis.
Colchester: ECPR Press.
James, S., Sawyer, A. and Budak, T. (ed). (2016) The Complexity of Tax Simplification:
Experiences From Around the World. Hampshire: Springer.

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Littlewood, M. and Elliffe, C. (ed). (2017) Capital Gains Taxation: A Comparative
Analysis of Key Issues. Cheltenham: Edward Elgar Publishing.
Lymer, A. and Hasseldine, J. (ed). (2012) The International Taxation System. New
York: Springer Science & Business Media.
Scully, G.W. and Caragata, P.J. (ed). (2012) Taxation and the Limits of Government.
New York: Springer Science & Business Media.