Income tax fairness

Oxymoron definition: a figure of speech in which apparently contradictory terms appear in conjunction.

Oxymoron example: a paid volunteer.

The coming election always brings a raft of tax policies for voters to digest. Within these policies is normally another oxymoron “tax simplification”. In my twenty plus years as an accountant, I have heard this term many times and yet it would appear that the tax system only gets more complicated.

In my opinion this is because successive governments have attempted to achieve fairness and simplification at the same time. As far as I am concerned, these two factors are at opposite ends of a spectrum. The only way to achieve fairness is to make systems more complex, and to achieve simplification will result in apparent unfairness. Of course it does depend on how you define fairness.

I have always been a fan of a flat income tax rate. The reason for this is that what I get to see is that the less fortunate often get targeted with tax credits and lower tax brackets and the more fortunate get targeted with higher tax brackets by the politicians. From this structure the result generally ends up with the wealthy using their resources to minimise their taxes and being no worse off than the not so wealthy. The population in between (generally referred to as the middle class) end up paying on average more tax than the rest as a percentage of their income. So if the income tax system for at least the last thirty years hasn’t worked, how about a flat rate instead? This way we would all pay the same rate which would be simple and a lot of taxpayers in the middle wouldn’t feel so unfairly treated.

Related: Parties' tax policies explained

Another reason I favour a flat tax rate is that in my job I see great effort put into minimising taxes due to the different tax brackets. I would like to see this effort channelled into increasing business productivity and teaching financial literacy, which would benefit the country as a whole. And this would ultimately lead to more profit and therefore more tax paid, so the government would not lose out on the lower taxes gleaned from the middle class. Also the IRD would spend less time pursuing tax avoidance such as the Penny & Hooper case and instead look at tax evasion and also assist businesses with their compliance burden. There are also a number of my clients who state that it is simply not worth it earning an extra dollar if the taxes effectively increase. While this thinking is against reason (because for every extra dollar you earn you will still be better off after tax) it certainly is part of many taxpayers’ psyches and must surely affect productivity for the economy.

Now I don’t pretend to think that a change to the current system to a flat rate would be simple or not have other issues. One of the biggest issues is convincing all New Zealanders that this would be in the best interest of everyone. There will no doubt be the question of what rate to use. It may be the case that current tax brackets move over time to come together like the increase in New Zealand Superannuation age eligibility in years gone by from 60 to 65.

The point I want to make here is that the current system is actually unfair to everybody. A flat rate will redirect unproductive effort into other areas that could make NZ better off. There are obstacles that would need to be overcome, but in my opinion this would probably achieve the closest to fairness and simplification as possible without being known as another oxymoron. In this modern political scene of MMP it is clear that if politicians want to appease voters they should strive to achieve common tax policies. From what I have seen in the run up to this election there is still a dichotomy between even the most central parties. Looks like the current system will remain for at least another three years!

Murray Couper BMS CA is a director of Accountants On Elliott LP which is a Chartered Accounting firm located in Papakura. Murray has 20 years of accounting experience in commercial and public practice roles. He deals on a daily basis with small to medium business owners with wide ranging accounting  issues for entities including manufacturing, retail, trades, rental properties and family trusts.

Disclaimer:
Any views and opinions the writer has expressed are his own and not necessarily those of Accountants On Elliott LP. The information supplied has been written in general terms only. This information should not be relied upon specifically without also obtaining appropriate professional advice after detailed examination of your particular situation.