A Flat Tax: The Good, the Bad and Why It Probably Won’t Happen was the headline on an article published in Money Talks News – pitched at an American audience – in 2014.
Act leader David Seymour, who included a flat tax among the policies he unveiled at the weekend, should take note. Even if he was to get 14 MPs into Parliament (anyone putting money on that very, very long shot?), all the other Parliamentarian will vote to stick with a progressive income tax system.
But that’s no reason for a debate to be stifled.
The article in Money Talks News took the complex US Federal tax code into considerations (the code comprised 73,954 pages in 2013 and included seven tax rates, four standard deductions and at least a dozen tax credits for individuals. Then there were exemptions, itemised deductions and the special tax rules.
Why not eliminate all those hoops and simply tax everyone using the same percentage?
The answer was that it depends on who you ask.
Simplicity is a major advantage of a flat tax. No matter what you earn, you would pay one rate for all your income.
A pure flat tax would also eliminate deductions and credits to further streamline tax filing and payment.
Proponents of the flat tax also say this is fair. Since everyone would pay the same tax rate, all would be contributing an equal proportion of their income to the maintenance of government services.
Finally, flat tax supporters say a simplified, uniform tax rate would encourage economic growth. They say that many fast-growing economies are found in countries that have flat, rather than progressive, tax systems.
Economic growth arguments might no longer apply to this country – at least, not under the Ardern government. The question here is whether it would improve our wellbeing.
Opponents of the flat tax say:
* Its champions are intent on creating a system that favors the wealthy.
* The success of former Soviet countries which experienced tremendous economic growth after enacting a flat tax has been over-stated. Some countries that enacted a flat tax have been repealing those laws.
* A flat tax may simplify the tax code, but it would do so at the expense of lower- and middle-class families. Most flat tax proposals set taxes in the range of 17 to 20 percent, requiring low earners to pay more while wealthy families get a break. This may be especially true if a pure flat tax is enacted – that is, one that includes no deductions or credits.
The critical point – said Money Talks News – is that while the debate regarding the flat tax can be interesting and heated, “it’s largely theoretical at this point”. It dossiered the advocacy of a flat tax by politicians and economists in the US during the previous 30 or so years.
In this country introducing a flat tax rate has been shunned by almost all political parties represented in Parliament. Only ACT (long before Seymour’s weekend speech) has regarded a low flat tax as fair, efficient and simple.
“It’s the best way to maximise tax compliance and economic growth for a given level of revenue,” leader Rodney Hide told The Independent Financial Review in 2008.
ACT candidate Sir Roger Douglas around that time declared his aim to do away with the top 39% tax rate and return to values he espoused on flat tax rates when he was Finance Minister in David Lange’s Labour government.
Douglas had been poised to introduce a flat tax in December 1987. The radical proposal, given almost unanimous Cabinet support, would have been accompanied by a guaranteed minimum family income for low-income households. Higher-income households, however, would have incurred more fees for health and education.
Lange had a change of heart and scuttled the measure and NZ’s readiness to discuss a flat tax and its economic growth was scuttled with it, although the McLeod committee, set up by the Clark govt in 2001 to review our tax system, did recommend flattening the tax scale.
In 2009, National prime minister John Key said the Government would not introduce a flat tax system despite advice in a Treasury working paper in support of one.
The papers, obtained by Radio New Zealand under the Official Information Act, suggested a flat tax rate or cuts to taxes on dividends, interest and profit were ways of closing the income gap with Australia.
A capital gains tax and increases to GST and land tax would be increased to fund the changes.
Cabinet would discuss all those issues but “there’s not going to be a flat tax system”, Key said.
“We need to close the gap with Australia, we’re committed to doing that by 2025, no one’s under-estimating how difficult that challenge is and tax will unquestionably play some role in that.
“We also need to make sure we put together a system that isn’t regressive and that is fair,” he said.
Similarly, National leader Simon Bridges hastened to rule out his support for Act’s proposed flat income tax rate of 17.5 per cent on personal and company income.
Unveiling the Freedom to Earn tax plan, Act leader David Seymour said it would make New Zealand a magnet for investment and create opportunities for everyone.
But Bridges said he favours a progressive tax system which requires those who earn a lot more to pay a lot more.
“I don’t think I’m for a flat tax.”
Your blogger – writing about a flat tax in the TransTasman newsletter in 2008 – noted the administrative simplicity.
Hong Kong (with an essentially flat tax) at that time had around 200 pages of tax law whereas NZ was adding around 100 pages annually to an Income Tax Act which then stretched to some 2400 pages.
A check this morning shows the April 1 2019 reprint has 3577 pages.
The PM should be alerted to the environmental possibilities of adopting Seymour’s proposal. The government could reduce its carbon footprint by sparing the trees being pulped to print bulky tax laws.