Balancing the load: Principles for an equitable tax system
Are we bold enough to create a tax system which truly supports wellbeing? In this article, we review how changes in taxation of the digital economy and environmental taxation could contribute to building greater equity and a fair future for all New Zealanders.
- Tax is all about fairness
- The (wellbeing) future is here
- Adapting to the digital revolution
- Taxing the digital economy
- The sharing economy
Co-author John Lohrentz on Article 4
Tax is all about fairness
Kiwis care a lot about fairness, especially when it comes to our tax system. Our public debates often use the language of social and economic impact when evaluating whether the outcomes of policy changes are fair. But the time is ripe to challenge our conceptions of fairness by also focusing on how tax policy is impacting future generations and our ecosystems.
In challenging our notions of fairness we must do the hard work of looking for the intersecting points between environmental, social, financial, human and intergenerational impact. By doing so, we may uncover a richer perspective of fairness and how tax policy can take us there.
The (wellbeing) future is here
A useful beginning to this conversation can be found in the Treasury’s Living Standards Framework. The Framework promotes higher living standards and intergenerational wellbeing by “maintaining, nourishing and growing” natural, social, human and financial capital.1 This forward thinking approach underscores the 2019 Wellbeing Budget’s mandate to take an “all capitals” approach to how government spends our money.
However, we could also consider the analogous impacts across the differing capitals when considering how we collect this money. The tax system should be a coherent set of principles that determines how much and why each person and organisation contributes to the shared purse. What we choose to tax, and how we choose to collect it, has a range of consequences for all of us and the environment, both now and into the future. In this way the tax system can be seen as an instrument to create or erode fairness.
More immediately, two key tax policy conversations are how we adapt to the digital economy and our approach to environmental taxation. Let’s use these significant advances and challenges to start exploring a wider notion of fairness in the tax system, accepting that this topic is not able to be done justice in a single article.
Adapting to the digital revolution
The digital economy brings with it a tectonic shift in how we talk about fairness. Historically, it made sense to collect tax based on annual net income because the vast majority of individuals and companies operated at a community or national scale. What was a simple calculation (essentially, income less expenses) is now a lot more complex, in part because the internet’s interconnectivity is creating a global economy that has demolished traditional barriers to trade. With the world in the middle of a fourth industrial revolution, tax systems globally are reckoning with how to apply historic tax concepts to an evolved, almost unrecognisable, emerging economy. And as a result, some highly digitised multinational corporations can have very low national effective tax rates, as they don’t need to be physically present in the countries where they operate.3
Inland Revenue’s Business Transformation programme: improving fairness through efficient administration
The Inland Revenue’s Business Transformation programme is a multi-stage programme to modernise our tax system by 2021. Inland Revenue says that, “by streamlining our processes, policies and upgrading our online services, it will be easier for you to pay your tax and receive your entitlements.”4
For taxpayers, especially individuals and small businesses, the faster tax returns and payments can be completed correctly, the better. It frees up time to grow social and familial relationships (social capital), build new skills (human capital) or invest in their business (financial capital). Getting it right can save taxpayers’ money in late fees, use of money interest and penalties – not to mention stress! A more automated system also means higher levels of voluntary compliance and easier mechanisms for introducing new tax policy for Inland Revenue (financial and social capital).5
Fairness is personal and practical. Take a moment to reflect on your interaction with Inland Revenue’s new online systems this year. Fairness is not just a question of what we tax, but how we can streamline the tax collection and administration systems.6
Taxing the digital economy
In response, since June, Inland Revenue has been consulting on whether to introduce a tax on digital services platforms like YouTube, Facebook and Google, based on where their users are located.7 A core justification for the proposed tax is that it will increase perceived fairness with more multinational digital giants paying their “fair share” of New Zealand taxes (i.e. improved social capital), despite only raising $30–80 million NZD annually (in financial capital).
But this isn’t the whole picture. In order for a digital services tax to be “fair” (according to our international trade agreements) it must also apply to comparable New Zealand businesses, potentially creating a double tax (financial capital).8 John Cuthbertson, from Chartered Accountants Australia New Zealand,9 also points out that if the idea of taxing companies based on the location of their users catches on, exporting businesses may choose to migrate overseas to avoid additional tax imposts – decreasing future tax revenues (financial capital) and skilled worker availability in New Zealand (human capital). With our isolated economy heavily dependent on global export markets, international capital investment and our global reputation, potential short-term benefits may therefore be reversed by significant long-term social and economic impacts.
In considering our response to the digitisation of the economy, we will do well to consider the ideological basis of any changes to our tax system. Are we just considering social, human, natural and financial capital at home, or are we thinking internationally too? A digital services tax might be seen as a “market access fee” by digital companies looking to do business in New Zealand, sending the message that we see them as separate from our economy. If our major trading partners mirror this message it may have a significant impact on our exporters, but it will also have an impact on the wellbeing of people in other countries.
Setting our sights higher: taxing natural capital
It’s also time to think about the role the tax system will play in protecting and fostering our shared natural capital, for us and our children. The science demonstrates that we are doing near irreparable damage to Earth’s life-systems. The time to act is now, using every tool available.
While tax is only one tool among many for creating a low-emissions economic future, it is an efficient way to financially internalise the cost of reduced natural capital around vulnerable and damaged ecosystems. While we do collect some environmental taxes (e.g. road user charges, fuel tax and the waste disposal levy), the Tax Working Group identified that there are several areas where taxes can be an effective means of addressing known externalities (e.g. greenhouse gas emissions, water pollution and waste).12
We have an opportunity to design and implement a framework for environmental taxation. If we recycle environmental tax revenues into strategies to rehabilitate our ecosystems, we can have a corrective effect – accelerating the shift away from fossil-fuel reliant, high-waste economic activity. But we will need to be strategic about how we design environmental tax policies. We must anticipate the impacts it will have in some sectors and the declines in excise tax revenues as ecologically damaging activities end (e.g. increasing public transport and electric vehicle adoption will decrease fuel tax revenue).
It doesn’t have to be about increasing overall taxation, but rather how tax should evolve to have regard to what else is happening around us – to explore how we might future-proof the tax base. Our long-term challenge is weighing future generations’ needs against our own while also understanding that climate change and poorly designed taxes disproportionately affect low-wealth families.13, 14 Are we bold enough to paint a future vision of New Zealand where our ecosystems are flourishing again, cognisant of inequalities and preserving our social institutions?
Conversations with consensus
Fairness is subjective and based on our personal contexts. We all think differently about whether indirect taxes like GST should be more pronounced, whether those who earn more should pay a greater proportion of their income in tax, or whether capital is or isn’t taxed more comprehensively. The spectrum of opinion means that no version of the tax system will seem truly fair to all.
The challenge is that our shared understanding of fairness is low and often one-dimensional. Instead of attending to whether a specific new tax or rule change will be “fair”, we would do well as a society to step back and consider how we can enrich our consensus on fairness (see article 3 in this year’s State of the State series on engaging audiences to create more equitable outcomes). Here are three practical considerations for achieving this change:
- Choose to think like a 21st century economist:15 Economic thinking is the foundation of tax. So when we talk tax, it’s all about figuring out how to efficiently share a part of our resources to take care of our collective needs, like public roads and hospitals. But our economic language is based on many outdated assumptions and we would do well to consider developing a new economic language for the challenges of the 21st century.
- Engage in conversations and debates about tax: There is no one right or perfectly “fair” tax system, and the tax system we have is the product of our shared efforts to get a consensus on fairness. The most powerful tool we have to improve our tax system is participation in the public process of making tax laws. Strong, kind public debate on things like environmental taxes and the digital economy will sharpen and challenge our perspectives.
- Actively make room for young people in policy development: While they may not have a tertiary degree or decades of work experience, our rangatahi have a valuable voice. It is fundamental that we don’t make decisions without considering those who will be affected by the decisions long-term. Our policy design will be better for it.
1. New Zealand Government (2019). The Wellbeing Budget. Retrieved from https://treasury.govt.nz/sites/default/files/2019-05/b19-wellbeing-budget.pdf
2. The Treasury (2018). Our living standards framework. Retrieved from https://treasury.govt.nz/information-and-services/nz-economy/living-standards/our-living-standards-framework
3. Policy and Strategy of Inland Revenue (2019). Options for taxing the digital economy. p6. Retrieved from: http://taxpolicy.ird.govt.nz/sites/default/files/2019-dd-digital-economy.pdf
4. Inland Revenue (2019). Transforming Inland Revenue. Retrieved from https://www.classic.ird.govt.nz/transformation/bt-programme/bt-programme-section-contents.html
5. Marr, E & Wong, A. (2017). Business Transformation – where are we now? Deloitte New Zealand. Retrieved from https://www2.deloitte.com/nz/en/pages/tax-alerts/articles/business-transformation-where-are-we-now.html
6. James, G. (2018). Address to Deloitte partners. Deloitte New Zealand Annual Partners Meeting, Wellington.
7. Inland Revenue (2019). Consultation on taxing the digital services industry. Retrieved from http://taxpolicy.ird.govt.nz/news/2019-06-04-consultation-taxing-digital-services-industry
8. Delbene, S. & LaHood, D. (2019). Letter to Secretary Mnuchin and Ambassador Lighthizer on Digital Tax, June 19, 2019.
9. CAANZ (2019). International digital services tax – a Trojan horse for NZ? Retrieved from http://www.scoop.co.nz/stories/PO1904/S00106/international-digital-services-tax-a-trojan-horse-for-nz.htm
10. Heller, N. (2017). Is the Gig Economy Working? The New Yorker. May 15 2017 Issue. Retrieved from https://www.newyorker.com/magazine/2017/05/15/is-the-gig-economy-working
12. Tax Working Group (2019). Future of Tax: Final Report. Retrieved from https://taxworkinggroup.govt.nz/resources/future-tax-final-report
13. New Zealand Productivity Commission (2018). Low-emissions Economy. pp.271-299. Retrieved from https://www.productivity.govt.nz/sites/default/files/Productivity%20Commission_Low-emissions%20economy_Final%20Report_FINAL_2.pdf
14. Warburton, S. (2018). Is fuel tax regressive? The New Zealand Initiative. Retrieved from https://nzinitiative.org.nz/reports-and-media/opinion/is-fuel-tax-regressive/
15. Raworth, K. (2018). Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist. Cornerstone.