TAXN201 Lecture Notes - John and Katie PDF

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TAXNLECTURE ONE: INTRODUCTIONReadings: Required - New Zealand Taxation, ch 1 (and 2) Additional - Budget 2020 - Supporting information for BIM 2017 - The New Zealand tax sys tem and how it compares internationally (2017) - TWG Future of Tax: Final Report 2019What is a tax? A compulsory unrequited pa...

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TAXN201 LECTURE ONE: INTRODUCTION Readings: Required • New Zealand Taxation, ch 1 (and 2) Additional • Budget 2020 • Supporting information for BIM 2017 - The New Zealand tax system and how it compares internationally (2017) • TWG Future of Tax: Final Report 2019 What is a tax? • A compulsory unrequited payment to the government (OECD working definition) • Link produces tax glossary as well, if intend to specialise can come here and get a quick definition • Key idea: compulsory – you have to pay it, if you fall within the letter of law you have to pay • Unrequited – not buying something, you’re paying the Government and there will be a range of public services you benefit from, but cannot say my tax dollar goes to that. • A compulsory contribution to the support of government, levied on persons, property, income, commodities, transactions, etc., now at fixed rates, mostly proportional to the amount on which the contribution is levied (Oxford English Dictionary) • Is a tax compulsory if we (mostly) pay voluntarily and control the democratic process? • Richard Murphy: why do we use the word compulsory? Most of us voluntarily pay tax, if we didn’t – Court systems wouldn’t handle it. And if people evade tax, there are often uprisings e.g. UK in 1980s • COVID-19: well-funded Government could support everyone • Democratic process: we elect Government and they put forward tax policies and we vote on them. So how can we say its something that is compulsory and forced upon us? Why do we tax? • Finance public expenditures (roads, hospitals, prisons etc). • Promote certain economic goals/objectives e.g. redistribution (WFF) take from those who have more to help those who have less. • Promote social and political objectives • Modify behaviour • Environment – do we use taxes to change people’s behaviour? • Ireland taxes company cars that uses bigger engines – should we be doing that? • People likely to pay taxes are likely to be poorer? It’s regressive – the more income you have, the less tax you pay. Do we need to tax? Alternatives

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Commandeer e.g. wartime • High rates of tax, Government might simply take things. If you have a large house, the Government can turn it into a hospital. Create money • Quantitative easing: print more money to pay for Govt services? Borrow • Borrow and spread the interest cost over 50 generations. Money is incredibly cheap at the moment. Charge • We do this to an extent • Local authorities i.e. sewage tax • The Govt could be a provider of services at a particular cost, not for goods that we all share though

How do we classify taxes? Direct

Indirect

Subject matter

Income, wealth, property

Transactions and events

Example

Income tax, capital gains tax, local rates

GST, customs duties

Who has the relationship with IRD?

Person intended to be taxed

Person who collects tax

Example

You make a provisional tax payment

Shopkeeper charges you and collects GST on your purchases

New Zealand has a very simple tax system compared to US or UK. We don’t tax a lot of things other countries tax. Income Tax (direct):  Income Tax Act  We don’t tax wealth but proposal from Green Party  Property – local level (rating) and if you are a renter, you indirectly pay that tax  Direct because income earner pays the tax (historically, directly with IRD)  PAYE – withholdings Goods and Services Tax (indirect):  Shopkeeper who charges it, hands it over to Government so indirect  Other countries like Canada do not put GST on the shelf

Adam Smith’s Four Canons of Taxation 1776 (designed to generate revenue not modify behaviour) How can revenue taxes be judged?

Equity

Economic efficiency

Qualities of a tax

Certainty

Admin convenience

Relevance: same criteria we always use, but the four basic benchmarks of taxation are held today. They change how we interpret them over time. 1. Economic Efficiency Does it change people’s behaviour? Inefficiency – window tax, all you had to do was board windows, but people got sick. Poor health consequences. 2. Equity Is it fair that you have all this money and I have so little and I pay the same amount? Income tax: should we treat a single person exactly the same way as people with children? Labour Government wants to introduce a 39% - poor equity gesture, people who have businesses will rearrange their affairs. 3. Certainty Adam Smith’s time, there were customs officer who had a lot of discretion in what people paid. There isn’t a schedule of customs duties. Goes against the concept of certainty. If I earn this amount of money, I want to know how much I pay. Part of that is – what if I’m a company with complex transactions? We want an Income Tax Act and an IRD that is consistent and clear in its communication. 4. Admin convenience

NZ’s tax system is very convenient and efficient but at the expense of equity. In other countries, can get a deduction for home office but cannot in NZ unless you have a business.

LECTURE TWO: NZ PUBLIC FINANCE AND TAXATION Readings: Required • New Zealand Taxation, ch 1 (and 2) Additional Tax Working Group Future of Tax: Final Report Vol 1 pp 15-22 Some features of NZ’s Tax System  Fairly simplified system compared to other countries so we have a strong focus on two taxes in raising revenue o Potentially makes us vulnerable if things go wrong o One of the reasons why we didn’t proceed with CGT because CGT is very complex  Denmark, Germany has local taxes  GST is regressive – more income you have, the less GST you pay so it hits disproportionately poorer people  Strictly speaking we don’t have a CGT, but some capital is taxed as income  Theoretically, land tax is a good use of tax because it encourages efficient use of land  Most developed and developing countries have capital transfer taxes (gifting things, transferring land). So we have a very narrow tax regime. It benefits wealthy people because only they have capital. Major source of tax revenue is personal income tax (30%), GST (30%) and company tax (15%) No comprehensive capital gains tax No (national) land tax, wealth tax or capital transfer taxes No need for most New Zealanders to do an income tax return We don't have a separation of taxes, income tax rates are inclusive except for the ACC Earner’s Levy

Tax rates:

Taxable Income

Tax rate (excluding ACC earners’ levy)

Up to $14,000

10.5%

$14,001 - $48,000

17.5%

$48,001 - $70,000

30%

$70,001 and over

33%

Planned $180,001

39%

No notification

45%

Company Tax Rate: 28% (Flat Rate)  Higher than a lot of other countries and is problematic  On one hand, we don’t want it to be too low because it will incentivise people to use their company for income to avoid income tax  On the other hand, we’re not going to raise company tax rate because we won’t to be competitive internationally GST: 15% (Flat Rate)  Not incredibly high but it impacts lower income groups (a lot of other countries also have 20,000 income earnings tax free, but in New Zealand you are taxed for every dollar you earn, so then because GST is so comprehensive, you pay it on everything). It’s skewed towards the wealthy. We have real equity problems in our tax system.  Australia is 10%  We should have introduced a comprehensive GST and then increase benefits (we did not increase benefits when GST was increased). Punitive: pay 45% tax rate if you don’t have a tax code Comparison - Australia: Taxable Income

Tax rate

Up to $18,200

0

$18,201-$45,000

19%

$37,001-$120,000

32.5%

$120,001-$180,000

37%

$180,001 -

45%

Company Tax Rate: 27.5% or 30% (Flat Rate)  Distinguish between large and small companies GST: 10% (Flat Rate); exemptions  Don’t pay on education, unprepared foods so more complex tax but it’s perceived as being fairer  When you don’t tax on vegetables, you will still get a disproportionate effect on wealthy because they consume a better diet than poor people Medicare levy: 2% Comprehensive CGT  Incredibly complicated legislation  We would have had a much simpler version  Don’t have capital transfer taxes at a national level Comparison – United Kingdom Taxable Income

Tax rate

Up to £12,500

0

£12,501-£50,000

20%

£50,001-£150,000

40%

£150,001 and over

45%

Plus National Insurance

12-14%

Company Tax Rate: 19%  Dropped recently and very competitive VAT: 20% (on most items)  A lot of exemptions; children’s clothing; unprepared food Comprehensive CGT and Capital Transfer Taxes  Kicks in fairly low rate (600,000 pounds) Where does Government revenue come from? Total Tax Revenue Forecast 2019/20 ($87.5BN)

Where do tax go? Core Crown Expenditure 2019/20 ($87.3BN)

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Social Security and Welfare is partly due to Superannuation so it’s a huge expenditure

Why we tax? • Reclaim the money government has already spent • Ratify the value of the country’s currency • Have to pay NZD, so have to use that as a system of currency and gives strength to country’s currency • Reorganise the economy • Redistribute income and wealth • Reprice goods and services • Raise representation • Democratic process as Murphy sees it • OECD says taxing brings accountability to Government

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• Need high levels of trust if we have high voluntary tax payment Richard Murphy The Joy of Tax (2015) ch 15

TWG: Purposes of Tax • Source of revenue for government • Means of redistribution • Influence behaviours • Improve living standards • Develop sustainability Concepts of wellbeing (waiora) • Living Standards Framework • Financial and physical capital • Human capital • Social capital • Natural capital (environment) •

Te Ao Māori (the Māori world view – method to integrate TOW principles into TWG) • Manaakitanga (care and respect) • Kaitiakatanga (stewardship) • Whanaungatanga (relationships) • Ōhanga/whairama (prosperity)

Introduction of these ideas into tax system are very long lasting and will be the main thing that comes out of TWG. Principles of Tax Design: • Efficiency • Equity and fairness • Revenue integrity • Fiscal adequacy • Compliance and administration costs • Coherence • Predictability • Certainty Key features of the NZ Tax System: • Broad base, low rate e.g. GST • Dispute this, we have narrow base for income tax • Dispute’s GST low rate as well – Australia has 10% • Disproportionate eliance on income tax and GST • No general capital gains tax • But some things that would fall under capital gains are taxed under income tax • Some capital gains are taxed as income • Income tax not progressive (but Working for Families) • Gives tax credit to people with children

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Negative income tax – pay you a bit Low income with minor children – govt will not take tax from you but give more tax back to you

Capital/Income Distinction We don’t tax capital, only income. So important to determine whether it’s capital or income. • Factory – capital /product – income • Tree – capital /fruit – income • Property – capital /rent – income The income-capital fairness issue • Amy earns median wage • Over 10 years Amy pays $70,000 income tax • Zak bought a rental property 10 years ago • Deductions cancel out income tax liability • Zak sells the property and makes a gain of $120,000 • He pays no income tax • One’s capital and one’s income • An economist would say – there’s receipts for both sources of income, why can’t we tax capital gains? Why do we draw this distinction? Based on a legal distinction drawn in the early days of taxation? • [Both pay GST on their consumption] Recommendation – REJECTED • TWG wanted a CGT that was simpler than Australia, and Australia academics said this proposal is the most administratively simple CGT in the world. Very doable. Majority: • General CGT • Gains taxed at marginal income tax rates • No inflation adjustment • Only pay in nominal gain not real gain but at the moment we haven’t had high inflation • Capital losses deductible (generally) • Exemption of family home and personal property • Anything that the CGT was supposed to do in cooling the housing market, was not going to do because the family home was removed from it • Other countries like Australia and UK has found that a CGT does not cool housing markets only more homes cool that Minority: add specific receipts only e.g. rental properties • Just extend items that are taxed already rather than pooling everything in • It was rejected by Government • Jacinda said – not on her term because it means that the Prime Minister won’t introduce a tax that we actually need The externality issue:

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Cost or benefit that falls on an unrelated third party Negative e.g. factory pollutes neighbouring community Positive e.g. wetlands on a farm may provide flood protection for a neighbouring community

Recommendation: Circular economy would take out all waste. Not good at this in NZ, produce 800 kilograms of rubbish every year. • Use taxes to price negative externalities • Expand and increase Waste Disposal Levy • Strengthen Emission Trading Scheme (trade carbon instead of taxing – nonsense) • Encourage congestion charging • Long term – environmental taxes significant part of the tax system Issue of economic double taxation: If you have a company that earns profits, and pays tax, then distributes dividends to shareholders, they pay tax on dividends they receive. For economist, that’s a double taxation because same bit of money. For lawyer – what’s the problem? Different legal persons.  Economics argue that we use a tax credit when a company pays a dividend, imputation system. • • • • •

Alpha Industries Ltd (AIL) earns profits of $1m and pays tax of $280,000 AIL distributes $720,000 to its shareholders Bella, a shareholder of AIL, receives $1,000 dividend Bella pays $330 tax Economists call this double taxation

Recommendation: • NZ uses an imputation system • The dividend carries a tax credit to take account of double taxation • TWG: Keep dividend imputation • Alternatives are really complex, or really simple, but really unpopular Retirement savings: How do you encourage people to save for their retirement? Kiwisaver: successful, but does not provide serious tax incentives to join. In Australia there are massive tax reductions for people to save retirement funds. • Contributions – investments – pay out • T-T-T – no incentive • E-E-E – too expensive • E-T-t – common • T-T-E – NZ Recommendation: • T/t – T/t – E • Reduce tax on employer’s contributions for lower paid employees • Reduce average rate on investments

Essentially, they just wanted to make it fairer for lower paid employees. Will cover more later on. Low paid employees: • NZ unusually taxes first $ of income (unusual in comparison to other countries) • $0-14,000 taxed at 10.5% • Recommendation: increase threshold to e.g. $20,000 or $22,500 Further work needed:  Charities  GST: remarkably regressive and not commonly looked at. Unfair tax but incredibly efficient. The less money you have, the more you spend – pay more GST. The more money you have, the less you save – pay less GST.  Corrective (behaviour modifying) taxes Future challenges: • Demographic changes • Limited retirement savings in New Zealand • Australia A$2.9 trillion in managed funds (June 2019) v NZ $60 billion • We had a proposal for a compulsory superannuation fund in 1973, but was scrapped by the incoming Government. If we had done it, we would have billions of dollars in funds. • Sustainability of NZ Superannuation • KiwiSaver • Covid-19 debt Percentage of the Population in Three Age Groups (2001-2051) 0 – 14

15 – 64

65+

2001

23

66

12

2011

19

67

14

2021

18

65

18

2031

17

61

22

2041

16

59

25

More challenges • Sustainability of income tax regime

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• So few people paying income tax • Very easy to use trusts and companies to lower tax rate Alignment of tax rates (companies, trusts and individuals) • 39% will lead to people bunching around the 180k salary mark Large proportion of personal income tax paid by a small proportion of the population High reliance on company tax Consumption and income well taxed – but not capital/wealth

LECTURE 3: INTRODUCTION TO THE INCOME TAX ACT Readings: • NZT 2020, chs 3, 13 and 14.4 • Glossaries NB. Two types of property:  Land property (can also potentially be taxable)  Physical intangible property We have a traditional linear company whereby we go along this process and chuck things away in a landfill, we need to close the loop and recycle so have taxes to prevent that (circular economy). We need to change our tax system. EXAM – he is very interested in environmental taxes to become more important so might come up in exam. Income Tax Design: some basics Schedular v global • When it was first introduced, very wealthy people would only pay tax. Schedular system – how much I get from land, business, dividends etc, and that information was never mixed together so privacy was guaranteed. Government wanted to know the business of wealthy people. • Global – IRD knows how much income we have together but under very strict privacy rules. Some countries still retain idea of taking different types of income and taxing different. But we have a global system here. Source v residency  Issue of whether you only get taxed in your own country or in other countries as well  In NZ, we can invest money in wherever you like  If we only tax what arose in this country, huge loss for tax system Individual v couple/household  In NZ, we get taxed individually  But there are issues of benefits. Student loans – we look at family unit  Tax system invariably looks at individual, benefit system looks at family  Other countries can look at household, for a long time husbands and wives taced together Progressive v flat rates

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Not particularly progressive in NZ Historically, rates have been incredibly progressive US – introduced income tax in 1910 at top rate of 17% and end of WW2 it was at 77%, we can get extremely progressive taxes esp at times of crisis

One tax or more? • Schedular: separate ‘taxes’ are imposed on different categories of income e.g. on rental income and salary (promotes secrecy) • Global: a single tax is imposed on all income, whatever its nature • Composite: global + schedular • Global aspects and schedular aspects • In NZ we only have global system Which base for income tax? • Source – where the income arises • Residency – where you live • Citizenship – where you are a citizen – USA only (and Eritrea to an extent) • So if you are US citizen but live in NZ, taxed as an American • Only way to get out of it is renouncing citizenship Source: • Where does the income arise or is earned? Example: Z a UK-resident singer performs in NZ – their fee is taxable in NZ: s BD 1(4)-(5) • Countries invariably tax income sourced in that jurisdiction • It would be bizarre if we had non-residents come here and earning income here and weren’t taxed here • (Most examples we look at in class, it will be obvious where the money has arisen from so don’t need to worry too much). Residency: • Most countries tax the worldwide incomes of their residents Example: Z a UK-resident singer performs in NZ – their fee is taxable...