Monday, February 12, 2007

The Tax That Trev Built

Since its introduction 21 years ago, no-one has screwed with the Goods and Services Tax. Apart from the rate going from 10 to 12.5 percent, it has been left well alone. No dispensations, no repeals, no sectorial favours. It was the brick shithouse law that Trev built. While the Mortgage Tax, Capital Gains Tax and even Super Fund ethics are doing the rounds, it would be worthwhile seeing how to build something good, fair and lasting.

The Fourth Labour Government inherited a tax system from Muldoon that was a hell of a mess. Carrots and sticks were strewn everywhere, lacking rhyme and reason. Supplementary Minimum Prices guaranteed many farmers a lifestyle beyond what their produce was actually worth (I should know. I went to boarding school with a lot of their kids). Individual tax returns were something like 12 pages long and had rebate charts for everything. Import licenses and a mesmerising schedule of import duties favoured the savvy and the connected. Bob the Builder has admitted that this is how he made his millions. Imagine inviting a bunch of teenagers to have a bender in the Fiscal Library while Treasury and the Reserve Bank are away for the weekend, and that's how trashy the place looked.

The consensus was that significant reform was in order. Reform always involves pain. Such is the nature of change. SMPs were unceremoniously dumped, leaving many distraught farmers and a few suicides out in the backblocks. There was no way around this. SMPs were worse than buying Lotto with Visa. Devaluation made many a fortune for those with the liquidity to perform such things. That it came at the expense of the country in general was of little consequence to them. There was no way around this. Muldoon should have devalued as early as 1979, but lacked the intelligence or the scruples of NZ's public good.

My father was tasked by Roger Douglas to formulate a clear, fair and enforceable consumption tax, in part to replace the myriad import duties which were due for a levelling and partly to put a clearer stick on consumption. New Zealand has always imported more than it exported. A consumption tax might pare back some of the Balance of Payments in our favour, or at least mitigate the damage without quite so much paperwork.

Trev was well placed to craft such a thing. As a top notch lawyer, who should have been made QC back in 2000, he had the legal skill to properly frame such matters. There had to be an internal consistency between the spirit, the statutes and the clauses. There had to be beauty. Isn't that the reason for laws? To make things simpler and more beautiful? As a knowledge sponge, few in caucus could compete. Geoff Palmer, maybe a couple of others. Trev immersed himself in consumption tax. He and his wife traveled widely, inspecting Britain's VAT system, talking with Milton Friedman and Dagg knows who else.

The VAT experience clearly demonstrated the problem of allowing exemptions. Compliance costs moved money towards accountants or wasted business hours which could have been more productively spent on earning more tax. Exemptions kept a festering sore of sectorial grievances and lawyers, which Oz is learning very slowly with its kangaroo court list of exemptions on its GST.

Such a fundamental change to the taxation system was bound to send shockwaves through the people. The regressive nature of a flat tax on consumption would unduly affect the less well-off, as a greater proportion of their income is spent on the necessities of food, shelter and warmth. Therefore, income supports were introduced to mitigate this collateral damage. No-one was demonstrably worse off after the introduction of GST. I noticed this most keenly when the cost of vinyl dropped by a few bucks and stereos got incrementally cheaper.

Finally, restructuring of the taxation system sends jitters through business confidence. You do it as rarely as possible to avoid any run on the dollar. You tell the market what you are about to do, and why you are doing it. If the law is to last, it must be equally accepted. It must be immune to the loopholes that favour those with the scales of economy to plunder them.

The ideas of Mortgage Tax or Capital Gains Tax are both fraught with too many loopholes. Lawyers and accountants would end up making more money out of them than the Treasury will ever see. It was only a matter of time before the Cullen Fund was mired in unethical investments. If it wasn't going to be alcohol, tobacco and fireams, it was going to be porn or drugs. This is what happens when the state gets involved in things beyond the public good. Investing in stocks and shares is stuff best left to individuals, or the legal fiction of individual companies at least.

If that was my money (which it once was), I'd be quite happy to see my portion of the funds (which I will never see again) go towards British American Tobacco. I'm not so fussed with Wal-Mart though. I'd never buy Wal-Mart on principle. No doubt there are some who would choose otherwise and so be it. But, like me, they have no choice either. Even Hooten and Harre on the Nine to Nooner were plagued by the slippery slope of ethical yet profitable investment guidelines.


Delegate it instead. This is pretty much what KiwiSaver looks set to be; more unethical retirement investments proxied to the poxy unit trust funds and zombie funds, paid for once more by El Schmucko the taxpayer.