Time to talk about making tax fair

People don’t like talking about tax, and they probably don’t think too much about their savings, especially those savings that are locked away until they’re 65. However, the combination of tax and savings is hugely important. When tax is taken from the earnings of an investment, less is left to reinvest. Taking tax from reinvested earnings exacts a significant toll over long periods - the Financial Services Council estimates it reduces earnings in Kiwisaver Accounts by 54.7 percent over 40 years.

Of course, any modern society needs to collect tax but it’s important that everybody shares that burden equally. It’s unfair and economically damaging otherwise. An important problem, which the Fair Tax campaign addresses, is the fact that investors in term deposits are paying far more tax than many other investors.

The Financial Services Council estimates 750,000 New Zealanders have term deposits. And there are good reasons people invest in term deposits – it’s a suitable investment for many. But it is clear these savers are carrying the burden of tax for other investors, many of whom are not paying tax at all. This is not because these other investors are hiding income from the IRD, but because the tax system does not treat important types of investment income as taxable. By far and away the most obvious investment returns overlooked by the IRD relate to housing.

The Fair Tax campaign proposes the inflation component of interest be excluded from tax. This follows a recommendation of the Savings Working Group, which reported in 2011. The Group recognised housing investments rewarded their owners by rising in value but these gains were not considered taxable income. Taxing only the real component of interest earned in term deposits goes some way to ensuring fixed interest investors are treated the same way – only real returns, not inflation, would be considered taxable. There is more that could be done too.

The Savings Working Group had to work within the confines of policy at the time. It couldn’t discuss the merits of taxing house price gains. It recognised the distortions and unfairness caused by leaving housing out of the tax net though. It is clearly still contributing to housing speculation and price excesses.

By highlighting the fact term deposit investors carry an unfair tax burden, the Fair Tax campaign contributes to an essential and wider debate about what investment income should be taxed.

If capital gains, or some other measure of the returns from housing, were taxed, the Government could afford to lower the tax rate paid on all investments. There would be no loss of government revenue - casting a wider net would see to that. This broadening in the tax base would allow lower tax rates on all savings. This would help with the second issue identified in the Fairer Tax campaign - the heavy tax toll currently imposed on fully taxed long term investments.

Revenue Minister Todd McClay says “taxpayers already made a significant contribution to retirement incomes…” and “what is being proposed would …disproportionately benefit those who earn the most…”. This is disingenuous. Many of those who “earn the most” currently pay no tax and they certainly are not contributing to the retirement income of others. If the Minister is genuinely interested in capping the benefits his policies offer to those who earn more than most, he should start bringing them into the tax net in the first place. And that means discussing unfair tax burdens.

The campaign is backed by Consumer New Zealand, Age Concern and the Taxpayers' Union.

By Susan Guthrie.