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PoliticsSeptember 24, 2018

After years of neglect, public servants want to see real tax reform, not tinkering

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Image: Getty

The government call for a ‘revenue neutral’ package of reform from the Tax Working Group, combined with refusal to relax the Budget Responsibility Rules, reveals a failure to pursue a fairer system that properly funds public services, writes the PSA’s Erin Polaczuk

There’s a lot of good stuff in the Tax Working Group’s interim report: the recognition that our current tax system is unfair and unbalanced in its treatment of income from capital; the proposals that aim to increase retirement savings for people on low and middle incomes; and the acknowledgement that the tax rates and/or thresholds of people on low to middle incomes may need to be lowered.

One thing the PSA is very concerned with, however, is the request from the minister of finance that the TWG present a “revenue neutral” package of reform. This will constrain the opportunity for genuine tax reform, with the added backdrop of a stubborn refusal to relax the Budget Responsibility Rules.

In its original submission to the TWG the PSA put forward two major recommendations for reform of our tax system. First, we need to increase tax revenue to adequately fund the high quality public services that make our communities strong, and second this additional revenue needs to come from currently un-taxed income and wealth.

Revenue from taxation funds the essential services that our members work in, and that we all depend upon. The level of revenue that the government collects from tax impacts directly on the quality and availability of these services: if revenue sinks too low and government spending is reduced, services decline and the jobs and working conditions of our members are compromised.

Our public services, sometimes called the “social wage”, are vital to the health and wellbeing of individuals, families, communities, our society and our economy, and are part of the redistributive function of tax. The integrity, availability and quality of these services, and the important role that they play in ensuing the health and wellbeing of our communities, risk being eroded if they are not funded properly.

Our members who are delivering these essential services have the right to decent pay and conditions that reflect the value of the work they do. Too often public service and community workers bear the brunt of government decisions to freeze or reduce revenue gathering and spending, through low and stagnant wages, insecure work and redundancies. People working in public and community services have faced nine years of stagnant wages, and workforce shortages that cause significant stress to workers.

With the dominance of women in low paid occupations within the community and public sector – such as care workers, social workers and administration and clerical workers – there is a compelling argument to be made that female workers have long subsidised our public services through receipt of wages that don’t represent the value of their work. The PSA’s long-term commitment to equal pay for women workers is an attempt to rectify this long-term discrimination; achieving this goal will rely on government raising adequate revenue from taxation and being prepared to allocate sufficient government spending to close the gender pay gap.

Many of our members on low to middle-incomes struggle to make ends meet, particularly after housing costs have been accounted for. While this is largely a problem of low and stagnating wages and the high cost of living, the tax system is currently inadequately structured to address income and wealth inequalities. Our key concerns relate to the high and uniform application of the regressive GST, the steep introduction of the lowest and middle tax rates at relatively low-income levels and the absence of a capital gains tax. The sharp clawback of government transfers, such as Working for Families means that many of our members see little net benefit from wage increases.

Our current tax settings are unfair: most of our tax revenue comes from wages and salaries and from the regressive GST. Conversely, people who derive income from owning capital – the wealthiest among us – pay very little tax (if any) tax on that income. The result of this is that the New Zealand tax system has very weak “equity outcomes”, among the poorest in the OECD.

The PSA supports an extensive and comprehensive tax on capital to tackle this inequity, and we urge our political leaders to tackle this thorny beast once and for all. Arguments against a capital gains tax because it is too complicated and complex need to be put to rest. The fairness, equity and balance imperatives of a capital gains tax must triumph over bureaucratic considerations. Besides, we have a great deal of confidence in the capability and skills of the public servants at The Inland Revenue Department to implement the most complicated of tax reforms efficiently and effectively.

Alongside this, we would like to see a reduction in the amount of tax paid by people on low to middle incomes and a reduction in the rate of GST. These reforms, twinned with a possible increase in the tax rates on very high incomes, and the introduction of a capital gains tax, would go a long way to restoring the progressivity and fairness of the NZ tax system.

In its Future of Tax: Submissions Background Paper the TWG notes that current revenue and expenditure settings at 30% of GDP will not allow for the maintenance of public health and superannuation at current levels. In other words, we will either need to increase revenue or cut expenditure.

The health and wellbeing of our people and our communities will not be enhanced by cuts to health and superannuation, or to any other essential public services. More revenue does need to be raised, but it needs to come from those currently not paying their fair share.

Erin Polaczuk is the national secretary of the Public Service Association

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