Friday, February 18, 2005

Simplify Taxes the Kiwi Way

Tech Central has an article advising the administration to follow the New Zealand model when approaching tax simplification. Link.
The tax code and regulations are now 46,000 pages long, up from 26,000 in the mid-1980s. The number of different IRS tax forms jumped from 400 to 500 in the past 10 years.

Congress is now considering proposed reforms to decrease this complexity. Before embarking on a new path, and potentially repeating some of the mistakes that undermined the 1986 reform, US policy makers may want to learn from reforms in other nations. The New Zealand's tax code overhaul in the 1980s and 90s led to incredible economic growth. This experience provides a good role model for the US to follow. (...)

NZ shifted its income tax towards a simpler and flatter structure using a broad-base, low-rate principle. The top marginal personal income tax rate was reduced from 66 percent to 33 percent. The tax base was extended and most loopholes removed to reduce complexity and compliance costs to a minimum. In that spirit, many innovations were introduced such as the low rate Fringe Benefit Tax applied to non-cash income.

The NZ tax base is broad by international standards but avoids double-taxing certain types of income. There is, for instance, no second layer of tax on capital gains. The absence of capital gains tax is consistent with New Zealand's move towards a consumption-type tax, like the flat tax, which doesn't tax capital gains at all.

The tax system we had pre-Reagan was the worst of all worlds. Its high marginal rates (70% maximum) discouraged work and entrepreneurship, while the large number of exemptions kept the actual tax take low. There were only two beneficiaries: accountants/tax lawyers, who sold their expertise in lowering taxes, and Congressmen, who sold tax exemptions for large campaign contributions. The Reagan tax cuts were a move in the right direction, and they unleashed the greatest surge in economic growth since the late nineteenth century. However, they did not go far enough in simplification. We have gotten the rates down (maybe not enough, but down never-the-less). What is needed now is making the recent cuts permanent and broadening the base so that the rates can be cut even more.


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