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Defeating the tax rort

Making our system simpler is the only way to fix it. A flat tax is the best way forward.

Making our system simpler is the only way to fix it. A flat tax is the best way forward.

When I first moved into a hall of residence at university, I noticed that the people who were able to get the student allowance weren’t necessarily the most needy.

This is a common theme in our tax and benefit system, with people who can move around their income paying less tax and receiving benefits that others can’t. The government and opposition thinks that we can solve this by muddying up the tax system further – a capital gains tax, taking fruit and veges off GST. But in truth we can only fix these issues by making the system simpler.

As a result, I’d suggest that all political parties throw out their current tax policy – and commit to setting a flat tax on consumption (GST).

At first brush, this seems a bit weird. I’ve complained that our current tax and benefit system often misses the most needy, and I’ve suggested that we fix it by making what they buy more expensive. Such a suggestion probably makes you wonder whether I actually understand tax at all.

But a flat tax with an appropriately targeted set of benefit policies to help those in need is the best way to ensure we actually help the most needy, and that we do so at the lowest cost to everyone else in society.

In order to understand why, we need to think of what a flat consumption tax really is. Many people claim that a flat consumption tax is “regressive” (the poor pay a greater proportion of their income). However, this doesn’t make sense because, over a person’s lifetime they’ll spend most of their income on consumption – and whatever is left goes to their children, who will spend this money on consumption. As a result, all income will get taxed.

With all income being taxed at a flat rate, we don’t need to worry about someone paying a lower proportion of their income in tax due to “tax avoidance” – because there’s a single tax they have to pay, no matter what.

With GST raising all tax revenue, government can then use that revenue to help the most vulnerable in society. Offering a minimum level of income to people, using tax money to fund services to the poor, and subsidising education are all ways that the government can turn around and directly help the neediest.

Actually targeting spending instead of fluffing around with the tax system implies that government can transparently, and efficiently, help the very worst off. It also implies that when people go to vote, they can tell exactly what they are voting for, and can vote on the basis of whether they think the money being paid to society’s most vulnerable is really “fair”.

You may think that the dole should be lower and that people should work for it, or you may believe we should have a high rate of tax and give everyone a comfortable living standard at the cost of people who work for higher incomes. However, no matter which view of fairness you subscribe to having a flat consumption tax as the starting point is the best way forward.

Matt Nolan is an economist at Infometrics and blogs at www.tvhe.co.nz.