There’s a very old saying that taxation is the science of plucking the chicken without making it squawk. The earliest form of the saying seems to go back to a 1766 letter from French economist Anne Robert Jacques Turgot to David Hume – though the exact origins are disputed.

Some aphorisms are timeless; this one is as true now as it was in Hume’s day.
A squawkless chicken is a rare bird – especially while it is being plucked. But some birds have more cause for complaint than others.

Each year, the Tax Foundation ranks countries’ tax systems in its International Tax Competitiveness Index.

The point of the exercise isn’t to weigh the quantity of feathers collected.

Instead, the rankings assess how different governments pluck the birds – because some methods are a lot more painful than others. And countries that are superb at plucking the neck can be an utter shambles when it comes to the legs. We can all learn a bit from each other.

This year’s ranking has just been released.

New Zealand maintains its third place standing among the thirty-eight assessed countries. We also gained just under two points in the Index’s 100-point scale as compared to last year. Our consumption tax regime – the GST – is ranked best in the world. But we have a few problems in how we handle corporate taxes, and in our cross-border tax rules.

Let’s start with the good.

New Zealand’s GST tops the charts. The assessment is straightforward.

Exemptions from GST mean that a higher tax rate is needed on everything else to collect the same amount of money.

They also create a lot of other problems.

Exemptions mean boundaries between things that draw GST and things that do not.

Setting the boundaries is hard enough; everyone will want their product or service exempted. Maintaining those boundaries is even more difficult – every exemption helps make the case for the next exemption.

And adjudicating disputes around the boundaries, when companies have very strong reason to make their taxable thing look like something that isn’t taxable, is superb for consulting tax experts but not so great for anyone else. Australian litigation over whether a mini ciabatta was a taxable cracker or untaxed bread saw a European bread-tax expert flown in to provide testimony. No sane tax system requires experts to decide on the specific tax status of a mini ciabatta.

New Zealand’s GST is the OECD’s most comprehensive. Exemptions mainly exist where it would be an administrative nightmare to try to figure out the value that should be taxed. The Tax Foundation estimates that about 96% of consumption is covered by our GST. The average across the OECD is only 55%.

Because our GST is comprehensive, it can raise a lot of revenue at a relatively low tax rate – the eighth-lowest rate among countries ranked.

And while the Foundation saw no need to spell it out, fans of progressive taxation can still appreciate our GST. A flat GST can be combined with a progressive income tax to get whatever level of progressivity a government wants from its tax system. At the same time, GST captures spending from income that can otherwise be difficult to tax, as well as from visitors from overseas.

Estonia and Latvia, which took the top positions overall, could learn a bit from New Zealand’s GST. Their own consumption taxes ranked poorly compared to ours. Each taxes a narrower base than New Zealand while exempting more smaller businesses from registration. Their sales tax rates then wind up at 21% in Latvia and 24% in Estonia. Both could do better by adopting New Zealand’s lower sales tax rate on a broader sales tax base.

At the same time, New Zealand could learn a bit from both Estonia and Latvia on corporate taxation and on cross-border tax rules. Or, at least, from the more than thirty countries that ranked ahead of us.

New Zealand applies relatively high taxes on corporate income.

Corporate net income is always revenue less expenses, but different countries have different rules about tallying expenses.

Companies invest in long-lived assets like machines and buildings. Different countries apply different rules about how the cost of that equipment is spread out over time. And different ways of running those rules mean that companies count different proportions of that equipment cost against their revenue over time. Being able to deduct less of the capital expense means a higher effective tax on net income.

Tax experts will debate about the best way of handling these things. What is otherwise ideal may be impracticable. Companies in top-ranked Latvia and Estonia are effectively able to count the full amount of their capital expenditures against their revenues. Similar provisions here could create their own distortions barring broader changes to company taxes. But New Zealand’s provisions for deducting business capital expenses are well below OECD averages. Only Costa Rica, Hungary, and Chile earn lower rankings than ours.

At the same time, we also rank near the bottom of the pack for our range of tax treaties with other countries, and for relatively high withholding tax rates facing foreign investors. The combination of the two makes investment in New Zealand less attractive.

On the surface it sounds great – more taxes are paid by foreign investors as compared to locals. But the catch is the resulting higher cost of foreign capital for New Zealand businesses, making it harder for them to invest and expand.

The New Zealand government is currently in a very substantial structural deficit – the kind of deficit that will not go away on its own as the economic cycle eases. And the outlook gets worse as demographic changes hit hard in the 2030s and 2040s.

Spending restraint will matter. But so too will a hard focus on the efficiency of the tax system. The more the government wants to spend, the more careful it needs to be about its tax system settings. Poor settings have greater overall cost when the government wants to raise more revenue.

Our GST already shows how to raise revenue quietly – and particularly as part of a tax system. The same discipline to capital write offs and cross border settings could pick up the loose feathers before tugging at live ones.

To read the article on the Newsroom website, click here.