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from reducing high tax rates. The broad-base low-rate approach to taxation has other benefits such as

administrative simplicity, and reduced opportunity for tax avoidance and arbitrage.

The shift to the broad-base low-rate approach can be seen in the removal of exemptions and loweringof rates in the personal income tax base in the late 1980s; and in the introduction of a low rate and

comprehensive GST together with the removal of specialised and high-rate sales taxes.6From a cost-

of-tax perspective, New Zealands broad-based GST, which has very few exemptions and a relatively

low rate, is highly efficient. International studies have concluded that increasing rates of GST or

property taxes are likely to be more efficient than increasing company tax rates or personal taxes.7But

in New Zealand, there is an additional reason that increasing GST is likely to have lower economic

costs than a rise in income tax. This is because of our relatively broad and efficient GST base.

Box 2: Principles of a good taxation system

All of the options for reform were assessed as far as possible against six principles the TWG considered

important for a sound tax system:

1 Efficiency and growth:Taxes should be efficient and minimise as far as possible impediments to economic

growth. That is, the tax system should avoid unnecessarily distorting the use of resources (e.g. causing

biases toward one form of investment versus another) and imposing heavy costs on individuals and firms.

An important question is how various taxes affect key economic and social variables such as employment,

investment, savings, productivity growth and international competitiveness.

2 Equity and fairness:The tax system should be fair. The burden of taxes differs across individuals and

businesses depending on which bases and rates are adopted. Assessment of both vertical equity (the

relative position of those on different income levels or in different circumstances) and horizontal equity (the

consistent treatment of those at similar income levels, or similar circumstances) is important. The timeframe

is also important, including how equity compares over peoples life-times.

3 Revenue integrity:The tax system should be sustainable over time, minimise opportunities for tax

avoidance and arbitrage, and provide a sustainable revenue base for government.

4 Fiscal cost:Tax reforms need to be affordable given fiscal constraints.

5 Compliance and administration cost:The tax system should be as simple and low cost as possible for

taxpayers to comply with and for the Inland Revenue Department to administer.

6 Coherence:Individual reform options should make sense in the context of the entire tax system. While a

particular measure may seem sensible when viewed in isolation, implementing the proposal may not be

desirable given the tax system as a whole.

These principles are used in Chapter 3, which sets out the key features of various individual taxes and their

possible role in reform.

There are areas in which New Zealands tax base is not as broad as in other countries. An example

is the absence of a comprehensive capital gains tax (CGT) across all types of income. This means

that New Zealand has a lower tax on capital gains, including gains on property, than most other

OECD countries. By not comprehensively taxing capital gains, New Zealand is unusual amongst

OECD countries.8One of the questions the TWG has addressed is whether or not the absence of a

comprehensive CGT is a disadvantage. The Group also examined whether or not other forms of base