Should we reduce the top tax bracket closer to that of companies and trusts?

The argument for decreasing the top tax rate is typically one of the following:

  1. The rich don't like paying tax, they argue that a flat tax ensures they pay more the more they earn, they don't need a rate increase on top of that.
  2. The educated potential rich will move overseas.
  3. The difference between trust rates and top tax rates encourages tax evasion.

The argument for keeping the top tax rate is typically one of the following

  1. If we decrease the top tax rate, we need to recoup that tax income somewhere else, so the tax burden ends up more on the poor
  2. Our top tax rate is not as high as some other countries top tax rate.


It is definitely true that anyone who earns at least a few thousand over the top tax bracket, has the impetus to "structure" their tax affairs. Typically this means gifting an investment property to a trust, such that the trust earns the rental income and not the individual. Property speculators can potentially have little or no income via this structure, and thus pay no personal tax, and receive full family tax credits. Beneficiaries of trusts can also live in "their" houses without paying fringe benefits tax. 

So as i see it there are 2 options, we could lower the tax on high income earners or we could increase the taxes on trusts, and perhaps fix some of the fringe benefits rules and regulations too. For example, beneficiaries required to file an IR12 style form to a trust, deducting PAYE on cash dispursements, and the trust required to pay a fringe benefit tax on people living in the house rent free. Doing so would make the trusts a less attractive option, encouraging families and individuals to have more transparent ownership of property and only using a trust where there is a specific reason do so. We need to reconsider why as a country we should enable trusts? Do we have them so that the rich can avoid tax? Or do we have them to safeguard assets against spendthrift children? Lets consider why we want to have trusts, and create enabling leglislation that permits the desireable outcomes, but discourages the negative outcomes (negative for the tax man).

As for company tax, it doesn't really matter except for overseas investors. Companies that retain a profit, pay company tax, then pay dividends to owners with an imputation credit attached. The imputation credit is like PAYE tax. In many ways, this means that for NZ owners of NZ shares, companies really do pay 0% tax (and so they should because this really would be double taxation for a purely paper transaction). We should only decrease company tax if we are really wanting to encourage foreign ownership of our assets?

Whatever the top tax rates we pick for companies, trusts and individuals, although there is some need to keep them fairly closely aligned, they don't need to be perfectly aligned. The issue of tax avoidance via structuring is the issue, not the rates of taxes involved. People will always want to structure their affairs to pay less tax. If we are concerned about the rich avoiding tax, then let's crack down on those issues, and make trusts less desireable entities.


Posted: Monday 22 February 2010


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