Income tax with tax deductibility invites cheating and corrupts honest people

Tax Fraud - TimeToday I heard of someone who in the process of defrauding the tax department. I won’t go into the details of it on this occasion.

We have all heard these tax evasion stories. It’s because the tax system invites fraud like that. I can remember sitting in the accountant’s office at tax time and noting the way the accountant asked his questions. My husband was a GP and we had both written books, so our expenses for our book writing were tax deductible. The accountant would say, “And this $480, was that for travel associated with your book?” It was in the days when you had printed bank statements posted to your homes and it was a matter of labelling each sale and matching it up with a cheque. There was no internet banking then, and it was easy to forget to record a cheque properly.

The time with the accountant was a cross between a conspiratorial plot and an open honest discussion. I know never felt comfortable any way. We usually ended up so that some expenses were declared correctly and some dishonestly. I got the impression that the accountant had to run a fine line between pleasing his clients and keeping a good reputation with the IRD, so the atmosphere was palpable.

Just imagine this occasion multiplied a few thousand times by couples all over the western world. Is it or isn’t this item tax deductible? Such a waste of time. So many hours spent by so many on tax avoidance. Why? Because we have income tax, a completely illogical tax. We should tax what we hold or take not what we do or make.

Apart from the occasional saint, we all have tendency to get away with what we can and the system just brings out the dishonesty in us. Accountants will be more familiar than I am with all the various ways people can cheat – by declaring family gifts as tax deductible capital items and other forms of false deductions, as well as having offshore bank accounts and making false invoices. Then there is the straight “cash job” indulged in by a range of tradespeople and others.

Just as a welfare system based on your relationship status invites you to cheat, so a tax system based on what you earn invites you to cheat. Cheating is an inevitable result of a wrongly targeted tax system and an outdated welfare system.

In contrast a land rental cannot be avoided. There are no tax deductions. You pay for what you use of the commons and that is that. You can’t take your land offshore and hide it in a tax haven. You can’t cheat. The tax is simple and cheap and hard to evade. Likewise if you use water commercially for irrigation or other purposes, you pay for the use of the water. Simple. No tax deductibility there either.

Nobody owns the water but charge a rental for the privilege of the 49%

So John Key is right. Nobody owns the water. But that doesn’t mean that any private company or public/private company should be able to use it without a regular rental to the public for the privilege.

Whether this rental should be paid to Government for the commercial use of the water or partly to Tuwharetoa needs of course to be resolved. What did surprise me was that David Clendon the Green Party spokesperson missed the opportunity to apply Green Party policy on a tax on the commercial use of water. Well if he was just the Treaty spokesperson, where were the leaders in the resource rental business? Have they forgotten their policy or are they just focussing on the snub John Key gave to the Waitangi Tribunal by announcing he didn’t have to take any notice of their findings?

It was fine when Mighty River Power was a publicly owned power company (well it still is, let’s keep it that way despite the empowering legislation!). Tuwharetoa was happy for the public to use the water. But sell 49% to private owners and the scene changes. Now 49% of the water is going to be used for a private purpose, so there should be an appropriate rental paid for the privilege. 49% private ownership means those private owners don’t own the water because, as John Key said, nobody owns water. Therefore those who use it in commercial quantities should pay a regular rental to the public.

Does this mean charging half water rental to the company once half is bought by private people? No it doesn’t actually. It means charge a full rate to the shareholders for the water the shareholders have the privilege of using. That is the principle of resource taxes. Private/public partnerships make the whole set up ridiculous. When it is fully publicly owned there doesn’t have to be any rental paid to the public. It is only when a subset of the public owns it or part of it that a rental should be charged.

All this talk of extra shares and so on is wrong. The fact is that there should be an ongoing rental charged, not a one off charge.

Otherwise the whole selling thing should be called off, which is only logical