Inland Revenue Commissioner Peter Mersi

Inland Revenue Commissioner Peter Mersi yesterday dodged a whole series of questions about whether he was advising the Government on a new wealth tax.

His persistent response was to neither confirm nor deny.

The questions came from both Labour and National MPs at the Finance and Expenditure Committee’s annual review of Inland Revenue and focussed on the investigation commissioned by Inland Revenue Minister David Parker into high-net-worth individuals.

Finance Minister, Grant Robertson, has repeatedly maintained that Labour will not implement any new taxes during its current term in Government.

The next term, on the other hand, is a different matter.

Speaking to reporters at the Labour party conference earlier this month, Robertson confirmed Labour would go into the election campaign with a tax policy.

“You’re at the event which begins the process for setting Labor’s tax policy,” he said.

“So it’s not set yet.

“But there will be a tax policy. Labour will have a tax policy.”

National MP Simon Watts asked a series of questions of Mersi about whether the research commissioned by Inland Revenue Minister David Parker into high-net-worth individuals would be used as the basis for tax policy.

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Mersi confirmed he expected the report would be ready early next year.

“The purpose of it was to look at the effect of marginal tax rates for that group. And that’s what the report will respond to,” said Mersi.

Labour Taieri MP Ingrid Leary asked Mersi whether he had received any instructions from the minister or the Government to do any policy work on changing tax rates for high-net-worth individuals.

“At this time of the of any (Budget) cycle, we engage with ministers on a whole raft of tax issues,” said Mersi.

“In a sense, regardless of your question, the outcome will be the same, which is that we canvass a whole range of issues at this time of year with ministers, but it’s very early in the process.”

Leary: “Can I take it from your answer that you haven’t been specifically asked to do any work on tax rates for individuals? 

Mersi: “You can’t take that from my answer, but I also wouldn’t interpret that as me saying we have.

“In other words, I’m simply saying that at this time of the budget cycle, we engage with ministers on a whole raft of very early conversations on tax.”

Leary: “So I just want to be really clear that you have not heard any instruction from any minister to look at the tax rates of high net worth individuals?”

Mersi: “All I’ll say is that at this time in a budget cycle, we discuss a whole range of tax issues.

“So again, your question is focussed on high net worth individuals; the answer I would give would be the same had you asked me a different question, which is that we discuss a whole range of issues at this point in a cycle. It’s very exploratory.”

This, however, was not enough for National North Shore MP Simon Watts.

“Coming back to that point around the high wealth individuals research unit, are we supposed to believe that that unit is not helping to develop, even informally, new ideas or new tax ideas for government?” he said.

“And the reason why I raised it is, as the Minister of Finance throughout this year and last year has said continuously, no new taxes under this Government.

“We will look at our tax policy in the future.

“And on that basis, coming off the first point of the question, have you at any point expressed concerns to the Minister or the Public Service Commission in regards to establishing that unit?”

Watts asked Mersi if he had expressed those concerns that he provide them to the Committee.

Watts said the concerns would be that potentially (the High Net Worth research unit)  might be used to come up with ideas that the Labour Party might announce.

Mersi said the information being collected was for research purposes.

 “The purpose of that research is to identify the effective marginal tax rates of that group of individuals is paying,” he said.

“Conversations about ‘so what’ are for the future.”

 Watts: “So you can categorically rule out that that unit is not providing or coming up with new tax ideas?”

Mersi: “If your question is, am I expecting my policy staff not to think about a whole range of policy issues that we might get asked for, not next year, the year after, the year after that, then I’m hoping they are thinking about those things because that’s part of our stewardship function.

“So you know, it’s a bit hard to ask a policy person not to think about policy.”

But though Mersi must have left the Committee wondering about what was going on in the Beehive over tax policy formation, he was a little more forthcoming at another appearance yesterday, which focused on his department’s long-term insights briefing.

He highlighted two issues that he said distorted the New Zealand investment market; the high marginal company tax rate paid to foreign investors and the inability of businesses to take inflation into account when calculating depreciation.

The briefing found that despite New Zealand’s broad-based income tax settings, there was likely to be considerable variability in the costs of capital.

This variability is increased significantly by quite small levels of inflation, especially when real interest rates were low.

“There are likely to be ongoing questions about whether New Zealand should change its business tax settings in ways that lower costs of capital and make them more neutral,” the briefing said.

“Whether to lower costs of capital is a difficult issue because measures that do so will normally have a fiscal cost and may often reduce the progressivity of personal income taxes.

“They can also, at times, provide windfalls to those who have invested in the past or to those who would invest in New Zealand regardless of whether taxes were cut.”

Explaining this, Mersi was also quick to point out that IRD did not set tax policy.

“We don’t propose a solution here, and part of the reason is that, as is often mentioned, this is a partial analysis,” he said.

“It’s looking only in the area of tax and its impact on investment.

“Take an obvious issue, which is overall tax take; the Government will have objectives about how much it wants to raise in the overall tax system.

“If it wants to make a change in this area, it needs to think about other things being equal; where else would it take money?

“We haven’t formed any judgement in these papers about what that mix might look like because those are decisions that are the property of Parliament.”

But when it comes to tax, the dividing line between the IRD and the Ministry is hard to draw.

Tax policy has its origins, generally, in the department. It will be workshopped around Wellington, particularly by Treasury, and political preferences will play a big role in its final acceptance or rejection.

But the original idea will have started in Mersi’s department. He was, perhaps, a bit too modest in front of the Committee yesterday.