Tax reform is never easy

IN his new book A Fine Mess, author T.R. Reid discusses how the United States can and should reform its complex tax system, by comparing it with other taxation systems all over the world. Mostly, he writes about stories and lessons that the US could emulate. In turn, he documents the necessary struggles for any tax reform, not just to prevail, but also to endure.

One example Reid cites is New Zealand, with its efforts in lowering its income tax rates while broadening its tax base in the 1980s. At the time, the Kiwi nation relied on a progressive income tax schedule that imposed higher rates on the rich and lower ones on the poor. Like many countries, New Zealand at the time had a long list of exemptions and allowable deductions that, although they had good intentions, ended up becoming loopholes for many to circumvent tax obligations.

By the 1980s, when New Zealand’s Labour Party won the parliament, a massive effort was launched to remove all the exemptions, rebates, allowable deductions, special business allowances, and agricultural subsidies that were in place — with the avowed goal of cutting the top income tax rate in half and reducing other rates across the board. To make up for the lost revenue, the Finance Ministry proposed a goods and services tax (GST), similar to the VAT system we have in place, where virtually no exemptions were provided.

Individual taxpayers and large businesses, including the accounting firms and tax consultants that helped both take advantage of New Zealand’s complex tax system, rose up against the Labor party’s tax reform initiatives. Some decried the loss of the deductions that benefited them. Others said that the lower income tax rate was a gift to New Zealand’s rich that would exacerbate inequality.

Sir Graham Scott, then policy chief of New Zealand’s Finance Ministry, said to Reid in an interview that to every person who angrily complained about losing their cherished deduction, finance officials responded: “If you want to keep that deduction, we’ll have to raise the rates for everybody.” Scott added, “People understood the trade-off; you lose a deduction, but you get a simpler tax code and much lower rates.”

Another example discussed in the book is the much-lauded tax on beverages with added sugar or high-calorie sweeteners imposed by Mexico in 2014. Reid wrote that backers worked to make the tax palatable by promising it would solve two problems simultaneously — the runaway obesity epidemic and the lack of clean drinking water across the country.

Large cola companies fought back, spending hundreds of millions of pesos lobbying against the proposal — mostly through paid ad campaigns. The supporters of the tax responded in similar fashion, releasing several TV commercials — one of which depicted doctors speaking with young children with diabetes. The latter’s TV commercials were partially funded by the charitable foundation of New York City Mayor Mike Bloomberg, who himself was an anti-sugar advocate.

Eventually, those in favor prevailed — partially because, as The Guardian reported in 2015, 70 percent of a survey’s respondents said they would support the tax if it led to clean drinking fountains in all of Mexico’s schools.

Noted French economist Thomas Piketty once wrote that taxation is not just a technical matter, but “preeminently a political and philosophical issue, perhaps the most important of all political issues.” Many may not think of taxation as an important issue, but it cuts across every swath of society. And that’s why tax reform can be very difficult. This is clear in T.R. Reid’s book. Email: Facebook & Twitter: