How Should New Zealand Tax its Inbound Investors? The development of a tax policy framework and an analysis of current settings against the framework

Abstract

Tax competition has put pressure on policy makers around the globe to reduce the tax burden on mobile forms of capital, including from inbound investors. New Zealand has not been immune to this trend. Many inbound debt investors will not contribute any tax to New Zealand’s tax base and inbound equity investors pay significantly less tax than a domestic equity investor. The question in this thesis is how New Zealand should tax its inbound investors? The approach taken in the thesis is first to determine whether a state has a theoretical right to tax inbound investors. The thesis argues that a person with an economic participation in a state can legitimately fall within the state’s tax base. Upon establishing this right to tax, the thesis then examines the principles that should determine how the tax burden should be spread across the tax base; that is, who should pay what. An argument is mounted that fairness and prosperity should be the guiding principles determining both the allocation of the tax burden and how much tax revenue a state should seek to collect overall. Making tax policy based on the principle of fairness is not new. However, in recent decades, tax policy settings have increasingly been set with the goal of economic growth in mind. This thesis argues that a wider goal of prosperity is a more suitable objective, and its implementation can result in quite different tax policy settings to the ones we have today. Tax settings that entrench or exacerbate inequalities of market outcomes run counter to sustained and shared prosperity. The conclusion of this thesis is that inbound investors currently receive preferential tax treatment, and the objectives of fairness and prosperity are better met by adjusting tax settings toward a neutral position with regard to inbound investors and other taxpayers.