The Tax Working Group's latest effort, on personal taxes, reveals the extent to which the Working For Families extension into middle income groups has increased the scope for gaming the tax system.

It also takes a well-aimed shot at a few tax myths.

And no, nothing about capital gains tax – yet.

This latest bunch of reports is on personal taxes and GST.

As the NBR print edition reported last month, the group is leaning toward recommending lifting the rate of GST.

The reports released by the group shows lifting GST will not necessarily be as regressive as some would have you believe.

One reason – upping the GST is a one-off wealth tax.

“The GST also imposes a tax on any wealth at the time the tax is introduced, as whenever the wealth (together with any accumulated interest) is spent, it will be taxed. Similarly, increasing the rate of GST would have an impact on any wealth held at the time of the increase, as whenever this wealth is spent, it will be taxed at a higher rate than expected.”

The other reason is that GST or other consumption taxes are less regressive when looked at over an individual’s lifetime rather than just at a snapshot of annual income.

More recent studies indicate, “while consumption taxes appear to be regressive based on annual income, they are likely to be less regressive and even progressive when their effect is assessed over an individual’s life time.”

The papers also indicate the extent to which the last government’s Working For Families package’s extension into middle income groups have upped up the scope for gaming the tax system.

Working for Families was based on a modest abatement regime introduced by the last National government – a regime which in turn was, ironically enough, built on rebates initiated by Labour in 1986 when it introduced GST.

But the extension into middle-income groups has had two large impacts. One is it has further skewed the net income tax paid upward.

Net taxation is “negligible or negative for around half of all households.”

The other factor – as reported by the NBR last month – is the number of households using the tax system to leverage property investment.

“There are, for example, over 9700 families with rental losses offsetting other income, who receive Working for Families tax credits.”

Working For Families also adds incentives to use income which is not taken into account when the entitlement is calculated – examples include sheltering income in company and trust structures, and investing in cash PIEs and other retail investment funds. Distributions from these are not included in calculating WFF entitlements.

Other examples include fringe benefits such as use of an employer’s credit card – especially when the individual owns or partly owns the company.

Such opportunities for gaming undermine the integrity of the whole system, the report says.