“The overarching weakness of our current system is that we tax income, particularly capital income, in inconsistent ways, and the differences in tax treatment do not reflect a clear policy intent,” Little said.

“This distorts people’s decisions about not only what to invest in, but how they choose to work and save. Our tax system incentivises putting savings into housing, penalises certain types of saving when inflation is high, and encourages work and saving through entities like companies.”

Little didn’t comment specifically on Labour’s proposal to tax capital gains on investment residential property, but his comments suggested this might target middle-income earners more than the rich, who have more of their money invested in businesses and shares.

Separately, he made the point that all capital income should necessarily be taxed at the same rate, “since not all capital is the same”.

Little said the way labour income is taxed should be considered in the conversation to get the balance right.

“This could also involve considering alternative income tax systems, such as a Norwegian-style dual income tax, which allows for different rates to apply to labour and capital income,” Little said.

“Alternative systems could give us the ability to reduce tax on productive capital investments without creating inefficient subsidies or making our system less progressive.”

Little recognised New Zealand’s existing low-rate, broad-base tax system had many benefits.

But Treasury has for some time been urging governments to change their approaches towards taxing and spending.

“If policies are left unchanged, the ageing population and other spending pressures would cause core Crown expenditure to increase from current levels of around 33% of GDP [gross domestic product] to nearly 45% of GDP by 2065,” Little said.

“If tax revenue did not increase in response, net core Crown debt would quadruple to 200% of GDP by 2065. These projections show without doubt that our current policy settings are not sustainable.”

Little recognised that making proper changes would take time and could span “several governments”.

He struggled to identify workable short-term fixes.

He believed a comprehensive capital gains tax, as was suggested by the Tax Working Group in 2019, presented the main opportunity to broaden the tax base.

However, it would need to be designed carefully and would take a while to generate meaningful amounts of revenue.

The costs and benefits of an inheritance, wealth or land tax would also need to be carefully considered.

Little recognised that because no goods or services are exempt from GST, it is a good revenue earner.

However, hiking the 15% GST rate would really harm low-income earners and prompt calls for different rates to be applied to different goods and services, which would get complicated.

Little recognised the Government could also increase personal tax rates on higher incomes.

The Labour Government added a new 39% rate to annual income over $180,000.

But Little said the trouble with adding another tier to the income tax system was that it would further increase the gap between the top income tax rate and the 28% company tax rate.

This would incentivise people to shelter their personal income in companies to reduce their tax bills, as is already the case.

Of course, more economic growth also supports the Government’s tax take.

Little said the Government’s Investment Boost policy – a 20% partial expensing regime for new business assets – was one of the most cost-effective ways a tax policy could support productivity because it was targeted at new capital investment.

However, with a price tag of $1.7 billion a year, he noted that funding another policy of this magnitude, while still returning the books to surplus in the next few years, would be challenging.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.