Polson Higgs taxation partner Michael Turner said care was needed to ensure that extreme examples did not result in significant changes that had not been well thought through and which ultimately disadvantaged those who it was not intended to catch.
"Any kneejerk reaction risks the type of decision-making that has got the tax system to where it is today.
"Any tax changes need to be well thought through and return the fairness and integrity to the system."
The Otago Daily Times asked Mr Turner to consider the latest hints from Mr English about what he intended to announce in the March 20 Budget.
Tax will undoubtedly be the big issue of the budget with possible changes to the top tax rate, a rise in GST to 15% and some avoidance measures around property depreciation rates likely to grab the headlines.
However, Mr English highlighted in Parliament how the system could allow a household earning $100,000 a year, with two dependent children, to reduce their tax from $27,500 a year to less than $10,000 a year.
"In reviewing the Tax Working Group's recommendations, the Government acknowledges the system needs to be fair and have integrity.
This is most apparently not the case at present, where highly uneven tax rates apply between taxpayers with similar incomes."
A self-employed person earning $100,000 a year would normally pay income tax of more than $27,500 a year on the top marginal tax rate of 38%, he said.
But in certain circumstances, the current system allowed them to significantly reduce their tax bill.
Examples he gave included. -Forming a company owned by another entity (on the current 30% company tax rate), paying themselves a $48,000 salary and reducing their tax bill by $3000.
Qualifying for Working for Families on that reduced salary with two dependent children, they would receive an extra entitlement of almost $8500 a year.
Using an interest in a leveraged property investment producing tax losses of $20,000 a year, their personal taxable income was further reduced to $28,000.
At that point, the total tax paid on income of $100,000 had fallen below $10,000, Mr English said.
"In other words, the effective income tax rate is less than 10% - or lower than the lowest personal income tax rate."
The example was not uncommon.
The Tax Working Group found that 10,000 households were reporting investment losses while also claiming Working for Families credits.
The Government was aware of tax advisers actively marketing schemes similar to that example, he said.
Mr Turner said Mr English's example was extreme, although it would apply to some taxpayers.
The problem was in the design of the tax system, not necessarily the behaviour of taxpayers.
"I can show you many examples where the system is unfair to the taxpayer's detriment, for example, a family who have wage income and genuine business losses who are not allowed to include the business loss in their Working for Families calculation.
"The true problem is the high marginal tax rates on individuals and the significant gap between them and the company/trust rate.
If Mr English adequately addresses this in the Budget, it will go a long way to returning fairness to the system," Mr Turner said.
Mr English said the current system lacked fairness and integrity because of the way income was defined and because different tax rates had proliferated.
In the Budget, the Government would make the tax system fairer by closing loopholes.
"We will make sure that taxable income more accurately reflects true economic income and that the system is fairer to all taxpayers."
