The Tax Working Group's interim report released on Thursday rightly disposes of some unworthy proposals but confounds some others, particularly the capital gains issue.

My list in the former category includes its position on tax and housing affordability, GST exemptions, and progressive company tax rates. It will not propose an inheritance tax or increases in the rates of income tax or GST. These decisions help reduce uncertainties and preserve efficient simplicity.

The interim report keeps its options open for extending the scope for capital gains taxation. A problem with its discussion of the capital gains tax is that it pitches it as a fairness or equity issue, rather than an efficiency one.

The efficiency issue is important.  It is that tax preferences distort investment choices. Exempt the family home and you can expect the rich to invest more in larger residences and less in more productive things. That is not a good thing.

The fairness or equity aspect is less clear. The winners are not always obvious. High expected capital gains on housing can produce low rental incomes. High expected capital gains benefit the exiting owner rather than the buyer. Would-be Auckland home buyers witness this reality daily. There is no free lunch for them. In subsequent years they might be lucky or unlucky.

All risky investments have that character. If subsequent good luck is to be taxed as a matter or equity or fairness, why not subsidise those for whom it was bad luck? Any attempt to do that fairly would be a complex mess, plausibly for very little in the way of net revenue in the fullness of time.

The option of taxing the normal return on risky capital, rather than the risky realised return, avoids such complexities.

To its credit, elsewhere the report does see the merit of using the benefit system to pursue equity, rather than the tax system.

The report also tilts in favour of environmental taxes. The case for corrective taxes is independent of the case for general taxation. Each proposal should be treated on its merits.

In general, environmental problems arise because those who impose a cost on others are not confronted with those costs. They seek a benefit they do not have to pay for. At base, this is because property rights are incompletely assigned. The Resource Management Act is a major example. It fails to confront those who object to a development with the cost to the community of forgoing it. High Auckland house prices are the result of forgone development opportunities.

Turning from the specific to the general, there is a more fundamental way of looking at the tax issue. It lies outside the Tax Working Group's terms of reference.

The only principled justification for general taxation is the need to fund wellbeing-enhancing spending that cannot be funded by non-coercive means.

To tax people to fund wasteful or ineffectual spending is a dereliction of the duty of care. The prior question for taxpayers when assessing tax decisions is the quality of the proposed spending.

To force taxpayers to fund wasteful and ineffectual spending must reduce trust in government and corrode social cohesion.

The point is relevant because a report published by the New Zealand Initiative this week cited overseas research calculating that perhaps 13 per cent of GDP, representing about $20,000 per household annually, was being spent ineffectually.

Is this plausible? It is certainly possible. It is easier to spend someone else's money poorly than well. If no-one is measuring value for money in spending, it is even easier.

Sadly, successive Productivity Commission reports have documented an entrenched lack of focus on value for money in government spending. Here is one quote: "There is little regular and systematic review of the value for money from existing expenditure".

Of course, the loss of trust in government is lesser the greater the degree to which taxpayers are unaware of the extent of wasteful and ineffectual spending. Governments are not going to tell them about its extent, because then they would have to make cuts that were unpopular with the unworthy but vocal and focused recipients.

Her Majesty's loyal opposition should expose waste, and indeed does to some extent. But if it is a major party, its position is likely to be compromised by its earlier record in government. Smaller parties such as ACT try to, but lack the information about value for money that the incumbent government is choosing not to generate.

A stronger Treasury would help, but the establishment can hardly hope to reform itself from within.

When governments in New Zealand are spending 40 per cent of gross domestic product annually, the quality of that spending really matters.

The current situation of systemic entrenched neglect within the state sector leaves it to private sector organisations and think tanks to try to fill the gap. Hence the Initiative's report.