By Brian Fallow
Watching Grant Robertson announce Labour’s minimalist tax policy on Wednesday the most dispiriting thing was that he evidently believes the economy will be too frail and convalescent over the next three years to handle any meaningful tax reform.
Either that or Labour has made a political calculation to offer the smallest possible target to its opponents in this election, even if that means forgoing tax as a mechanism for advancing its purported agenda of building a more inclusive, sustainable and productive economy.
The phrase which ran as a verbal motif through Robertson’s remarks was “stability and certainty”. That is what we need as we recover from a one-in-100-year shock.
For “stability’ read stasis, for “certainty” read conservatism.
Nothing about the policy indicated willingness to deliver a tax system capable of meeting the challenges of dealing with the triple challenge of the debt legacy of the pandemic, stunted productivity and shameful levels of child poverty.
The revenue yield of the new 39% tax bracket kicking in at $180,000, we are told, will be $550 million a year.
That would cover barely more than half of the Budget-forecast increase, a cumulative $3 billion, in the Government’s interest bill over the next three years. The stealth tax increase of fiscal drag, which would remain unaddressed, would just about cover the rest.
But it would be unsafe, and depressing, to assume that bond yields will remain at their current deeply recessionary lows indefinitely. The Treasury doesn’t. Its projections at the time of the May Budget had the average yield rising steadily from 0.5% in the current year to around 4% by the mid-2030s.
And there has to be some doubt whether the $550 million a year will eventuate. We have to assume – lest this be, like second marriage, the triumph of hope over experience – that many of the 75,000 taxpayers potentially caught by the new rate get the artful dodgers of tax practice to ply their trade.
On the tax planning opportunities offered by opening a gap between the new top marginal income tax rate on one side and the rates at which trusts and companies are taxed on the other, the plan is evidently to rely on beefed up anti-avoidance vigilance by Inland Revenue and the precedent value of the Supreme Court’s ruling in Penny and Hooper.
Other jurisdictions, after all, have not made a fetish of aligning those rates.
But there was a cautionary note: “We are not going to increase the trust rate because there are legitimate reasons for people to use trusts. But if we see exploitation of the trust system we will move to crack down on those people.”
On the issue of income inequality and poverty, a case can be made that it is better addressed through transfers than tax. Officials advising the Cullen tax working group made that argument.
And indeed when New Zealand households are ranked by income the bottom four deciles pay less in tax than they receive transfers, principally family tax credits, benefits and New Zealand superannuation.
But overall, OECD data indicates New Zealand’s tax and transfer system combined delivers less of a reduction in income inequality relative to market incomes than most developed countries.
The Welfare Expert Advisory Group made a persuasive case that the social safety net is too narrow and slung too low. How willing Labour is to take up its recommendations remains to be seen.
As Robertson kept saying on Wednesday there are no costless options.
As for our frankly lousy productivity levels and growth rates, part (though only part) of any plausible explanation of that has to be the capital shallowness of New Zealand businesses.
Those low capital-to-labour ratios can, in turn, be linked to a tax system which discourages saving and encouraged borrowing.
For a generation now, since Roger Douglas fatefully introduced the internationally eccentric taxed-taxed-exempt (TTE) treatment of retirement savings, the tax system has given New Zealanders a clear message: If you want to provide for your old age, don’t save money – if you do they will tax every step of the way.
Far better to borrow money, use it to bid up the price of housing and then sit back and enjoy the benefits of leverage in what is almost always a rising market. Enjoy your untaxed imputed rents if you are an owner occupier, or your interest deduction if you are a landlord, until you sell and collect your tax-free capital gain.
I recall hearing Michael Cullen, when justifying the modest tax incentive in KiwiSaver, describe TTE as the worst example of intergenerational theft he had seen. A pity, then, that the tax working group he later chaired did not go near the issue.
Nor, it is pretty clear, will his successor.
76 Comments
Which political party in their right mind would address the controversial issue of tax, that desperately needs reform? None! (Perhaps with the exception of TOP)
Why would they? It's a guarantee of certain defeat.
Best to let the whole thing slide, and if there is any courage left in the tank "Do a John Key"; just change the tax system AFTER getting (back) in.
David Lange stuff.
If you want to, say, raise the GST to 20%, don't for Heaven's Sake say that now - wait until October, when there are 3 years left to run to see how the changes work out.
Whilst no new taxes were mentioned there was no commitment to no existing taxes being increased - very substantially if the interest cost of Labours new borrowing is to be met from taxes rather than more borrowing. Of course expenditure reduction and increased productivity are alien to Labour.
What do you expect, from the party which bought us 'taxing the middle class at the top rate only to give it back to them through an unwieldy re-distributive tax credit scheme which employs thousands of civil servants when you could just not take it from people in the first place'? Gleefully continued by all that followed, of course.
Which is why we should all be voting for TOP.
We are using a 1970's tax and spend system for an environment it's not suited. We need a bold change away from it to be better off in the long run. TOP's the only party talking about it.
This highly accurate paragraph shows exactly why, we are a nation of specuvestors and idiots:
"For a generation now, since Roger Douglas fatefully introduced the internationally eccentric taxed-taxed-exempt (TTE) treatment of retirement savings, the tax system has given New Zealanders a clear message: If you want to provide for your old age, don’t save money – if you do they will tax every step of the way.
Far better to borrow money, use it to bid up the price of housing and then sit back and enjoy the benefits of leverage in what is almost always a rising market. Enjoy your untaxed imputed rents if you are an owner occupier, or your interest deduction if you are a landlord, until you sell and collect your tax-free capital gain."
The idiocy of Labour's tax announcement is clear - assets have had the biggest rise in price and prices are still rising for the reason they haven't been taxed. Productivity is near enough to dead, because capital gets put into assets instead of productive work, because assets aren't taxed.
So what does Labour do? Tax productivity!
They did want to tax all major assets, including recreational boats and productive machinery, until quite recently. They abandoned the policy earlier this year when they realised how illogical and politically unpalatable it is. They still want to apply the same illogical policy to land though.
I find it quite funny that they like to paint themselves as a financially/economically astute party, but are almost at the point of insolvency as an organisation.
Thank you for your visionary comment that looks at one aspect of their change to the tax system without looking at all the others.
Imputed rent sounds horrific at first, then you realise it starts making sense. Interest have covered this before quite well: https://www.interest.co.nz/opinion/64556/dave-grimmond-says-consider-ta…
..so why should many of the renters i know pay tax on their savings when you pay NONE on your savings in your home (and all the while Mr Orr is desperately trying to deflate away the value of their savings!). You either don't understand or don't want to understand this blatant anomaly in the tax system.
Such a tax would hammer me, but I feel the pain of our savers, young and renters. This system is so freaken rigged against them it's criminal.
I do understand it. I also know that economists typically look for the biggest and most complex solution to a problem. If you ask an accountant, you'll probably get a simple one (so they can understand it). If you ask a politician, you'll probably get a politically expedient one. None of these will be the same, but the economists have a monopoly on outrage at someone not sharing their desire for senseless complexity at the expense of any other consideration. Whoever presses the most buttons on their calculator wins, and then argue the toss using concepts like 'fairness' until you've taxed every granny in a 2 bedroom unit out of their equity by the time they're dead. And then complain about how no one else 'understands' when this doesn't turn out to be the vote winner of the century.
Some people have to pay women in big leather boots big money for that sort of release, but TOP voters have found a way to inflict it on themselves at the expense of our sanity.
And your response, which fails to take into account that a renter's saving account is making a bee's dick worth of interest and paying a third of a bee's dick in tax if you're lucky. But, let's completely bog down the tax system in additional compliance for people who own their own homes because people want to argue to the toss on 'fairness' over small beer money.
Face it. There are simpler, more direct and more effective interventions you could make to address housing, but they don't have the same appeal because they aren't as complex. Hell, you could even offer a zero percent RWT threshold for passive income under $50K if you wanted to really wanted to make life easier for those who don't own homes and rely on cash savings or passive earnings. But like I say, it's not about solving the problem, it's about solving it in the sexiest way possible.
E: ugh, mindless clicking and accidental reporting, my bad.
Is the right answer to go in this direction, by increasing the tax burden of owning a home to even things out? I absolutely understand what you're getting at regarding the unfairness of it. I want everyone to be able to afford a home and the tax burden to be equal. I'd rather go in the other direction though.
I live in a provincial town. House prices have gone up in the last two years by more than my combined take home pay for those two years, and I earn a good salary (well into the top tax bracket). Forget not spending money on coffees, even if I'd spent the last two years living in a box on the side of the road and eating nothing but fresh air, I'd still be worse off. I've already moved to the cheapest city in the country where it is possible to do my job.
Better to spend time finding & defining the right question.
Example.
Answer: tax
Question: ? (Everything) ?
Since wealth is the only thing that can cure poverty, you might think that the left would be as obsessed with the creation of wealth as they are with the redistribution of wealth. But you would be wrong.
T Sowell.
Labour proposes to increase taxes and the far left still screech like banshees.
They will never stop screeching until we have all been taxed so much that we are all equally poor, regardless of how hard you work. Taxed when you earn the money used to buy the asset, then ongoing tax/rent to the government to simply own the asset, then tax on any income you earn from the asset, then CGT on any capital gain when you sell the asset.
We already have lower tax rates for Iwi owned businesses, it's not much of a stretch.
https://www.ird.govt.nz/roles/maori-authorities
The sins were those of the Crown which still exists and to this day still benefits from those sins. But feel free to ignore reality.
https://www.stuff.co.nz/national/104100739/treaty-of-waitangi-what-was-…
No political party thinks beyond election - narrow thinking and JA leader of Labour is no exception now that has tasted power.
This change in tax is just .....less said the better.
As was reading earlier that if not interested in CGT why not impliment BLT by making it mandatory for all sellers to sign a form declaring if they own any other property either individullay or in joint name or under trust / company.
No intent by any government to curb speculation.
No political party thinks beyond election
The lack of strategic leadership from our politicians has more to do with their voters not being patient enough to wait for strategies to gradually pan out in their due course. There is too much NIMBYism clouding our political judgement for any political faction to lead us down a gradual but sustainable change.
NZ National has campaigned on no tax increases, instant asset write-offs up to $150k, more funding for core services, larger infrastructure spending, adjusting tax brackets for inflationary increases, and with all this, they are also targeting bringing crown debt levels back below 20%.
Am I missing something here? How does all that work simultaneously?
Someone call Steven Joyce, I think we have a multi-billion dollar fiscal hole to dig into!
This government have been so disappointing. Mediocre in their 'vision' as well as their execution.
Did they think about bringing in the 39% at say 130k?
That would generate circa $1.5 - $2 billion revenue per annum.
Politically sustainable in my view if a credible plan is presented as to what will be done with the revenue in terms of education and health investment.
If it kicked in at 130k, anyone earning 130-150k wouldn't be much worse off. I don't think it would hit them significantly in terms of the electorate, especially if they made the first 10k to 20k tax free.
Really underwhelming.
There-in lies the problem. After you allow for transfers, these people are the ones who are actually paying a huge chunk of net income tax. People who earn far less, however, can horse-trade in real estate all they like without paying tax on their gains on purchases older than five years. If I were a salary and wage earner caught up by your proposal, I'd be pretty miffed about that.
Making the first 10k tax free would cost the taxman upwards of $2.2 billion a year. Roughly 1.55m taxpayers earning above 10k a year would each pay $1,050 less, amounting to 1.63b plus another 600m from those who earn up to $10k. (data from IRD's 2019 info release).
That's fundamentally the issue with our tax system: our government is highly dependent on PAYE and GST; low and middle-income earners pay a much larger proportion of their earnings towards these 2 taxes.
High earners have the luxury to utilise trusts to spread their income over non-earners in their families or use investment vehicles to systematically convert income into capital gains.
That's what I would do. Zero the bottom tax bracket, put that amount into compulsory kiwisaver for all. Top tax bracket kicks in at 130k. Transaction tax on all property. That might actually help solve inequality, which the left moans about constantly but never does anything about. Sick of hearing about it. Just fix it and move on ffs.
I am not sure even $2b more money would make any dent in education, health etc. What is that we are going to do in those areas? what is the vision? what is the performance we expect? how are we going to measure it? It is only then you see how much money is needed and how and where it should be invested. Otherwise, even all that money is spent in those areas, it goes to ongoing operating costs without improving anything.
Great article and I think dispiriting is the right word.
The term 'never waste a crisis' comes to mind and it is clear that by ruling out any tax increases that is exactly what they have done.
The government's fiscal position has changed drastically due to COVID and they have had to step in.. I wont begrudge them that at all. But the question that needs to be asked is what next?
Two things I think Labour could have done is:
1, impose a COVID levy on income tax... rather than just stick the top 2% income earners indefinitely, apply it a little more broadly (say for the top 10% of tax payers) but crucially make it for a finite period.... say 5 years. Collect a meaningful amount of tax and make it clear it is to address the COVID deficits.
2, Reduce tax on savings. Aside from the fact its double taxation, it would address the skew toward property investment by making equity and interest investing more attractive.With such low interest on investments the tax loss would be tiny, but it would provide a boost to those relying on income from Term Deposits as well as allow investors to consider equities and other more productive investments rather than property.
But alas, Jacinda and Grant have boxed themselves in and have passed up the opportunity they have been presented. They are well ahead on the polls and its time to spend a little political capital.
What does Jacinda want her government to be remembered for? What is to be her legacy?
Yea....Dispiriting.
True. Grant Robertson indicated in early May that part of the government's response plan was aimed at positioning NZ as a safe zone in the future for international students looking to study overseas.
Just goes to show the length to which we will go to support our education export businesses without fixing the obvious education quality problems and post-graduation employability issues.
Let's look for solace in the fact that we're no longer pretending that the incoming students are a talented bunch choosing NZ for its quality of tertiary education.
We have too many dishonest and non-representative people in the major parties when it comes to allowing or welcoming honest and open discussion of immigration. Its place as a proxy for real economic policy makes it just another unsustainable sacred cow, alongside house prices.
Great to see some mention of the theft of the TTE system for kiwisaver (TAXED GOING INTO KIWISAVER VIA PAYE, TAXED INSIDE THE KIWISAVER FUND AND EXEMPT WHEN WITHDRAWN). The frictional costs of this are huge and robbing kiwisavers of the benefits of compounding and taxing when withdrawn. A TET or even EET would make a massive difference for retirees. Instead the tax distortion of exempt capital gains on houses continues. We need articles solely on this topic and kiwisavers educated on this theft.
Agreed. Policy announcement 1: Accommodation Supplement is scrapped. 4 billion more in to pay down debt. Rents will fall as tenants wont have the money. Policy announcement 2: All gains on houses, farms and shares are subject to CGT. Rollover relief if sale is going into another property. CPI indexing so not taxing inflation.
Some New Zealanders have an utterly irrational attitude to taxation. Everything in life has a price, and the price of living in a modern nation is contributing financially towards its operation. We all benefit from community assets such as health and education, roads and other infrastructure so it is only fair that we should contribute our share towards maintaining and developing these community assets. I have no patience with the “taxation is theft” argument - it is little more than cheap sophistry justifying blatant selfishness. We are currently doing better than most countries in handling the Covid crisis, and this is due to a collective effort, led by a government using its financial muscle backed by their legal authority to tax to pay for the management of the crisis. There is a future debt to be paid, and it is only fair that current beneficiaries of this collective effort help in the future to pay for the cost of dealing with it. We as citizens of New Zealand have the right to benefit from how we are being protected from this insidious virus, but we also have a concomitant responsibility to pay for it as well.
To be fair.. you have kind of missed the point. Noone disputes "a future debt to be paid, and it is only fair that current beneficiaries of this collective effort help in the future to pay".. but in what proportion?
Given we all benefit equally from the collective effort re Covid should we not levy all NZers $100 each to equate to the $500m that Robertson suggests will be achieved by the 39c tax rate. Have the top 2% of earners benefitted more from the COVID effort of the country?
I agree with you that the 'taxation is theft' argument is not helpful... but what taxation does introduce is distortion. As I have suggested above, the government is missing an opportunity to address some of these distortions.
Never waste a crisis..... They have been presented with a great opportunity to address many of their tax revenue (and expenditure) issues but seemingly ignored previous advice about the effectiveness of the 39c and just delivered very very little
Despite what the Right says and thinks, the Left have done nothing radical in NZ, USA or UK since 1974.
Been tacking Right all the time.
They are always a disappointment to their supporters.
Only consolation for supporters is National is even further to Right.
Labour constantly worried about the section of electorate that sits 35% above the bottom third and who they know do not like labour giving money to bottom third, who are perceived as lazy and a burden. Top third do not are because they have far more options for avoiding tax.
Wrong .
Plenty of people are not tax-resident in NZ but can and do vote ( you only need to set foot in NZ once in a three years to be able to vote) . A disproportionate number of those people vote Green/Lab - for higher taxes and spending , at no cost to them.
That is a major issue with NZ electoral system - representation without taxation.
Never mind worrying about tax on income - soon there will be nothing left to tax . In a report prepared for Ecan in 2017 on the social and economic impact of an 80% reduction in nitrate N loss in the Selwyn Te Waihora catchment, the report's authors concluded that " ( the proposed action) is expected to result in a reduction in operating surplus returns from the catchment in excess of 80% from $348m to $45m per annum"
David Parker's Water reforms are predicated on the proposition that "... in a healthy freshwater ecosystem all five biophysical components are suitable to sustain the indigenous aquatic life expected in the absence of human disturbance or alteration... " . As modern living and farming are considered to be the sources of nitrate N in our water ways this suggests that Mr Parker would like to see the removal of the other 20% as well, irrespective of its effect on local economies. Sources- Selwyn Te Waihora Memorandum by Simon Harris and Tim Davie, June 2017 and NPS Freshwater 2020 Appendix 1A
Really all that tells us is that intensification of the catchment under the CPW irrigation scheme should never have got underway in the first place;
https://www.rnz.co.nz/programmes/water-fools/story/201840731/water-fool…
And there was an entire ECan council who got fired because they knew that and opposed the irrigation scheme.
Water fools for sure, led by none other than JK who fire the elected members.
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