Andrea Black is a tax commentator - letstalkabouttaxnz.com - and former Independent Advisor to the Tax Working Group - who has been exploring current tax policy issues and more recently what tax fairness could look like in a world without a capital gains tax.
In a previous post she explored what policies she would support if she were ever elected as leader of a tax party. In this post she explored how any youth wing might look at things
Kia ora koutou
Andrea has handed over to us on the youth wing of the Andrea Tax Party for this week’s blog post so we can set out our views on tax.
What she proposed is ok but we can’t help feeling it was more than a little influenced by her Gen X, neoliberal, tax free capital gain and imputed rent earning privilege. A bit like the recent Budget – more foundational than transformational.
But we have also worked out that – by definition – any capital gains tax that applied from a valuation day or worse still grandparenting would have hit any gains our generation would have earned rather than the gains that have arisen to date.
And don’t get us started about the exemption for a family home. The only members of our generation who will buy a house – with exorbitant mortgages – are those whose parents can help financially. Again more revealed Gen X privilege.
So we aren’t super sad it is off the table.
TOP are still promoting an alternative minimum tax and CPAG want to tax a risk free return on residential property. Both reasonable and we may yet move over to them but it the meantime we are seeing if we can do better.
This is what we are thinking:
Land tax on holdings over $500,000. Limited targeted exemptions.
This was a proposal under National’s tax working group (see page 50) in 2009/10 that was also then ignored by the Government at the time.
The deal is that there would be a tax on the value of land. That’s pretty much it. There could be exemptions for conservation land, maybe land locked up for ecological services and Maori freehold land.
The last one might be controversial but we are completely over the race baiting that goes on anytime different treatment for Maori assets comes up. Settlement assets were a fraction of that taken by the Crown and until such time as Maori indicators – not the least the prison population – gets anywhere near non-Maori, we are open to different treatment to improve outcomes.
As this tax is certain what tends to happen is that the price of land falls by an NPV of the tax. The effect therefore is the same as a one off tax on existing landowners. And to be honest – we’d be open to that. Seems much lower compliance cost something Andrea and her friends get so excited about.
Now we know there is an argument that because of the effect on existing land owners – this is unfair.
However to a generation locked out of land ownership in any form due to the high prices – we are deeply underwhelmed by that argument. It was equally unfair that existing owners got the unearned gains over the last 10 years or so. And yes they might not be the same people who are affected – but again – underwhelmed.
So all holdings of land over $500,000 – other than those mentioned above – will be subject to a land tax. And honestly maybe we have the threshold too low.
GST – no change
This one causes us pain.
We really want to drop the rate as poor people spend so such more of their income than rich people. But rich people who might be living off tax free capital gains still have to buy food – and they spend more on food than poor people. So a cut in GST is – in absolute terms – a greater tax cut for the rich.
However the prevailing wisdom that increases in GST don’t matter if you increase benefits is also BS. This is for a couple of reasons:
Benefits – until this Budget kicks in – are increased by CPI but low income households have higher inflation than high income households.
Benefit increases do not survive National Governments. The associated rise in benefits from the GST introduction were unwound by the benefit cuts in 1992 and more recently benefits were eroded through changes to the administration by WINZ.
And even Andrea witnessed the changed behaviour of WINZ as she was in receipt of the Child Disability Allowance from 2007 to 2012. She went from having a super helpful empathetic case manager to having the allowance stopped when they lost her paperwork.
If anyone wants to argue instead that the last government increased benefits – bring it on – because if that is how Andrea was treated by them just imagine how WINZ behaved to people who weren’t senior public servants.
So we are recommending no change here unless there was some way of making it progressive.
Inheritance tax on all estates over $500,000
Andrea might be fixated with taxing people when they are alive but all this means is that the huge untaxed gains that have been earned get to be passed on to the next generation. And yes that might be some of us but anything to reduce the wealth inequality in New Zealand has to be considered.
We take Andrea’s point about this also applying to death of settlors (and maybe beneficiaries) but all estates over $500,000 will be taxed at the GST rate as it is inherently deferred consumption.
Make the personal tax scale more progressive
When Andrea started work in 1985 – as an almost grad – she earned $15,000 and paid $5,000 of that in tax. That is an average tax rate of 33% and probably a marginal tax rate of something like 45%.
She had no student loan because University was free. In fact she also got a bursary of about $700 three times a year. There was no GST.
Grads in 2019 start on about $50,000. Income tax is about $9,000. This is an average tax rate of about 18% and a marginal tax rate of 30%. Student loan repayments are 12% and GST is probably about 10% allowing for rent and savings. This gives a marginal tax rate of 52% which will then climb to 55% if they ever get a well paying job. So 10% higher tax than 1985 on pretty middling incomes.
We get that including student loans might upset Andrea’s tax friends but we are also guessing none of those people have 12% of their earnings going to Inland Revenue every pay day.
Team if it looks like a duck and quakes like a duck….
In fairness we also know her father in 1985 had a marginal tax rate of 66% although he got deductions for life insurance and ‘work related’ expenses. Now parents top out at 33% plus say 10% for GST – 43%.
We guess then parents should pay more but 1) not everyone has middle class parents 2) declining labour share of GDP and the ones who can are already helping us and that is a recipe for entrenched privilege.
So our policy proposal is:
1) Make the changes Andrea suggests to stop all the tax avoidance and tax evasion.
2) Extend the bottom tax rate of 10.5% to $40,000
3) Increase the next tax rate to 25% from $40,000 to $70,000
4) Bring in a new threshold of 40% at $100,000
Or something like that.
The bottom threshold needs extending to include anyone who can still receive any sort of welfare benefit while also earning income. That reduction in tax then needs to be clawed back for higher earners and really high earners just need to pay more.
Emissions trading scheme
And please if there isn’t going to be any sensible carbon tax or any environmental taxes could we at least put a proper price on carbon in the Emissions Trading Scheme.
It is only human life on this planet we are talking about.
We think that is it for us. Andrea and her Gen X biases will be back next week.
Ngā mihi
Young friends of Andrea
This article is a re-post from here. It is used with permission.
32 Comments
Yes, as I assume you to mean, that they will grow up one day to learn the value to the individual of tax avoidance - and subsequently, the need to hire specialist tax advisers/accountants to implement the most beneficial structure of their affairs in order to make such avoidance beneficial to them and the least beneficial to society as a whole.
you assume completely wrong - as usual I might add.
They will grow up to understand the value of incentives , the importance or respecting property rights and the perils of confiscation , outright to or gradual. The will also grow up to understand that details and facts actually matter and that appearance of simplicity is just that -false appearance.
With reference to no tax on Maori land "" until such time as Maori indicators – not the least the prison population – gets anywhere near non-Maori, we are open to different treatment to improve outcomes.""
Well there are some PI groups who have very similar deprivation indicators as Maori so should they have tax exemption or is the author being racist? My own children are Pasifica so when I die and they inherit would our land be taxed? I am probably unusual but my three best known Maori acquaintances are all multi-millionaires.
Where the author is wrong is to call it "Maori Freehold land". It is 'sharehold' not freehold - no Maori can use their communally owned land as collateral for bank loans and that is why is should be exempt from proposed new land taxes.
The idea of linking tax inversely to incarceration rates is weird. It would have recent Asian immigrants and all women paying more tax than pale males like myself.
You are right I misspoke. I meant land registered under the Te Ture Whenua Māori Land Act 1993 only one type of land covered is Māori Freehold Land. https://www.maorilandcourt.govt.nz/your-maori-land/ . The exemption was in reference to a land tax which would apply to land recovered under settlements - settlements which were only a fraction of the original land taken. If similar situations apply any other group, my young friends would be open to considering it.
Do you have any evidence that prison is more probable for Maoris living on land registered under the Te Ture Whenua Māori Land Act 1993 than Maori's living in Auckland on normal freehold and leasehold? Why bring prison incarceration rates into a matter of tax? Are you aware that men such as myself are 10 times more likely to be in prison than women like you? Should it affect our tax rates?
Tax is tax. Social issues are important. Getting them muddled doesn't help either. For example I know two people living in North Shore, one has Maori blood, knows his iwi etc but refuses to tell his daughter and the other is South Africa born but tells everyone he is a Maori. Do you think the IRD should be issued with DNA kits?
Every prisoner suffers and so does his/her family and friends. I too think NZ incarceration rates are far too high. Every time I read it as being a specific Maori problem which as you say is very frequently in magazines, newspapers and blogs I find the authors are either asserting systematic racism by our law courts and/or paternalistically wanting Maori culture to be just like pakeha culture. I am receptive to solutions proposed by Maori themselves.
I understood her to say Maori were disadvantaged by the the rampant theft of their land by the Crown which has resulted in disproportionate negative social indicators e.g. percentages of prison population. Therefore, Maori land would be exempt from land taxes to recognise robbing a people twice is probably a bit over the top. As for non-Maori land, "welcome to the party", I find the social justice behind such an approach refreshing.
According to internet the NZ median wage was $49k in 2016. So putting $40k at 10.5% tax would be an immense reduction in tax receipts for the govt. There are always many more poor and middling earners than there are high earners. My proposal:
0% to $10k
20% from $10k to $30k
25% from $30k to $50k
30% from $50k to $80k
35% from $80k to $120k
40% from $120 up
Adjust the ranges to raise the same amount ot tax but keep the numbers simple and the steps small. And as Kate says "No specialist skills needed to interface with the tax regime."
The idea behind extending the bottom threshold and then raising the second threshold rate was to 1) Stop the secondary tax or need for a tailored tax rate but then 2) claw it back for higher incomes. The numbers are just indicative and work in conjunction with increased taxes elsewhere.
Your proposal also has merit but I still think there is something in the idea of extending the bottom threshold but clawing it back for higher earners. But yes it does require additional revenue to make up the difference for lower earners.
Tax naivete, I'm afraid. Unless the tax rates for personal. company, trust etc are within a percent or two of each other, the incentive to simply shift to a lower-taxed organisational form is overwhelming. Recent history bears this out: the 39% personal rate, when company and trust tax was 33% (IIRC, cannot be arsed looking it up) caused a distinct shift to - quelle surprise - companies and trusts as loci for economic activity......
At least the authors are not thinking of diddling with GST rates, possibly for the reasons I've outlined......thank Gaia for small mercies.
I would rather see business tax rates lower than typical income tax rates - persuade small businesses to invest in their business - that will boost NZ productivity and retain earning in our country rather than on foreign holidays. Low business tax rates make sense - sense for keeping our businesses in NZ - sense to persuade foreigners to invest in NZ instead of other countries. See Ireland as an example. I assume we should leave trusts as high tax.
That’s what we have now and we also have climbing overdrawn current accounts for closely held companies which would indicate that the money is being used for personal consumption rather than investment in the business.
Foreign direct investment is more complicated as the allowable debt levels are as relevant as the company tax rate.
But I agree trusts should be taxed the same as top personal rate.
My tax rate is 19.5% and I have a small company which has a much higher tax rate so every year all company profits are paid to me as earnings.
I am concerned about NZ companies moving overseas when they are successful; NZ needs some non-agricultural export businesses.
Wouldn't it be easy for the IRD to insist that current accounts cannot be overdrawn? You have to declare them when you do a tax return.
I agree about thresholds for land tax (I was hit by it myself once purely by accident - from memory the difference between owning more or less than 4000sm in a single section).
Are there issues about land value also being easy to create loopholes and the Auckland Unitary plan has different building rights for different pieces of land. I could build 2 houses on my property but the same site about 500m up the road is zoned for 6 properties on the same small section.
Is it a matter of valuing land annually or only when it changes ownership?
It's an aggravating issue being a good idea that is hampered by details - maybe easiest to just nationalise all urban land - isn't that what Singapore does?
Interesting idea nationalising all urban land - is that what Singapore does? I'd be quite nonplussed if all I owned was the house on which the section I live on sits. Point is there is very little value-add (aside from building/infrastructure) that one can do to a 1000m2 or less residential plot of land. Hence, why should I profit from the capital gained from doing nothing, aside from having occupied/enjoyed the use of it while living in the built infrastructure upon which it lies?
The tax of the technological future is a financial transactions tax, and as earnings become more precarious, the consideration of a UBI will again raise its head, so taxation of robotics etc or even the question of who should own them, will be issues of the future.
FTT would have to be applied simultaneously, across all jurisdictions, at the same rate. Otherwise, the result would be the instantaneous transfer of all FT to the lowest-taxed jurisdiction. Instantaneous, because FT are electronic and move at close to the speed of light.......
Probability estimate?
Zip, zilch, nada, zero.....
That will happen eventually, and as for transferring wealth to other jurisdictions, already happening, although the Chinese seem to have found a way to stop it.
It will happen eventually because there will be no other way to tax the likes of giant corporations who are having more and more input into the economy but paying nowhere their fair share of tax. No wonder we have to rely on the ponzi scheme of rapid population increase to give an illusion of economic growth, I think even you know that cannot go on forever.
As an older person, I am really encouraged by this thread, particularly as the Tax Working Report almost completely ignored the way NZ's tax system, more than the tax systems of many other countries, is systematically biased against young people. This is not surprising, as the TWG was dominated by older people who were determined to ignore the major differences between New Zealand's tax system and those of most OECD countries, particularly surrounding the taxes associated with New Zealand anti-youth retirement income policies. In terms of its discussion of intergenerational economics, it was an intellectual travesty, systematically ignoring the work of the Nobel prize winning economists Samuelson, Phelps, and Diamond. Apparently the members of the group were so concerned about intra-generational equity that they were prepared to ignore intergenerational issues - as their report shows.
Mainstream economics has established that an intergenerationally fair tax system can be implemented using land taxes - especially on urban rather than rural land - and by adopting a save-as-you-go funded retirement income system. If young people adopted a system of individual retirement accounts, or demanded that New Zealand Superannuation was prefunded to a much greater extent, they would save themselves tens of thousands of dollar each. (Incidentally survey evidence suggests a majority of people of all ages would be prepared to accept a 2 percentage point increase in taxes now if it was able to reduce taxes on the next generation by 2 percentage points, showing that such a policy might not be unpopular. And yes, the technology exists to converty a temporary increasy in taxes on my generation into a permanent decrease in taxes on future generations.) Reforming the taxation of retirement savings would also reduce the extent NZ's tax system, unusually in the OECD, provides large incentives to over-invest in large houses. The theoretical basis for these propostions has been around for decades, and ignored by people like Sir Michael Cullen for just as long. It is time young people woke up, studied orthodox tax theory, and realised how much New Zealand has adopted a tax (and retirement income) system systematically biased against them.
Or at least that is what I teach students at Otago University....
Andrew_Coleman,
I am no expert on tax theory,but when you cite 'mainstream economics' and those such as Samuelson in support of your argument,I become very wary indeed,given that much of orthodox economics is total bs.
As an example,i have recently done a short course(a MOOC) on the Fundamentals of Finance from a UK university. I do these just for fun,as I am long retired from that world. I was amazed that a significant part of the course was taken up with the Capital Asset Pricing Model(CAPM) which was discredited well over 20 years ago. By whom you ask? None other than Eugene Fama,the high priest of the EMH and that's another story.
What about Paul Samuelson,a major figure in 20th Cent. economics. It would be fair to say that he was largely responsible for pushing economics down the path of becoming a rigorously mathematical based discipline. As Hayek later put it; "physics as the science of economics to imitate". Of course,economics was and remains a social science,but much damage has been done by the pretense that it something else. It led,amongst other things,to the utterly absurd Arrow-Debreau theorem.This fantasy-for which they too received the Nobel prize-assumes forward markets for every commodity and every contingent market for every time period in all places. Do you teach this too?
One of the things economics is useful for, even if some of it is bs, is to expose Cowdung, the conventional wisdom of the dominant group. Mathematical economics can be boring, and appear useless, but most of it is trying to gain insights into processes that have very complicated feedback loops. The Arrow-Debreu model assumes that there are forward markets in all commodities in all time periods not because this is a realistic description of the real world, but because it is a useful counterfactual to help understand what happens when these markets don't exist. This is relatively similar to what happens when a physicist assumes there is no friction and tries to work out how far a projectile will travel (or how quickly a stone will fall from a bridge) when there is no friction: it provides insight into how friction actually works. Economists don't always explain this very well, and like all groups they from time to time become obsessed with the tools they create rather and forget to apply the tools to real problems, but it is not a great reason to dispose of the insights from mathematical models. Arrow went on to found real option theory on the basis of some of these insights, and the models were instrumental in working out how options can properly be priced. I certainly have sympathies with your criticisisms of the CAPM model, and Fama's insights as to why it doesn't work - but in turn this led to significant insights about the way firms respond differently to liquidity shocks and fundamanetal investment shocks, and how this reduces investment.
Samuelson has some truly stunning insights into taxes and intergenerational economics. He proposed a theory of public goods and when it is appropriate to raise taxes to provide public goods (a lesson successive NZ governments seem to have ignored, given the substandard transport infrastructure New Zealanders endure); he proposed a theory of the circumstances under which it is appropriate to have capital gains taxes (which the Tax Working Group ignored when they came up with a rubbish capital gains tax proposal); and, along with Diamond, he derived the conditions under which a pay-as-you-go retirment income scheme imposes large costs on young people and future generations (conditions that appear to apply in NZ; hence my oft-stated comments that NZ has a retirement income system that is systematically biased against the young. Many of his insights are best understood using mathematics, but that does not mean they can't be explained in plain language. The real tragedy is the determination of our politicians to ignore them and continue with policies that favour older people at the expense of younger people. Andrew
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