The new UK Labour Government delivered a tough first budget this week featuring hefty tax hikes intended to fund healthcare, education, and infrastructure spending.
While the party ruled out increasing taxes “on working people” during the campaign, it has increased businesses' social security contributions, tightened rules around inheritance tax, and lifted the capital gains rates to 18% and 24%.
Together these changes are the largest tax increase since 1993 and are expected to bring in roughly £40 billion, bringing the overall tax take to a historic 38.2% of economic output.
And yet, the United Kingdom isn’t alone in this. Data collected by the Financial Times shows taxes are at all time highs in many countries: the United States, Japan, Australia, you name it.
The thing about "the UK’s tax burden is now at a record high", is that this is also true for almost all countries 📈 pic.twitter.com/Is40bLZOdt
— John Burn-Murdoch (@jburnmurdoch) October 30, 2024
The likely reason for this is that the entire developed world has an ageing population which has been driving up governments’ healthcare bills — which is often a country’s largest single cost.
Simon Wren-Lewis, a professor of economics at Oxford University, wrote in a blogpost that health spending had been trending upwards in all major economies since 1970.
Longer life expectancies and advances in medicine—as well as lower birth rates—had contributed to this increase and almost guaranteed tax increases.
“If health spending is mainly paid for through taxes, then unless some other large item of government spending is trending in the opposite direction, taxes are bound to be at historic highs,” he wrote.
“I have heard journalists in the media say that UK taxes are at record levels countless times, but I have never heard them also say, but of course this reflects the steady increase in health spending as a share of GDP”.
Most highest taxes
Interestingly, New Zealand was not on the list of nations with a record tax burden. While the tax take has increased from 26% in 2014 to 29% today, it remains lower than it was in the 1980s and the late 2000s.
It doesn’t feel that way to everyone. Certainly not to the taxpayer who sent an official information request to the Treasury in September with the subject line: Paying High Tax.
“Can you please advise why is the average New Zealander paying the most highest tax in the world? It may be an idea just to add Breathing Tax to the list of everything else that is taxed,” they asked.
“My OIA request is not for the above, it’s just a kick in the guts statement, my request is for everything that has been taxed where has this money been spent and the reason why…”
The Treasury responded with links to financial documents showing where every dollar was or will be spent, but it could have pointed out that Kiwis pay relatively low taxes.
In 2022, NZ was already ranked 22nd out of 28 OECD countries with a below average tax take, and the Coalition Government has since cut taxes by about $3.7 billion annually.
But the country isn't immune to rising healthcare costs and is also on the hook for a universal superannuation programme which eats up about 13% of all spending.
Catching costs
Healthcare suffers from Baumol’s cost disease, a concept that explains why labour intensive services keep getting more expensive, even if the quality doesn’t improve.
This happens because wages in fields like healthcare have to rise to keep up with other industries, even though it’s hard to speed up tasks like patient care without losing quality.
Pensions are also indexed to wages, so even if a clever government successfully lifts productivity it still has to contend with proportionally high spending and therefore taxes.
Dominick Stephens, the chief economic advisor at the Treasury, gave a speech last month which warned even the “unprecedented” planned spending cuts would not be enough to prevent public debt levels from rising over the next few decades.
There are different views on whether allowing debt levels to climb would be tolerable or even desirable, but the Treasury's position is that net debt should be kept below 30% of output.
It is currently comfortably below this ceiling—despite the Covid crisis—at about 21% and is forecast to peak at 24% in 2026 after a few tight budgets.
Stephens said managing health spending was key to overcoming the long-term fiscal challenges as it was “a large and growing part of total government spending”.
Some savings could be made from reducing inefficiencies and doing more preventative initiatives but “substantive savings” would require “tough choices around entitlements”.
This is a polite way of suggesting some people would need to pay for more healthcare services out of their own pockets, instead of from taxes. This may reduce spending on health overall, if it reduces demand, or simply avoid having to sell a tax hike to voters.
The Marie Kondo method
Finance Minister Nicola Willis has said she will fund annual increases in healthcare by cutting other government spending instead of increasing taxes.
The amount of new spending in each of the next three budgets is just $2.4 billion and half of that has already been allocated to health, leaving just $1.4 billion for everything else.
In recent remarks, she reminded reporters that other policies can be funded by cancelling an existing programme or raising revenue. Although, she has ruled out any “big new taxes”.
One existing programme she sees as being ripe for reprioritization is superannuation. The National Party campaigned on raising the age of eligibility but gave it up to form a coalition with New Zealand First.
Willis recently said, while wearing her party spokesperson hat, the burden of superannuation would become proportionally much bigger in the future and would need to be addressed.
She would find support for that policy in a coalition with just the Act Party. It recently raised the idea of increasing the pension age to fund a boost in defence spending.
In its weekly newsletter, the party said each taxpayer would need to stump up an extra $1000 a year to raise enough money to hit the 2% target for defence spending.
It could do so by increasing the bottom income tax rate from 10.5% to 17.5%, or by raising the pension age to 67 over the next eight years.
There is little doubt that National and Act would look at some kind of pension reform if reelected without NZ First, staving off the need for tax increases.
Capital switch
On the opposition benches, the Labour Party doesn’t like the idea of raising the pension age or making healthcare less universal — and so, it has to look at tax increases.
It has promised to put in place a new tax which captures income earned from capital, and is expected to land on a specific policy at its conference at the end of this month.
A wealth tax proposal drafted while Labour was in government was structured as a tax switch which wouldn’t increase overall revenue. But Barbara Edmonds, the party’s finance spokesperson, isn’t sure if that will remain the case with a new proposal.
“It is politically more palatable to do it as a tax switch … but again with those [fiscal] challenges coming ahead, we need to have a discussion about whether that’s actually possible,” she told RNZ.
As the population ages, voters will have to decide whether they want to pay more taxes to fund existing healthcare and pension policies — or if they would rather cut entitlements.
Which would you choose?
154 Comments
"The entire developed world has an ageing population" with "Longer life expectancies and advances in medicine—as well as lower birth rates"
Spot on. And when New Zealand FINALLY gets around to addressing the inevitable similar costs, luckily we have an as yet untapped source of revenue to fund them with:
"tightened rules around inheritance tax, and lifted the capital gains rates to 18% and 24%"
Those who refuse to see what's coming will pay the biggest slice of those costs.
Health care for everyone must be free, accessible, timely, and comprehensive.
And NZ Superannuation, already not enough for a renter to survive on, must remain universal from the age of 65 and needs to be increased: the net rate for a couple to the higher of 100% of the net after-tax median income or 80% of the after-tax average income. That, to help pay for it, would require the simultaneous imposition of a surtax on all other income of those signed up for Super.
So yes, other revenue sources must be found. They will include land tax, capital gains tax, wealth tax, inheritance tax (and therefore necessarily gift tax); and all of those will require the busting open of family trusts, closely held companies, and all the other tricks for hiding wealth and evading tax.
Perhaps it's time for a universal medicare levy, a hypothecated tax, to pay for health services and render all private medical insurance redundant except for overseas travel, pet insurance, and cosmetic nice-to-haves.
And perhaps, looking forward 20 years, KiwiSaver needs to be revamped now along the lines Andrew Coleman has suggested: a compulsory savings scheme to fund the first decade of 'retirement' from 65 till 75, with a guaranteed state top-up for those unable to save enough.
A surcharge along the lines of the one in force till 1998 would deal fairly well with that, while keeping entitlement to NZ Super universal.
https://www.auckland.ac.nz/assets/business/about/our-research/research-…
“And stop paying super to those still working on high incomes” This is crazy.
If you are over 65 and on a high wage you obviously have an essential skill that is valued within our economy. We want to encourage these people to keep working.
Plus the added bonus of paying for their own super via their taxes.
Yep. Punishing people for working sounds like something from a 70s era union hack. You just know when people talk like they are a few cans short of a six pack. Of course people should be encouraged to work as long as they can. It’s a win win for every one, and they collect their super too (which of course as you say they are self funding via their I don’t taxes from continued work).
Well given that Super is a benefit ....funded by today's taxpayers and paid to today's beneficiaries. I guess you could abate the same way as all the other benefits. Anything over about $200/week (I forget the actual number) and your benefit gets knocked back $ for $. I can hear the screams already.
I am 78 and have a pretty good income. Paying me a pension is nonsense, but I take it anyway. What I do with it my own business. If the pension became income tested and I didn't get it any more, I wouldn't grumble.
Oh and as far as "I have paid into this for umpty years ..." - you haven't - there is no "Pension Fund" with your name on it. The tax paid went to fund your parents' pensions.
Thanks you for a down to earth perspective. It is tiresome for current workers getting lumped with the need for increased tax and costs to fund current pensions for those not in need, and ever rising health costs also. People don't mind paying their tax for the greater good, however the thought of paying more and more to fund the population bulge getting to their later years, and then the potential of not having the same benefits afforded to them later in their own lives is unpalatable to say the least. Yes for some they will inherit wealth form their parents and this, for them, may mitigate the above, however for the majority it won't be the case and change is needed. Personally I'd like to see higher tax for those such as yourself still working and on a good income or means tested super, as there are many elderly who need a pension to survive and currently it isn't enough to go on in many parts of the country. Should means testing come in and I have sufficient wealth when I reach retirement age, and I not qualify, so be it, as this simply indicates that I've planned long term for it well, and prepared myself to live more comfortably in the later years, and the secondary benefit of my planning is that someone who really needs it can have a basic standard of living.
"The NZ Herald & Radio NZ Misled the Nation by asserting "65% of Kiwis Support Capital Gains Tax". The survey they used shows around 90% oppose it."
https://www.downtoearth.kiwi/post/the-nz-herald-radio-nz-misled-the-nat…
The other side of the deal of higher taxes is an assurance of probity in the public service to give value for money collected: the notion of spending public money as carefully as your own hasn't been noticeable for some time.
The practice of health actually needs to be a little inefficient to make it effective, and that is actually OK: I'm sure I'd not want a highly efficient GP who has the bedside manner of a robot.
However: what of the management class within health, and the government activities that invariably run over budget and time, and miss specifications? I'd cite pretty well anything involved with infrastructure management, for a start.
And without a drive to improve or poor productivity, higher taxes are a bit like bailing a boat when the bungs are out: delaying the inevitable and everyone just ends up too exhausted to swim.
Efficiency in healthcare is an interesting one. I see that the Treasury is upset that efficiency has fallen because there are fewer cases per FTE. Meanwhile the budget has blown up partly because of unexpectedly high nurse recruitment.
Go back a year or so and the nurses pay negotiations agreed to higher nurse numbers because of unsafe staffing levels, and the government agreed...
So do we want efficiency, or safe staffing levels? The two are in conflict. Of course there could be ways of working smarter to square the circle, but I see absolutely no sign of this from there current government or management. Huge cuts in the data and digital staff who would need to facilitate technical changes.
If you run the health system like a business, then where are the incentives to cure / fix the patient at the first available opportunity and keep them out of the health system for as long as possible?
And I've pointed out before, that measuring productivity in the health system is the wrong measurement. Want high productivity? Have large wait lists so that all staff and beds are 100% utilised. As you point out, it's a complete conflict with patient wellness.
Wealthy, and threatened by increased taxes? No worries, just transfer your investments to the Bahamas (or Vanuatu, Brunai, Bahrain, the list goes on) and buy yourself a golden visa to live in one of many countries that doesn't tax people on their overseas income (or how about an Elite Visa for Thailand?).
Et voila, no tax at all!
Disclaimer: I'm no accountant, so this particular approach may be flawed, but the point is that it's very easy for the wealthy to escape punitive taxes. As is underway in the UK:
https://www.cnbc.com/2024/06/18/millionaires-are-abandoning-the-uk-in-t…
The land doesn't disappear, but it will be worth a hell of a lot less (and get you less land tax revenue as a result).
So, either the land taxes increase ad infinitum, or the value of land has to be kept high by means of artificial strangulation.
In other words, the same problems we have now, but we make government revenues contingent on perpetuating a problem they don't see to know how to fix?
Gee, I wonder what will happen.
I think the most effective way to structure it would be similar setup to how rates are managed. The government would set a budget and then collect a fixed amount from properties based on their comparative values. Ideally they would start with a low rate then gradually bring it in to reduce the tax burden on income earners whilst giving people and the market time to plan.
An approach like that would prevent revenue from fluctuating wildly with each new valuation, providing a more stable and predictable income stream for the government and allowing people to plan their finances more reliably.
I think to really get on board with a land tax, I'd need to know how it handles the urban development issue. Under most current plans I see pitched, a single rate is used nation-wide, so those living in rural backwaters get the biggest benefit from the associated tax relief on income taxes with no consumate rise in land tax obligations, while those in cities (we only really have three, let's be honest) would not get the same benefit - even though it's in theory far more efficient to cluster populations for service delivery.
I've not heard a good solution for it, but it's a real issue in places like Auckland where a LGV can be 80% land.
If those in urban centers feel hard done by, there is nothing to stop them selling land to each other for cents in the dollar and driving down land tax due relative to other areas. You know how it is handled, I've offered this solution to you previously, but it seems you just want to hold onto high land values and not pay high land tax.
If you don't think that is fair, no one is stopping you moving to a place that is getting a 'free ride' - oh, but the back water location isn't to your liking - maybe it's time to pay up for getting to live in the premium location?
This is the frustrating thing about a universal land tax, it's difficult to game in your favour!
So in other words, those in the city take a hiding either through cash outflows or negative equity? Can you understand why this isn't exactly the deal of the century?
I am happy to take a land tax but the outcome can't be financial ruin for the generation that had to stretch much harder for things like home ownership; given we have already been collateral damage when it comes to retirement saving, debt and now with people clamouring to trash the value of the only real asset some of us will ever own outright that isn't a car, the hand-waving of this as a criticism is pretty hard to just overlook.
I mean, any tax policy is great if you can just dismiss the negative outcomes as acceptable collateral damage.
So in other words, those in the city take a hiding either through cash outflows or negative equity?
Absolutely not, even if you've rejected the option suggested of moving/selling to save on land tax. The amount of the land tax in dollar terms for most (and we're talking circa 80% of the population here based on TOP's numbers) is negligible or negative due to less income tax to pay. Half of Auckland rents, they don't have to pay any land tax and will get an income tax cut or UBI equivalent - so no hiding there at all. Owner occupiers of a single house will generally win with the exception of retired whom may offset on sale of the property so no cash outflows for them, reduced equity (also goes by the name of more affordable housing for future generations). Multiple property owners and land bankers will take a hiding and to a lesser extent those on large inner-city plots (I'm fine with that cohort being the losers).
Can you understand why this isn't exactly the deal of the century?
It's not intended to be. It's intended to make the tax system fairer by removing some of the burden from income taxes and make housing more affordable (via reduced land prices and better utilisation) to name a few.
I am happy to take a land tax...
You're clearly not. Did you ever stop to think the reason you personally had to take on so much debt is because the system isn't working (land prices have been allowed to rise in conjunction with population growth)? You should be angry, but a land tax is a misdirection of that anger and frankly a little selfish towards your children whom, whether you realise it or not, you want to pay off your debt rather than have a fairer tax landscape to contend with in NZ.
...but the outcome can't be financial ruin for the generation that had to stretch much harder for things like home ownership;
Partial agreement. But your anger should be directed at those that meant you had to 'stretch' into maximum debt rather than those trying to fix the problem going forward. I would be in favour of assistance to stop recent FHB's from having the house sold out from under them due to negative equity only, but others suffered sooner by continuing to rent for example, so I'm talking about govt taking an equity stake in the property or something - nothing that would advantage those that bought over those still renting. You were lied to if you believed that buying was a one-way ticket to wealth, as Yvil defined for me recently, there is such a thing as mortgagee auctions.
people clamouring to trash the value of the only real asset some of us will ever own outright that isn't a car
Housing should never have been anything more than secure shelter. You're wanting it to remain financialised for your children regardless of the obvious problems that has caused yourself obtaining security of shelter (that's why my hands are waving). Owning a house should be an expense (rates, maintenance, land tax - to disincentivise accumulation of land) in my view just like renting isn't free. A car isn't an asset, it has a value but generally depreciates to zero and requires maintenance.
I mean, any tax policy is great if you can just dismiss the negative outcomes as acceptable collateral damage.
As with any rule change, some win (renters and future generations), some lose (those with large value land holdings), and some stay the same. The question is one of fairness, and our tax system hasn't been fair for decades to those that don't already own. Shelter is a need which is why I advocate for a land tax that makes that more accessible for future generations based on their own effort.
but it will be worth a hell of a lot less
Agree and regard that as a 'good' thing because it will take less years of saving to afford the same piece of land (ie improved housing affordability).
(and get you less land tax revenue as a result)
Disagree because I think it's possible to change tax rates. Your assumption that the land tax rate may not be changed isn't likely in my view. I would expect the rate to increase as land prices across the board fell. Note, that doesn't mean more land tax in dollars would be raised - just the rate higher.
In other words, the same problems we have now, but we make government revenues contingent on perpetuating a problem they don't see to know how to fix?
Disagree, due to your (unrealistic in my view) assumption that the land tax rate cannot be changed in conjunction with rating valuations. We might need all councils to issue new valuations in the same year so the nationwide land tax can change or just switch rates when the 'latest' valuations come out at different times for different regions. Either way, I wouldn't expect the land tax to change much from year to year for the same property. It might change if say zoning changed and therefore the value changed significantly - but even in that case the land tax is doing its job of encouraging better use based on the new zoning afforded it.
Re: Improved housing affordability - so in other words, lots of people have to lose out so some others can win.
Re: Changing tax rates - that depends if we actually change our tax rates. You'd be brave on recent evidence to go into this believing this will actually happen. I'm assuming if the LVT rate goes up because values drop people might then start to question what this actually has to do with the underlying value of the land at all.
Re: Conjunction with LGV valuations - Well it's not something that seems to come up. The only our reason our rating system works in the UAGC and that's a bone of contention in itself. Something similar might create a broad enough base for land values to handle the rest of the weighting, but flies in the face of 'it's so simple' argument that people like to put forward for land taxes.
so in other words, lots of people have to lose out so some others can win.
As I said up thread, most win with a tax switch off income tax and onto land tax. People's houses are still 100% able to be used as houses. I guess you lose the investment element, so yes, people that treat houses as investments instead of homes stand to lose.
There have been several tax rate changes in my lifetime (income, company, trust, GST). I'm basing my assumption rates may change in the future too on that history, you are welcome to hold assumption they won't change but I don't think that's reasonable.
I'm assuming if the LVT rate goes up because values drop people might then start to question what this actually has to do with the underlying value of the land at all
Great. If they're asking the question, then they are much more likely to be open to listening to the reason that land taxes help ordinary working people obtain secure shelter for themselves without going into huge amounts of debt. Understandably people that thought accumulating land and houses over and above what they personally need might decide to put spare dollars elsewhere for investment purposes - that is a feature, not a bug.
Something similar might create a broad enough base for land values to handle the rest of the weighting, but flies in the face of 'it's so simple' argument that people like to put forward for land taxes.
The test for a land tax isn't if there are some details to be ironed out, there will be. The question is whether or not it would be better to share the tax burden over income and land or just income (status quo). Other ideas like a wealth tax and CGT need to be included in the analysis although they fail the efficacy test in my view.
As for simplicity, there is none simpler and less unavoidable. Trying to bring in complexity about how land values will be decided is pointless as we already have them. Land values will adjust based on the new land tax regardless of what formula you try and invent for establishing them as sales occur anyway - so you might as well run with the land values we already have. Council valuations may be contested now and that would continue, although some might want to revalue down instead of up with a land tax!
You guys are discussing stealing other peoples money to pay for your own lack of planning and the mismanagement left behind by a hideous bunch of idiots (aka The Labour Party). It’s quite frightening how useless they were and how they wasted all of that money and drove the best and brightest overseas. You now want to tax those that can afford it and remain here to fix the problems you voted for. Fact is, you will all have to pay. Time to tighten your belts gents.
Newsflash averagejoe, all political parties waste money. As do all businesses. And all individuals. But on the whole, they get things done and make our lives better with their efforts.
You, of course, have the right to rant about how much worse the other teams was, while your team makes similar but sometimes different mistakes that'll involve just as much waste. But such rants are really quite naive and tiresome. They also say much about the ranter's maturity.
Looking forward, and encouraging the teams to play a better game, would make our society - and our institutions - function far better.
You mean tiresome like having constant fantasies about taking more of other peoples money to fund stuff ups that you actively support. That kind of tiresome. When this site becomes paid only you and your ilk will be able to prattle on about silly ideas that have no hope of seeing the light of day, much less effecting the people you seem to despise (the successful). Most people won’t pay to participate, and you will be free to discuss your ideas in your own little vacuum and vigorously agree with each other. I’m sure it will be bliss.
I had that discussion with the local Green candidate before the last election.
They asked if I thought it would lead to a brain drain: my response was that it would lead to a haemorrhage of the most enterprising and entrepreneurial. They didn't seem to get the distinction.
From the article above: "In 2022, NZ was already ranked 22nd out of 28 OECD countries with a below average tax take."
Perhaps that's because they looked at the other 21 countries and concluded your 'distinction' was unsound?
The Green candidate was far more polite than I'd have been. ;-)
I should have been clearer: the distinction I was making was not about tax levels, but that the "brainiest" are not necessarily the most enterprising and innovative.
Taxes overseas may well be higher, but the opportunities are disproportionately higher - one of the first moves here for a successful enterprise is to head overseas for capital, markets, expertise and a receptive environment.
Good question, possibly in the short-term. They wouldn't rise 'just because landlord costs have risen' if that was your thinking. Rents are set based on what the market can afford to pay.
It is conceivable rents would rise since employed tenants would get the tax break if it was done as an income tax switch. Similar to how rents rise when accommodation supplement rises. This would be countered by the land tax's ability to improve utilisation of land eg existing empty houses rented out or sold and vacant land developed or sold. Short-term, there is uncertainty about which of those factors would win out, but medium-term and long-term definitely not.
A final point, I would reduce immigration to drop rents if that was a short-term priority as it's a much faster driver of them as I witnessed in Auckland during covid border closures.
The squeeze may well be attributed to issues related to the availability of cheap energy to run our civilisation.
I remember being blown away by Vaclav Smil’s “Energy and Civilization,” which explains human beings relationship with energy use over time.
The availability of cheap energy in future would go along way to prop up much of our future needs.
The lack of cheap energy in future will degrade living standards and contribute to the cost of living crisis.
Using demographics to prop up living standards may well be an illusion.
Ah, so it's just because of increasing life expectancies and stuff. I'm so glad to hear that it doesn't have anything to do with governments' disastrous response to the covid virus (locking down the world, destroying small business, allowing inflation to run rampant for months before massively hiking interest rates, etc) and the enormous global increase in sickness, disability, and excess deaths that began (coincidentally) just after the global vaccine rollout.
https://ourworldindata.org/grapher/excess-mortality-p-scores-average-ba…
Ongoing effects from long COVID, new COVID infections, delays in healthcare and diagnosis through the pandemic, people letting themselves go during lockdown... Now we will start seeing impacts from underfunding after the recent dramatic cuts to health spending too.
I don't think it's the vaccine. Would be a very easy clinical trial to run to prove an adverse impact.
Try adding the UK and US into the picture and have a think about whether those big spikes correlate best with COVID, or the vaccine.
https://ourworldindata.org/grapher/excess-mortality-p-scores-average-ba…
It turned out not to be a vaccine at all. When you take it then get Covid 3 or 4 times after that its pretty obviously NOT a vax. So glad I never took any of that shit, people are so wild they were effectively forced to take it. The worst part of all is that the people are not going to stand for the same shit during the next Pandemic, which means if its really serious and not a cry wolf, the outcomes will be really bad.
Yep. Looking back, there was no natural immunity, mask wearing was going to be forever. Vaccine required every six months, no more international travel. Shows how clueless the people we are supposed to trust actually are. Micheal (no one should be allowed raw chicken cos is dangerous) baker in the news all the time. Hilarious.
Sorry, but this whole article (and wider debate) is trapped in a flawed framing that leads to ill-informed discussion and poor policy choices.
To have an informed debate you have to understand the basic hard fact that Govt spending puts money in the bank accounts of the private sector (in the same way that bank lending does). When Govt spends, households and businesses have more money. When Govt taxes, households and businesses have less money.
Treasury call the amount of money that Govt has spent (given to us) but not taxed back yet... 'residual cash'. You can see this figure and term in the accounts. It was $19.3 billion in the year ending June 2024 (page 4). I am going to presume that people know what 'residual' means.
Treasury sell bonds to (a) soak up residual cash and (b) provide a super safe financial asset for pension and investment funds (including their own ACC Fund!) Govt debt does not change a dollar when a bond is sold. Bonds sales are not a borrowing operation. Someone needs to explain this to Rachel Reeves.
So, now come at the challenge from this framing...
In the future, Govt will have to spend more to employ more doctors and nurses, build hospitals, pay care companies to look after old folk etc. This money will flow into the economy - doctors buy meals, nurses pay rent, building companies pay wages, wages buy beers etc.
Govt will then tax some or all of this money back out of the economy. The private sector will be no worse off in aggregate. In fact if Govt run a deficit (leave more residual cash in the economy), we will be better off.
Now, 'in aggregate' is doing some masking here because the people receiving the extra Govt spending (eg doctors, nurses, care workers, builders etc) will only pay some of what they receive back in tax. So, Govt has to tax bacj the money they have spent from elsewhere in the economy. But, let's be clear, Govt are not extracting more money from the economy net - they are spending more into the economy and taking more out again.
What does change when Govt spends more? Govt end up requiring a larger share of the resources in the economy - labour, materials, energy etc. That is all good when we have resources spare (like the 400,000 people currently unemployed or under-employed), but when Govt start to compete for resources with the private sector (e.g. builders), increased Govt spending can cause prices to rise. This is where tax policy is critical - taxes should reduce consumer demand in the economy so that there are enough resources available for Govt to provision for our shared needs.
I was going to go on to say that another key reason that Govt spending / taxation is having to go up is that growing inequality and our housing ponzi mean that the bottom 25% of workers can't afford to pay the rent (or childcare, etc) without Govt financial support. So, Govt is having to get 'bigger' to play a redistribution role. But, that's a rant for another time.
but this whole article (and wider debate) is trapped in a flawed framing that leads to ill-informed discussion and poor policy choices.
There is a reason I don't read most of them (besides winding up Yvil), it hurts to see such effort made to miss the big picture. PDK would probably have me missing the even bigger picture half the time too but your tie back into available recourses might get the nod of approval.
Now then, where is the button so I may tip you for your comment (I don't even mind if int.co take a commission for providing the platform). It's clear to me where the value-add is lies.
> Treasury sell bonds to (a) soak up residual cash and (b) provide a super safe financial asset for pension and investment funds (including their own ACC Fund!) Govt debt does not change a dollar when a bond is sold. Bonds sales are not a borrowing operation.
Is this a typo? Selling government bonds does increase government debt and bond sales are a borrowing operation. This is basic accounting.
EDIT:
To clarify, when the government sells bonds they receive money now for an obligation to repay the principal later + interest payments.
When this happens, a legal liability is created on the government balance sheet.
This is the definition of borrowing: money received now with an obligation to repay. Also known as "debt".
No. The buyer gets a bond worth $xxx,xxx while the government gets $xxx,xxx is cash. No change. The asset (cash) is the same as the debt (bond). Note that governments have issued bonds, while not spending the cash received, simply to suck cash out of private hands to damp down inflation.
The buyer does receive interest on their bond. And the government must return cash to the bond owner for this interest. That issue is frequently overstated. So long as the total interest paid each year is same percentage of the government's total tax collection the effect is neutral. (I chuckle when the US debt freaks focus on the nominal amounts without any regard to the percentages.)
> No. The buyer gets a bond worth $xxx,xxx while the government gets $xxx,xxx is cash. No change. The asset (cash) is the same as the debt (bond).The asset (cash) is the same as the debt (bond).
Having assets = liabilities doesn't mean you don't have any debts. That is simply not how accounting is done. Accounting practices can't be reinvented at will to serve political points.
The sale of government bonds (a debt instrument) increases government debt even before the money is spent (or whether or not it is spent). That is just a fact based on existing legally embedded accounting definitions.
No it ain't. You're misunderstanding Govt accounting. But as I say below, don't beat yourself about it. This language and the myths in economics textbooks have been used to condition us to believe that modern sovereign govts have to somehow raise money from the markets to be able to pay for education, health, etc. It's nonsense.
It's a common misunderstanding. Don't beat yourself up about it.
Govt creates liabilities (debts) when they spend. Or, more precisely, when Govt instructs RBNZ to credit the commercial bank account of Treasury or Govt ministries etc. This transaction increases bank settlement account balances (reserve accounts). Those settlement account balances are Govt 'debt'. Check out the top of page 21 here. Treasury helpfully spell it out for you - hell, they even tell you how much of their debt is reserve balances, and how much is bonds.
Bond sales are a liability swap - the primary dealer (usually a bank) swaps some of the balance in their settlement account for a Govt bond. This is debt-neutral for Treasury. Because their settlement account debt goes down, and their bond debt goes up by the same amount.
It's always been this way. Think about the $10bn of cash in circulation. That is officially and undoubtedly Govt debt. Correct? Now, what happened in the old days when people paid their taxes with cash? Govt debt went down of course.
Ain't life grand!?
Well I'll have to eat humble pie here as you are correct and I am wrong. Although it does make me far more bullish than I already was on crypto however as this (especially the last point about cash) is only true post the loss of any backing to the currency.
Think I will go do an extra DCA right now.
Cheers! I am not sure Govt currency was ever genuinely backed by anything other than the law. When colonial powers took over countries - what was the first thing they did? Introduced taxes. Why? To create a demand for their currency.
People romantically think that the NZ dog tax was introduced to tackle nuisance dogs or raise money. Nonsense. The dog tax was designed to create Maori unemployment - to force self-sufficient Maori into the workforce. The UK did the same all over Africa.
> I am not sure Govt currency was ever genuinely backed by anything other than the law.
Quite a serious blindspot in your economic history knowledge in that case. And if it were true would be hard to make sense of how inflation could ever occur as government could simply decree that money is more valuable than it is to solve any inflationary crisis from excess money creation.
Without a solid understanding of how bad our money is it is hard to make sense of the last 40-50 years of global economic history and especially asset price inflation.
My history isn't too bad. Countries messed about with metallic-backed money on and off for a few centuries, but earlier money took simpler forms - tally sticks for example. The 'backing' was the might and power of the state. Money was backed with violence.
Worth a read of Graeber's debt the first 5000 years.
Money supply driving inflation is a myth of course.
" When Govt taxes, households and businesses have less money."
That depends upon what is taxed. However your final paragraph approaches the reason for increased taxation, but sadly you save that rant for another time....asset accumulation.
Which is better for society, assets owned by the state for the benefit of all or assets owned by an ever decreasing proportion of society?
When the wealth is allowed to accumulate in the hands of the few then over time they own all the assets, including those that are needed to support life....not just housing, but healthcare, food production, transport, water services....indeed ultimately everything. What point then Government?
There are two ways it can be stopped (or mitigated) and only one of them dosnt require violence. Tax.
"If a monkey hoarded more bananas than it could eat, whilst most of the other monkeys starved, scientists would study that monkey to figure out what the heck was wrong with it. When humans do it we put them on the cover of Forbes."
Tax won't stop or mitigate it.
Unfortunately, humanity has been consumed by what was originally simply accounting jargon.
I hope I'm wrong about many things.
Your post below about effective tax rates is spot on. Part of the problem is that a few have been able to take advantage of the iniquities and the majority haven't. Now that many have jumped on board, there's upset that their entitlements and privileges are going to be taken away. The issue is everyone has been so misinformed.
The likes of Warren Buffett, who have spoken about the discrepancies, are also the ones with the power to influence changes, and they won't. It wasn't that long ago, many of the wealthy were talking about the imbalances and making changes or the pitchforks were coming for them. Nothing's changed and would appear to be worse.
I also think the tax issue is just one of many symptoms of deeper issues. One of those is alluded to in Jfoe's post - 400,000 people unemployed or underemployed are just resources.
The alternatives you mention aren't good for anyone, yet history and present would suggest we don't know any other way.
Something I've been pondering lately (as have 4 grandparents approaching 100) is the effect of our increased life expectancy on wealth transfer through inheritances. Simply put, I don't expect to receive a useful inheritance - when the eldest die, due to the significant increase in their life, what remains of their wealth will be inherited by people who are already 'wealthy and sorted'. But I see no signs that next generation has any intention to share the inherited wealth in any way that benefits the younger families who are raising the new generation. Meanwhile, this same generation clamours for their 'entitlements' (conversation literally had yesterday: 'Muldoon promised me this thus I am entitled to it') whilst still working, and using more than 3x our government resources than the rest of the population put together.
I don't know if it was always this way, or if our increased life expectancy has pushed inheritances back an entire generation, and the effect that distribution of wealth has.
I would say that culturally it was very common in NZ for elderlies to not 'share' their wealth to their offspring until they die, but that has been changing somewhat in the past couple of decades for a couple of reasons - a) a lot more elderlies have significant financial resources they simply know they won't need (the wealthy boomer generations), and b) the realization that financial help for offspring is increasingly vital for them to be able to buy a house (and thus stay around, not move overseas etc). I know that many of my friends (generation x'ers) are actively planning their finances to be able to help their children get onto the property market.
An interesting article Idea for Interest. Do some analysis on the amount of tax someone pays vs the amount they consume over a lifetime.
I did so in 2010 as part of some work for a DHB. At the time, the average individual was short about $50k over their life. Wonder what it is now?
Those stats are dodgy. But, whatever, there will always be net contributors and net receivers. Unless of course everyone is paid exactly the same! Imagine that? Govt wouldn't have to set up complex re-distribution systems to prevent people starving to death because they don't get paid enough.
When I explain this to friends, colleagues etc they almost deny it in disbelief, but when put plainly and rationally, they can't understand why we have set society up as we have. It's good to have these discussions with as many people as you can. Not to try and convince them of anything, but to get them questioning and thinking more critically about macro concepts through a factual lens, and remove any emotional reaction from the equation.
Such articles (conveniently?) overlook another significant factor in this dilemma while over-emphasizing effects like an aging population.
I am, of course, are referring to the vast hoards of wealth the very wealthy are hoovering up. Do they pay the same rates of tax as someone earning below, say, $250,000 per year? Hell no. Their effective taxes rates are as low as 10% or even less.
Warren Buffet made this point by saying his secretary pays a far higher rate of tax than he does. (more here.)
And every year, as they hoover up more and more wealth, their proportion of the tax take goes down while those earning far, far, far less must pick up a bigger share. (We don't see this effect in NZ as we don't have a CGT.) Were the very rich paying the same effective tax rate as someone on $250k, 39% in NZ, we'd have considerably more tax revenues and we'd need to tax other 95% far less.
Back in the days when NZ had almost no mega-rich, our government funded the delivery of huge infrastructure projects from which we all benefited. Isn't it about time the mega-rich started to pay more so that all of us, their workers, their customers, and even themselves receive the benefits?
You're right in spirit, but we had Exchange Controls and a Fixed Currency in those days? Today, anyone's wealth can hit the road at the stroke of a key. None of the pesky form filling and wait for approval to do it. Even where the Form Filling, a Managed Currency and Controls do still apply, e.g. China, there are ways and means, because the days of governed social responsibility and regard for the law are long gone. All that matters today is, "If I don't do it, someone else will. So it may as well be me"
Sigh, so many people don't understand this - wealth is not a zero-sum game, there is no "wealth pie" to be divided up, and the wealthy do not "hoover up the wealth"; they create it:
https://www.forbes.com/sites/objectivist/2011/06/14/when-it-comes-to-we…
And as many have previously pointed out, most of the tax base in this country is paid by the wealthy.
I'd hypothesise that most of the "hoovering up" seems to be occurring in the public sector. We have an enormous tax base compared to "back in the day" when most of our infrastructure was built, yet nowadays we can't seem to afford to maintain or extend it. Where are the taxes and rates going - politicians' fat salaries, extravagant perks, wasteful local government projects?
Yawn. That opinion piece (over 10 years old) has been roundly debunked. Further, it is written by hacks, one so extreme he was tossed out of his academic post (you're gotta be really extreme for that to happen), who are in turn sponsored by the Ayn Rand Center who are funded by the mega-wealthy to spread this drivel to the gullible.
Where have our taxes gone? Increasing empires of public servants who are doing what successive Parliaments have legislated for.
There was a time when a ministry of Women's Affairs did not exist. Ditto for Pacific Island Affairs.
If Maoris are a part of our modern society then they should be contributing equally to our society. That means paying rates just like the rest of us. And going to school, learning to read and to do maths, and getting jobs so that they pay their own way and pay their share of income tax.
Sighhhhh.
Money comes into our economy from two places:
- Govt spending
- Bank lending
The person who works out how to gather up a lot of that money becomes 'wealthy'. They then typically buy other assets (rentals, new world franchises, shares in pension funds etc) that enable them to collect even more of that money. These people are not 'wealth creators' - they have just worked out how to grab an over-sized share of the flow of money coming into the economy. They are wealth appropriators.
If Govt stopped spending, and bank lending stopped increasing, then the economy would go broke. This is what is happening now (albeit in slow motion).
I need a very short lesson. You and CoNF have discussions but my eyes tend to glaze over.
Govt spending. Where does it come from to spend?
I understand the bank lending for mortgages and I assume other lending comes out of fresh air so to speak. It's a book entry. The mortgage payments wipe that book entry out over time.
"... but my eyes tend to glaze over. Govt spending. Where does it come from to spend?"
My post above explains where government revenues are NOT coming from and why the burden falls mainly on each and every person that works for a salary or wage.
I did my upmost to keep the language simple. Surely, if you were to read it again, your eyes would not glaze over, and maybe you'll experience a lightbulb moment that may help to avoid the inevitable outcome.
Rubbish
money comes into NZ in exchange for goods and services too
sounding like someone from wellington there Joe
you can tell as many stories in your head as you like, but the problem remains we can’t afford universal super, childcare, accomodation supplements etc
thats the real probelm
"money comes into NZ in exchange for goods and services too"
Indeed it does.
And those goods and services must be paid for in NZD.
And where do those NZD come from?
And we are back to where Jfoe explains where our money actually comes from.
And at this stage, it's worth mentioning that more NZD heads off overseas to buy goods and services produced offshore than comes back as sell our goods and services overseas. Of course, those NZD aren't actually used to buy anything offshore, instead we have to buy the currency that those offshore goods and services are being sold in.
Let's pretend for a moment that all other currencies are in fixed in supply but the NZD isn't, and more and more NZD get created (as Jfoe explains). Our NZD would fall in value as more NZD would be needed to buy the currencies fixed in supply. (Much like how Gold, crypto, and other 'near money' that is in fixed supply has been rocketing away in 'value' when measured in NZD, right?)
But ... here's the key point ... all the big currencies we use NZD to buy, so we can buy stuff offshore aren't fixed in supply! In actual fact, those other currencies are just like the NZD - ever increasing in supply. Were we to create fewer NZD each year than other countries, our NZD would slowly appreciate. And if we create more NZD each year than other countries, our NZD would depreciate. If we match their level of creation with our own, the exchange rates remain hoovering around the same level.
And a subject for another day ... What happens to the NZD that are used to buy an overseas currency?
If Govt stopped spending, and bank lending stopped increasing, then the economy would go broke
Does that really break an economy or does it highlight that something's already broken, and the no. 8 wire, duct tape is no longer holding it together.
Could it be that attempting to store all the existing money in assets, rather than enabling it to flow and circulate, is what really breaks the economy?
It's only income if you want to mess with the concept of 'income' solely for the purpose of dragging more and more things into it.
How much should my kids pay so they can keep stuff that I bought using money that was already taxed, and then taxed again when I spent it?
Ah the injustice. To think that if I earn some dosh and pay tax on it, I still have to pay GST when I buy a new car. And exccise+GST when I fuel it up. And duty+GST when I buy a bottle of wine. And the person who sold me the car has to pay PAYE or company tax on the profit they make selling me the car.
But I paid tax on the initial money so there should be no more tax ever levied on anything I spend it on. Nice one ... :-)
Were the very rich paying the same effective tax rate as someone on $250k, 39% in NZ, we'd have considerably more tax revenues and we'd need to tax other 95% far less.
But then we just come up with another definition of income that we use to jump through hoops to pretend that they aren't paying their fair share and then clip the ticket on that.
That's the reason we have the problem in the first place.
A tax law to impose taxes on income, and those that wrote the law limited the definition of income. It was always written to tax the workers not the owners.
Before that when the monarchy etc. wanted to tax the land barons to fund wars, the tax was imposed on the serfs.
We haven't learned much have we.
We also don't seem to have learned at what point enough tax is enough for the state to function either.
Crown revenues have exploded in recent years; if that is not enough, then nothing will be. And I can assure you it won't just be the well-heeled or plutocrats they come after. There's always the 'greater good 'argument which instantly absolves anyone making it of any scrutiny. We fall for it every time in this country.
The ACC scheme and its bulk funding of the health service is about the only thing that's keeping it afloat -- a small increase in ACC levies would greatly speed up the process of ACC services being totally self funded and allow those levies to go into a new Healthservices fund with a similar concept of working towards it being self funded -
ACC is a clear , obvious and successful means of developing a long term funding strategy for services -- and there is no reason we could not start duplicating the concept -- with only very minimal tax increases.
There is also no reason why we could not achieve some of this additional funding from a progressive tax system on business profits. Simply create a couple of bands - say $10 million profit to $50million -- 50 -150 and 150mill + and add an additional % tax on profits above those levels -
Cant see that 99% of Kiwis would care if the Banks, or other massive corporations making huge profits out of hard working Kiwis paid extra tax -- and does anyone think for one minute that a 5% rise in taxes on our major banks would drive them out of NZ lucrative market -- yeah but NAH bro!
"There is also no reason why we could not achieve some of this additional funding from a progressive tax system on business profits. Simply create a couple of bands - say $10 million profit to $50million -- 50 -150 and 150mill + and add an additional % tax on profits above those levels - "
It's a good plan. Especially as so many taxes are effectively flat rates !!! Only PAYE is consistently progressive (why? just why?)
And not just in NZ - all over the friggin' world. Company tax? Flat rate. GST? Flat rate. CGT in other countries? Flat rate (and far too low, see OECD statements).
Rather worrying about how to take more money off the people who have done well, how about making those who havent got much, make better decisions?
I can guarantee that the consequences of introducing new taxes to take even more money off people will be huge.
Why should we be taxed so much more for working hard and investing well, when others sit on their butts and do nothing?
"Why should we be taxed so much more for working hard and investing well"
No problem with that as long as the 'investing well' bit is the fruits of the 'working hard' bit. And that's the problem we have created. We think 'investing well' is the ability to take on more Private Debt, and leverage that up, to charge the next buyers of the same thing more to repay the Debt + Interest and make a Tax Free Capital Gain. LVR's and DTI's mean little if the collateral depreciates unexpectedly. (the price change wipes out pledged Equity, in other words)
Cut that bit out and get back to the 'working hard and investing the surplus from that work' and taxes on working hard can fall. How? Tax all income, regardless of source, and get rid of the tax incentives to Borrow to Speculate (NB: Anything that relies on future price/asset appreciation, rather than positive income flow, is Speculative) Because as we will eventually see, Leveraged Speculative Debt might be good on the way up, but catastrophic for all concerned on the way down. (The secret, of course, is to 'get out' before that happens, as it looks like a lot have decided to try and do - all at the same time)
Sorry, but successive governments have feathered their own nests and taken the easy way out in the decades before I was born to the extent I now need massive amounts of money just to be able to maintain a basic standard of living.
To suddenly go "Oh what a mess we've created, we're going to need even more now, but don't worry we'll totally get it right this time!" given how well they've wasted their record revenues to date, is frankly, not my problem, nor should it be.
Sorry, the trust is gone. That the reflexive action is "MORE TAX" while people are screaming about not making ends meet of their current net income is beyond nuts.
We do need to spend more on healthcare, but money alone won’t fix the system’s issues. The UK spend almost twice as much as NZ on healthcare as a proportion of GDP, but have similarly long wait lists
Increasing user pays in health will almost certainly mean increased health costs long term as increased user pays = delays in getting treatment = higher treatment costs in the public system. Just short sighted stupidity - so standard behaviour from the current Minister of Finance.
All this deep stuff about the morality of collecting more money and what it will be spent on and all that .....
Capital gains are income. We tax income. A buck is a buck is a buck and all that.
Accruing the tax is too hard, so it gets collected when the gain is realised. Taxing a gain on the principal residence is a bit hard. There is a question about where inflation sits in the sums (note we don't do anything about inflation with GST or hardly anything with PAYE). The usual approach is to apply a discount of something like 50% give or take a bit. So the Oz rate is something like 20% and the Canadian one is something like 15%. Pesky, but could hardly be called large-scale confiscation.
It is pointless to insist that CGT revenues should be used to reduce PAYE. If capital gains are brought into the tax net, CGT revenues will start at zero and grow relatively slowly for quite a few years. The accounting would be a joke. With healthcare and Super running away on us, there may (ha!) be a need for more tax revenue to fund these costs. Particularly as the demographcs have these costs falling on a decreasing proportion of workers to beneficiaries.
Capital gains should be taxed - like they are pretty much everywhere else - because they are are income and income gets taxed. Nothing to do with selefless landlords providing accommodation od hard working farmers getting up at 5.30 to milk cows or whatever.
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