Reducing External Political Interference in New Zealand: A Modest Proposal.

Are we too generous about the civilian rights of non-doms, who do not pay tax on all their incomes? 

Bryan Gould has drawn attention to the dangers we face in New Zealand of foreign political interference by funding contributions to political activity. His apposite example is Chinese money being channeled into the change-the-flag campaign. Would it not have been humiliating if the change had squeaked through and then we found that we had swapped one colonially imposed flag for another? (As an aside, noting that the Prime Minister was involved with the proposal, it is ironic that a few decades ago the Communist Party was heavily criticised for taking Chinese gold.)

We probably cannot stop all attempts by such outsiders to spend money in order to influence political outcomes, or even to make such funding transparent. But we can do some things. Here is a modest proposal.

Some years ago, working on the top of the income distribution which is heavily influenced by tax avoidance, I had to investigate those personal taxpayers who are treated as non-resident. Let's call them ‘non-doms’ (the term used for those who are not domiciled in Britain for tax purposes). Here, non-doms pay taxes only on their New Zealand income, so any offshore income is not taxed by New Zealand while the offshore income of resident New Zealanders is. (I have put at the end of this column the section from the original paper.)

There are perfectly good reasons to have non-doms when assessing income tax and I have no quarrel with the principle of such a status nor of how they are treated for tax purposes. But how we define non-dom status is important for it includes rights to participate in New Zealand political life – to be citizens.

The primary definition of a non-dom is those who spend less than half the year in New Zealand. However there is a second test: ‘having an “enduring relationship” with New Zealand.’ As I understand it, there is no statutory definition of this relationship; it depends on the judgement of the IRD. I do not know how often it is applied.

Let us guess at some of the criteria which might indicate an enduring relationship:

            - a NZ passport. (But there are some non-doms who have good reasons to have one; for instance young people on OE);

            - being registered on the electoral roll. (I would have thought this a certain indication of an enduring relationship.)

            - claiming a first home in NZ for tax purposes. (If you are not a resident here, you cannot have a first home here.)

            - accepting or holding New Zealand royal titles and honours.

Here is another one, which I doubt currently gets much consideration.

            - contributing financially to political parties and to other political activities. (Note that contributions to charities are not covered by this criterion. One has no objection to Chinese gold, Russian roubles or US dollars contributing to the kakapo recovery program.)

Suppose we were to make such funding decisive evidence of an enduring relationship with New Zealand. That would strongly discourage non-doms interfering financially in our political processes. No doubt ‘Panamanian’ lawyers can think of ways around such a rule. However the ways would be tested by administrative decisions and judicial process. So the costs of getting it wrong would be horrendous because those found channeling donations into political activities would have to pay taxes on all their incomes.

At the heart of this approach is that taxes are the price of citizenship. If someone is not paying full taxes they should not have full citizen rights (although they must retain their full human rights).

A simple patch on the current system; is it worth doing?


From B.H. Easton, Distribution of Pre-Tax Top Personal Incomes

Under New Zealand tax laws, non-residents with high incomes can avoid declaring offshore income for taxable purposes by avoiding being New Zealand tax residents. The criteria for being a New Zealand tax resident are:

            - living in New Zealand for more than 183 days in any 12-month period, or

            - having an ‘enduring relationship’ with New Zealand, or

            - being away from New Zealand in the service of the New Zealand government.

People who are not New Zealand tax residents are liable for New Zealand tax only on their New Zealand-sourced income. Such non-residents report their taxable income in an IR3NR return. They are not included in this data. There is no long-term series for them, but tax payable from this source is currently around $30m-$40m per year, suggesting an annual income of around $100m; this would be only a portion – often a small proportion – of the non-residents’ total income. New Zealand is such a small economy that those with very large fortunes are likely to hold wealth portfolios diversified by jurisdiction. It is not implausible that for many less than a third of their income comes from New Zealand sources; only that part is reported in the tax statistics. Given increasing international mobility, it seems likely that an increasing proportion of those at the very top of the income distribution are not tax residents. If so, any Piketty effect of a growing elite of the rich is likely to be missed in the New Zealand tax data.


PS. This is a different issue from those covered by Panamanian papers, although no doubt some of our non-doms will appear in them.