Can we extend our tax system to make it more suitable for a modern (post-neoliberal) nation?

The economists in the macroeconomic division writing Treasury’s 1984 Post Election Briefing got into a robust argument about the purpose of taxation. Their boss, notorious for his common sense, broke the impasse. The Briefing read ‘the purpose of taxation is to raise revenue for the government’.

That remains the preoccupation, with the side assumption that the aim should be to raises taxes with the minimum of distortion from the neoliberal objective of maximisation of GDP.

A very distant third is that the burden of taxation should be fair. I have been to seminars on taxation in which equity was not mentioned. For some reason – I leave you to decide why – the policy recommendations of such seminars always favour the rich, including those attending. It would be revolutionary for equity to be given a higher status in our tax policy discussions.

Clearly there is a need to ensure the existing taxation system is effective, efficient and even equitable. I imagine the recently established Taxation Working Group will put a lot of effort into trying to attain these goals. Difficulties arise, for instance, with the definition of income. Create a loophole and the tax accountants and lawyers gallop through it, probably distorting economic performance.

An obvious loophole is capital gains, an omission which distorts (i.e. wastes) capital as investors deploy their resources in low-productivity activities which are not taxed. For this reason I am an unashamed supporter of including real capital gains in the income tax base, as are a number of official reports, although more cautiously because it is such a political hot potato. (By ‘real’ I mean only the capital gains above inflation; similarly I would exempt the inflation component of interest from income tax.)

One of the reasons capital gains taxes are not favoured by incumbent governments is because they are unlikely to raise a lot of revenue but they will raise a lot of political opposition. Even so, economists like me support them because they will lead to better investment decisions. The housing market has been badly distorted by the lack of capital gains taxes on houses not occupied by their owners. (First home-owners do not generally make net capital gains, because they also make capital losses on their next purchase.)

Observe that another reason for taxes is creeping into the discussion; the purpose of improving the pattern of production and consumption. We already have some examples such as excise which aims to reduce the damage from the misuse of alcohol and the use of tobacco. An intermediate form is the levies on motor vehicle use which fund the transport network.

The principle that market prices do not always reflect social costs and that taxation can be used to eliminate the worst failures has long been held by economists. It is an anathema to neoliberals which may be why its application has so fallen out of favour. It would be good to see it return to the economic policy framework, but only where the implementation is practical and the outcome is effective. Here are some examples.

There is a popular demand for taxes on sugar – especially in soft drinks – to reduce obesity. Unfortunately the advocates do not make a convincing case that the measures would be practical or effective; they see the measure worked for tobacco consumption and ask why not sugar?, without understanding why it worked for smoking and the differences from sugar. Suppose we were to tax all sugar (including that which crosses the border in processed foods). Would the higher prices discourage sugar consumption, and by how much? My guess is the big change would be at the production level, with the amount of sugar reduced in foods. It looks as though the government is going to seek voluntary agreements for this goal instead.

I favour raising the price of the cheapest alcohol to reduce binge drinking. Some advocates propose price controls, which would increase the profits of the liquor industry, which does not seem to be a good idea. Instead, one might introduce a tax-clawback regime where lower priced alcohol would pay more excise tax. It is probably feasible but more complicated than the current regime. I suspect that a treasury would recommend to just bang up the excise rate on all alcohol.

Perhaps the place to pay the most attention to is the environmental area where too often prices are poor indicators of long-run social costs. Among the areas of interest are water, transport and carbon emissions.

I have long been an advocate for pricing of water (including discharges into it) to encourage using it less wastefully. However, the approach has to be comprehensive. A tax on some uses (say export water) and not others is half-baked. Unfortunately, imposing it on all uses including domestic use is likely to cause a political outcry (and there are complicated issues about Maori rights). At the very least there is a case for a levy on water to fund local authority efforts to clean up the polluting messes we are creating. The levy rate would vary by district and may be popular insofar as it would be low, tackle a troubling problem and reduce the pressures on local authority rates.

The government is talking about allowing the Auckland Council to impose levies on motorists to add a source of revenue to fund Auckland’s burgeoning transport needs including roading infrastructure and public transport. Fair enough, but it is a short-sighted measure typical of our short-term problem-solving approach rather than a long-term vision. Why not allow all local authorities to impose the levy if they choose, providing the revenue is used for transport purposes? My guess is that most local bodies would welcome the opportunity, even though the legislation would be permissive and they, rather than central government, would impose any tax.

One reason why the sort of thinking implicit in the previous two paragraphs is not popular in Wellington is because it would empower local authorities, giving them greater spending discretion, whereas central government prefers to keep them on a tight leash. I really do think we need greater decentralisation; Wellington suffers from policy and implementation constipation. Neoliberals want to decentralise to individuals; other see the need for communities to have more power over themselves – which means they need revenue (some of which has to be raised at their own discretion).

To be realistic, any mitigation New Zealand contributes towards emissions generating climate change will have negligible international effects. My view is that as a global citizen New Zealand has moral responsibilities to share in the global challenge; we should use taxes on carbon emissions to help the mitigation.

Moreover, I am increasingly aware that the foreshore is being eroded by rising sea levels, tsunamis and storm surges. Leaving dealing with them to the short-sighted private sector and cash-strapped local authorities seems to me to be – well – par for the course. Perhaps some of the revenue from the mitigation should be channelled into foreshore protection projects.

This column may seem like a to-do list but it has an underlying theme. We have got to get past the notion that the only purpose of taxation is for government revenue and add that it can be used to promote wider social wellbeing

I am not sure that the Taxation Working Group is well placed to lead this task. It is stacked with accountants and lawyers who should do a good job dealing with a host of technical problems in the existing system, rather than extending it. There is only one economist on it to take the wider view. (Mind you the National Government’s equivalent committee had mostly economists, who seem to have taken such a narrow neoliberal approach that there was not much vision there either.) It may be that if this government is to make any progress it will be in a series of decisions outside the review committee. I cannot tell you whether it has the vision to do it.

We need to keep saying that taxation is the price of citizenship; that it has a role towards increasing citizens’ welfare (even if its initial impact reduces our effective incomes). And that we need to ensure that those who wish to avail themselves of the privileges of citizenship make a fair contribution to the tax revenue.

Comments (5)

by James Green on February 26, 2018
James Green

Tax (realised) capital gains at the same rate as income tax, reduce corporate tax to zero to eliminate double taxation problems with capital gains. As you say, with an inflation exemption.

In fact, tax all income at the income tax rate (with a minimum threshold exemption for gifts, inheritences, etc). Income is any money that anyone receives. Tax non-money income (fringe benefits) at a slightly higher rate.

Tax everyone at the same rate, say 40%. To maintain progressivity pay back everyone a state annuity (variable based on the age of the individual citizen or permanent resident).

Reduce GST back to 10%.

You call them excise taxes, but I perfer the term behavioural taxes because the point of them is to alter behaviour, i.e. reduce something's use, when outright banning something is not the goal. Some of my stances follow: tax alcohol, cannabis, sugar, salt, and carbon dioxide generating fuels (but not, for example, biogenic methane); ban tabacco (people can vape nicotine if they have to), and the mining or importation of thermal coal.

I know none of us like tax exemptions on specific things, but how about temporary tax exemptions to kickstart things, like removing GST from electric cars for 10 years?

I cannot understand this recent interest that has arisen to tax water. In no way do we want to discourage it's use, instead regional councils should determine how much each source (river, aquifer, etc) can spare and then auction off rights to that if it is anywhere close to being tapped out.

There should also be a bed tax on international tourists to help pay for infrastructure they use while here.

Tax laws should be as simple as possible, that doesn't mean there should be as low a tax take as possible.

Merge Regional Councils, DHBs, and some functions of local councils into provincial governments. Provinces with Provincial Assemblies; there needs to be party politics at the local level -- it is much easier to vote for a party than half a dozen individuals. Give them at least half of the GST take.

Oh, I almost forgot: land tax.

by Charlie on February 26, 2018

Where to start? OK point by point:

Post Neo-liberalism

Neo-liberalism i.e. market based capitalism and trade is alive & well. In the last couple of decades it has lifted literally billions out of abject poverty and continues its good work by building middle classes in former 3rd world nations.

I'm not sure what you're proposing after neo-liberalism - I trust not the system that killed 100 million people in the 20th century and continues its evil effects in Venezuela even today...?

Fair taxation

Our current progressives tax rates result in the top 3% of earners paying 24% of all tax received and whopping 40% at the bottom being net recipients. Not fair enough you say?

So let's negotiate this: My starting point for a fair tax system is a simple poll tax on every adult. ;-)

Capital Gains Tax

There is much merit in CGT. The problem is that it's awfully difficult to implement and can create more bureauratic overhead than its tax receipts, especially in the first few years. This is why successive governments have avoided it.

Sugar tax

The international evidence is that sugar taxes don't work. Examples are France and Mexico where it failed to reduce sugar consumption. Sugar isn't nicotine: A little sugar is good or you, even essential.

My recommendation is to leave people alone, stop being a wowser and allow adults to make adult decisions and bear the consequences of them. For better or worse.

Water tax

A levy on water consumption has great merit. The problem with our current water policy is that it is NOT neo-liberal, in that nobody owns the water.

Water is a commodity like any other and the best way to regulate and ration usage is to create a market based system of some kind, and let it sort itself out. 

The fact that the Treaty gets in the way of a sensible policy on water managment is more a reflection on our dysfunctional interpretation of the Treaty than anything to do with water.

by Moz on February 26, 2018

Perhaps the Australia imputation credit approach to corporate tax would work? It means that shareholders who don't pay income tax in Australia get no benefit from the tax paid by Australian corps, which is IMO a good thing. Ditto Australians who pay no tax (the poorest who own no shares, the richest have no taxable income)

by Matthew Percival on March 03, 2018
Matthew Percival

It's a shame thr writer uses the term "neo-liberalism" as it detracts from the article and exposes a lack of knowledge from the writer. Moving to a market based economy does not mean we've gone all "neo liberal". A great example being the housing market which is constrained by the RMA, Zoning laws, Lending Constraints etc. If you want an example of a "neo liberal" market examine crypto-currencies. Oh by the way, GDP is not the sole goal/measure of a market based economy. We have a huge number of measures some of which are employment, under-employment, inflation, wage growth etc.

Back to the topic - I am also largely in favour of wealth based taxes (let's expand the concept beyond capital gains) whilst at the same time reducing income tax. Currently we fail to capture the secondary intention to make a gain when buying assets. We seem to have this attitude in NZ that once you earn your money whatever you do with it is pretty much tax free, 

Must be said the Opportunities Party campaigned on a similar platform some one can only assume the electorate doesn't have an appetite for such measures.

by Charlie on March 08, 2018


You make a lot of excellent points although I disagree in the detail with this part:

We seem to have this attitude in NZ that once you earn your money whatever you do with it is pretty much tax free....

I would add, it's pretty much tax free.... unless you invest it in the stock market or deposit it in a bank

Sadly this is what the NZ economy really needs - domestic investment directed at businesses that make and sell products. Not holiday homes on the coast & SUVs. (This is where I have sympathy for TOP....but wouldn't want Gareth Morgan anywhere near the levers of government.)

So how's about a low/flat tax on bank term deposits & dividends on the NZX? How much revenue would be lost?

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