Taxing Issues

A canter through some of the issues facing tax policies.

The Treasury experienced vigorous internal debates before Rogernomics. One was over the purpose of taxes. Eventually, a senior economist, notorious for his common sense, settled it. There it is in the 1984 Economic Management: ‘The purpose of of any tax system is to raise revenue.’ (Of course there are other purposes of taxation such as redistribution and changing behaviour – the Treasury debate had substance.)

Fair enough; the level of taxation is the main determinant of the balance between community and private spending. There is a strong right-wing lobby arguing taxes should be lower, which means lower government spending – more private, less community. That is its political judgement, although I wish its advocates would not contradict themselves by pointing out failures of the public sector arising from inadequate funding.

Of course there are inefficiencies in government spending (as there are in private spending). Most are like the fat in prime steak: difficult to get at without destroying the texture of the meat. Even so, there is a view that this government has been sloppy over monitoring the effectiveness of its spending, but whether it is that Treasury is not doing its job or whether cabinet is ignoring it is unclear.

There are programs which might be abandoned, but usually the advocates of the cutting ignore the consequences on people. I was heartened by ACT, who when opposing free prescriptions – I don’t – went on to say the funds could be better spent in reducing GP charges – I hope they remember the tradeoff when they get into power.

What strikes me is how feeble left-wing advocacy has been in contrast to the right-wing message. The dominant rhetoric is for tax cuts; there is never the same clamour that it means public expenditure cuts too. Perhaps the left’s failure explains Labour’s unwillingness to contemplate new taxes.

The case for the taxes is not well made. Here follow some notes.

Like the Treasury, the Reserve Bank, the IMF and the OECD, I support a (real) capital gains tax (while acknowledging it is administratively difficult). The concern is that the tax system is currently distorting investment decisions. I’d favour using the revenue from a capital gains tax to reduce tax rates on interest income; we should not be taxing interest’s inflation component.

I would apply the capital gains tax to second houses and very expensive first houses – say, those worth more than twice the price of an average New Zealand house. They are distorting investment too.

When I looked at wealth taxes back in the 1970s, I concluded that they were really a requirement that the rich should get a higher nominal return on their investments than others to get the same after-tax return. I am not uncomfortable with that proposition (except I concluded that income from assets on which wealth tax was levied should not also be taxed). Historically, it was common to tax investment income differently from labour income; presumably the economic logic was that the supply conditions are sufficiently different. An important effect of a wealth tax is that it would cover assets which do not earn taxable income such as houses and yachts. (Administering a wealth tax is not simple.)

When we had inheritance taxes, I supported a lifetime capital accumulation tax which is a progressive tax (with a substantial exemption) based on transfers – estates and gifts – over an individual’s lifetime instead of estate duty. Its effect encourages a wider spread of wealth since the rich can reduce their tax burden by sharing their wealth around, making wealth ownership less unequal. Estate duty was abandoned by Ruth Richardson in 1992, partly for ideological reasons but also because Queensland had already abandoned it, so one could escape death duties by migrating across the Tasman. The revenue loss was made up by reducing the state support for those in residential care.

I agree with the proposed change on taxing trusts, aligning their tax rates with the top income rate to reduce tax avoidance. However, I would treat trusts similar to corporations, where the taxation is essentially a withholding tax, so that New Zealanders who receive disbursements from a trust are not taxed, while those who pay below the tax rate would get some tax remission.

There is a fashion – even in right-wing circles – to argue for a land tax on the basis that land is immobile while labour and investment can avoid taxation by going overseas. However, most of the discussion I have seen does not cover the impact on the farm sector, which remains a key element in New Zealand’s prosperity. The proposal is usually dismissed because we already have a kind of land tax in local authority rates.

A minor issue in terms of revenue, but important politically, is that non-residents pay income tax only on their New Zealand income. (A non-resident is someone whose permanent place of abode is here or who spends not more than 183 days a year in New Zealand.) That seems sensible, except I would restrict the notion of ‘non-doms’ (not domiciled here) also to those who do not participate in political life in New Zealand by voting or funding political lobbying. Taxation is the price of citizenship.

(While chasing up the nuances, I discovered that the IRD made special provision for the non-doms who were forced to overstay their 183 days because of the COVID lockdowns. On the other hand, the MSD made no similar provision for New Zealand Superannuitants trapped overseas during the lockdown. I leave others to explain the different treatment.)

I like the proposal to have an income exemption from income tax. The exemption was removed in the 1970s because there was no GST. When GST was introduced in the 1980s, the income exemption should have reintroduced but the priority was reducing taxes on the rich so the poor were forgotten. Introducing an income exemption is very expensive and almost certainly requires higher taxes elsewhere. Even so, when consideration is given to the next round of income tax cuts, consideration could be given to reducing the bottom rate (currently 10.5%). The effect of a 1 percentage reduction would be to give almost everyone a $2.70 a week reduction, peanuts to the rich but much appreciated by the poorest. (It would cost about $500m p.a.)

There are other taxes we might consider. I am comfortable with indirect taxes which reconcile private behaviour with the public good, as we do in the case of alcohol and tobacco. I am not quite so convinced of the effectiveness of a sugar tax. Our greenhouse emissions strategy needs a total overhaul; it needs to fund the retreat from the coast because of sea-level rising and making infrastructure more robust to storms. There is also a role for user-group pays taxes where it is not easy to charge for individual behaviour. An example is the road taxes to pay for road maintenance and extensions. (Proposals for charging motorists individually go back at least 60 years but, except in special cases, implementation has proved impractical.) I am not unsympathetic to a financial transactions tax (a.k.a. Tobin tax) as a substitute for the sector not paying GST. But we should wait for others to implement it first, in order to reduce avoidance. It will, however, not generate the enormous revenue its proponents claim, since the financial sector will be smart enough to find (legal) ways to avoid paying, demonstrating that perhaps they are smarter than the FTT’s proponents.

This column has been about getting the tax structure right rather than the levels which shape the fairness of the system. It is no secret that I am concerned with child poverty. That involves a better system of child support than the current Working for Families.

This canter though some of the taxation possibilities indicates some of the complexities which the general public discussion tends to overlook. I have been explicit about my own values. Yours may be quite different. But I hope this column contributes to a public discussion which is sober and rational – rather than uninformed and hysterical – despite our differences.