The run up to the election is the silly season; is there any point in taking most of the tax proposals seriously?
It’s the silly season when campaigning politicians repeatedly display their ignorance. Perhaps the most famous instance was NZ Party leader, Bob Jones, claiming in 1984 that floating the exchange rate would eliminate the government’s fiscal deficit, confusing the public sector with the entire economy with its deficit in the current account of the balance of payments.
More recently, when National and Labour announced extending cervical screening to women aged 24 to 69, ACT’s health spokesperson, Todd Stephenson, argued that public health funding would be better spent elsewhere. His party had just announced a policy of spending a billion dollars (presumably a year) on cancer drugs and another two billion on a cancer centre. Neither proposal has been properly evaluated, and many cancer drugs are both very expensive and very temporary (perhaps adding only weeks to life). Apparently, the schemes are to be funded from within the existing health budget and will take funding from elsewhere in the health system where it will be better spent – like on cervical screening.
Politicians’ tax pronouncements are another area where economists duck. I was initially appalled when National announced that it would not support new taxes. Taxes are instruments of economic management, so it is like going into a game refusing to use your left wing. However, there are silences in the promise. It does not cover changing tax rates or eliminating tax loopholes, while with a little skill a new tax can be dressed up as an extension of an existing tax.
I am pragmatic about taxes; their purpose is to meet economic and social objectives. For instance, I support a (real) capital gains tax in order to avoid distorting the income tax regime by rewarding speculation over productive investment, compromising productivity growth. I would be happy to use the additional revenue to reduce another distortion for the nominal level of interest is taxed, which includes the part which offsets inflation as well as the ‘real’ part which gives a return to investors. Many fixed-interest investors are taxed in excess of 100% on their real investment income.
I have long supported excise duties on alcohol and tobacco, to reconcile the damage their consumption does which users do not take into account. However, we may have reached the stage where raising the taxes does little to reduce that damage further and need to shift to more subtle measures to limit it. (The growing evidence that vaping is damaging to health may lead eventually to a tax on vaping; it would be lower than on ordinary tobacco. I am also tempted to rejig the tax on alcohol to raise the minimum price of alcohol without increasing the profits to providers.)
It has been too easy for the public health lobby to advocate additional taxes and not think carefully about how effective they are. The current fashion is advocating a tax on sugar to reduce obesity. However, sugar is typically a small component of most food items so a higher sugar tax would not raise the price by much. There have been none of the careful evaluations which justified the current excise duties on alcohol and tobacco. Sure, obesity is a serious and growing problem, but a tax on sugar is hardly an answer.
One user (group) pay which currently needs attention is the provision of roading. It was sheer cowardice by Labour and National when they reneged on proposals to cover the deficit on roading from more taxes on transport users. Instead, the gap of around $400m p.a. will be covered by general taxpayers. That means less government spending on its other areas or, if you are the other way inclined, higher income taxes. If transport users are unwilling to pay for their roads, we should not keep building them.
More generally, there are increasing user-charges from state-owned monopolies which National, in particular, is advocating to provide some relief from the squeeze on public expenditure arising from tax revenue caps. They could be labelled (de facto) ‘taxes’, but let’s not get into debates about definitions. Under a right-wing government user-charges will go up, and I shan’t be surprised if a Labour-led government also increases them. (Under supplying government services, forcing individuals into the private sector – a big pressure in healthcare – is also a kind of tax.)
User-pays aside, the two main purposes of taxes are to change the disposable income (spending power) distribution and to provide collective goods which private market purchases supplies inadequately. (Public understanding would be enhanced if the public accounts were to separate the two functions out with a transfer account and an expenditure account – better still to split the expenditure into current consumption and investment for the future.)
The two – the balance of spending between the rich and poor and the balance of spending between the public and private sectors – are proper matters for political judgement; economists can only tell you the implications of each; not which you should choose.
Our political parties combine the two dimensions into one – favouring the rich and private spending on the one hand or favouring the poor and public spending on the other. (You do not need to; the affluent might support a taxation regime which favours them but demand additional public spending on, say, the arts, the environment and healthcare.)
Regrettably their presentations are often dishonest. When parties on the right emphasize their low taxation objectives, they do not mention cutting government spending and the consequent loss of public services and the social damage caused by more people suffering from poverty.
Meanwhile parties of the left propose higher and new taxes without thinking much about their practicality both administratively (recall Labour’s stupid 2023 policy of GST off fruit and vegetables), and in the behavioural responses to taxes.
When I first became interested in tax policy, I overlooked the importance of international mobility – it was not nearly as high half a century ago. Many economists see merit in estate duties on the dead (better still, lifetime gifts and inheritance taxes, which I won’t elaborate here; The Opportunity Party (TOP) seems to advocate them). When Queensland abolished their inheritance taxes, the other Australian states had to follow in order to reduce the incentive for their people to retire up north. New Zealand followed to reduce retirees crossing the Tasman. (The loss of revenue was covered by means testing the government subsidy to those living in a rest home – a sort of inheritance tax on the living.)
Think about mobility in the context of a wealth tax. Two parties – Greens and TPM – are advocating one. Both include a 2.5% (presumably annual) tax on net assets above $10m. Given their top income tax rates – Greens 45%; TPM 48% – and that inflation is about 3% p.a., the wealth owner will have to earn at least 10% annually on that wealth to break even in real terms.* So what would wealth holders do? Go to Queensland? (Many will first get their lawyers and accountants to arrange their affairs to minimise payments of wealth taxes).
(I am not sure that such migration is necessarily a bad thing, unless – as we do – those avoiding paying tax by living overseas can be involved in our political life. I take the view that paying taxes is the price of citizenship.)
To be administratively practical, whatever the case for a wealth tax – there is a more convincing case if the tax rate is much lower – it cannot be implemented overnight, even if the advocates are planning to spend the proceeds from day one.
Finally, a mention of land tax which two parties – TOP and, to a lesser extent, TPM – are advocating. A land tax is popular among some economists, because land cannot migrate. Observe that we already tax land via local authority rates; given their popularity one understands why most parties do not advocate double-dipping land taxes.
Moreover, they would impact heavily on the farm sector (recognised by TOP having a lower rate on farmland). I have yet to see a careful analysis of the implications; it may involve a depreciation of the exchange rate to maintain farm profitability (which would mean the burden of a land tax on farms would be shifted onto higher prices).
Taxation issues are complicated. We have already implemented all the easy options (but we can change the rates). We should be taking some of the proposals seriously, as this column has tried to. But it is the silly season. Discussions on taxation will descend to confusing and often dishonest slogans.
* Someone with $1000 wealth (add as many zeroes as you like) and a before-tax income of $100 (i.e. 10% p.a.) would pay income tax of $45 plus a wealth tax of $25 and need to put aside $35 for the rise in prices. (When there are capital gains, the calculation is more complicated.)