Wealthy people’s money grows at a faster rate than the economy, like a dam hoarding water while the city below grows thirsty. To conserve our way of life, we need to ensure wealth flows between the top and the bottom, writes Tax Justice’s Louise Delaney
Now both major parties have released their tax policies it is time we address the asset elephant in the room – Neither National nor Labour take income gained from assets seriously.
It is no secret the rich have the means to exploit loopholes in the system and avoid paying their fair share of income tax. For instance, by putting money into assets that grow money for them.
National proposes ‘business as usual’ calling for tax cuts – while somehow paying back more debt than Labour. In turn, Ardern and her party say they will target high earners, without addressing the problem of value earned from assets.
Labour doesn’t even want to talk about it – rather recklessly drawing a hard line in the sand against any new taxes, a line they may regret given the flexibility 2020 demands of us all.
The stock market is booming, and at the same time we’ve entered a recession – something is wrong. To address growing inequality, the answer is a simple tax on wealth.
To put this into context, it helps to think of the economy like a roaring river. Beginning in the hills and ranges, our tax contributions feed the reservoirs that provide water to our cities, businesses and everyday Janes and Joes. In the same way, a healthy tax system moves money to where it can ensure a healthy life for us all.
Somehow, we’ve been convinced that by storing water with those at the top, we at the bottom will eventually have more. This is nonsense. Money pooling at the top grows stagnant and certainly doesn’t do the basic job of enabling individuals to flourish.
When the coronavirus pandemic hit, it wasn’t the rich who saved the economy. It was the Government that paid – with the revenue from all of us. Wage subsidies and the like were supported by all sides of the political spectrum, from Donald Trump to Angela Merkel. It was the Government that backed up business.
It is only the Government that can provide the big-ticket items that no individual or business can afford on their own – the health, education, justice and transport systems that support us to live lives of dignity and choice. But the Government needs revenue to do this.
We can – and should – ask the biggest salary earners to contribute more with higher tax rates, as proposed by Labour and others. But those with the deepest pockets aren’t salary earners – they’re wealth holders.
According to World Inequality Database, wealth is much more concentrated than income. The 40,000 New Zealanders with the highest salaries – the richest 1 percent – receive around 8-9 percent of income. But the 40,000 New Zealanders with the most assets – the wealthiest 1 percent – hold 20 percent of all wealth.
Unless those who hold those assets pay tax on them, this wealth contributes little to the public pool, largely amassing even more wealth for those who already have it.
Having and holding wealth is not inherently bad. However, as the renowned economist Thomas Piketty showed in his landmark 2014 book Capital in the Twenty-First Century, throughout history, accumulated wealth (which is often inherited rather than earned) has generated passive returns of 4-5 percent a year, whereas those creating wealth by actively working see their fortunes grow at the same average rate as the economy, typically just 1-2 percent a year.
Consider that for a moment. Wealthy people’s money grows at a faster rate than the economy. It is like the rich are building a dam higher and higher each year, hoarding water while the city below grows thirsty.
We could address this problem with a simple, low-rate levy on the very wealthiest New Zealanders – a net wealth tax – to make sure the system rewards those who work hard and create jobs, not those who sit back and watch their money accumulate.
Such a net wealth tax (ie: assets minus debt) should ideally be supplemented by a new approach to inheritance and lifetime taxes, given their present function in perpetuating inter-generational inequalities.
Why should small business-owners, nine-to-fivers, and freelancers pay more tax than millionaires? Something is wrong, and the vast majority of Kiwis agree: 59 percent support the idea of wealthier people paying more in taxes.
If we started taxing wealth at the national level, we would be in good company, alongside the United Kingdom, which has an inheritance tax, and Australia, which has long had a capital gains tax. We are one of the few OECD countries without some kind of tax on assets.
All these taxes recognise that the rich have generated their immense wealth partly by drawing from the common pool of resources – publicly funded roads, schools and hospitals – and that they should help replenish that pool.
That’s just as true here as it is overseas. To conserve our way of life, we need to ensure our rivers are clear of dams, so water and wealth continue to flow between the top and rest of society.
This is not just an issue for this election, but for the decades to come. Political parties need to keep all options on the table to make sure every Kiwi has the opportunity to thrive.