Analysis: Let’s talk about tax, baby.
Today, reports from Inland Revenue and the Treasury will show New Zealanders are competing on an uneven taxpaying field. Revenue Minister David Parker has blown the whistle for a stoppage in play; he has the ball.
But there’s nobody to penalise – it’s the whole game that’s out of kilter.
That skew is reflected in this country’s increased wealth gap; of all 37 countries in the OECD, only Sweden has experienced a steeper increase in income inequality since the mid-1980s.
This morning, Inland Revenue will publish the first findings of an 18-month study of NZ’s 300-400 wealthiest households, based on information they were ordered to supply under the new and contentious section 17GB(1) of the Tax Administration Act. This law change was passed through all three readings in just one day, under urgency in December 2020.
NZ’s increased income inequality, by Gini coefficient.
Parker, the newly appointed minister, noted “how complex the tax affairs are of some wealthy taxpayer groups" – prompting an accusation from the Tax Policy Charitable Trust that Inland Revenue was being given new coercive powers to act on the political views of the Minister of Revenue.
The think tank was seemingly worried the minister would stigmatise the wealthiest 0.01 percent of New Zealanders; in truth, the divide was already stark between those on wages and salaries, and those who derive their living from returns on their shares, property and trusts.
Countries tax wealth in different ways, the OECD says. Two member countries only levy recurrent taxes on immovable property. There are some countries that only tax wealth transfers and not total net wealth stocks; there are some that tax both. France replaced its net wealth tax with a new real estate wealth tax, in 2018. Then, there is New Zealand.
Here, instead of taxing wealth, the Government raises nearly 38 percent of its tax revenues from personal income tax, the OECD says. The average for the rest of the OECD is 24 percent for personal income, profits and gains, combined!
So a year ago today, when Parker delivered a speech at Victoria University in which he vowed to set in place tax principles to level the playing field, he was on strong political ground.
“I admire the creativity and energy of our successful business people,” he said. “But I believe we should all pay our fair share. While we already have evidence that the wealthy pay lower rates of tax than middle-income earners, no one can tell you how much lower their effective tax rate is.”
He said there was "no secret plan" to introduce a capital gains tax or wealth tax. But that was then.
Now, 12 months later, New Zealand has a new Prime Minister who may well be politically cautious, but he isn't bound by Jacinda Ardern's promise, "no capital gains tax under my leadership". And it has a governing partner in the Greens who argue for a wealth tax.
“We should always look at how we can make the tax system fairer," Chris Hipkins said in January. “I think overall there are some New Zealanders who perhaps aren’t contributing their fair share.”
It seems an undeniable fact that those whose prosperity relies on untaxed capital gains won't contribute such a high proportion of their wealth as a simple reading of the income tax codes might suggest; those whose salaries are channelled entirely into income tax and spending on GST-liable necessities will pay more than those codes might suggest.
That's why the economist Susan St John, an honorary professor at Auckland University, argues at Interest.co.nz that taxes must be raised in accord with the well-worn principles of horizontal and vertical equity, efficiency and administrative simplicity.
"The tax system as a whole has to meet the equity principle; for example a regressive GST requires a more progressive income tax to make the system overall progressive," she says.
"Measuring progressivity requires that the concept of full economic income is used, so all untaxed income and imputed income from owning assets must be included as well as windfall gains. The overall degree of progressivity is a political decision, but we may have got it right if our needs are met, voters are happy, and there are no extremes of poverty and wealth."
Tax specialists OliverShaw published a report last week finding the more New Zealanders earned, the more they paid in tax – that those earning above $180,000 made up 21.2 percent of taxpayers and paid 68.5 percent of income tax in the 2021 tax year.
But I call BS. For a start, it selectively omitted the impact of GST and excises, which weigh more heavily on those on lower incomes. An earlier IRD report concluded the wealthiest Kiwis paid an effective tax rate of less than 12 percent.
Despite how electoral campaigns (both Labour and National) have tottered again and again when taxes on capital are debated, there seems an inexorable shift towards levelling the taxpaying field.
David Parker is expected to detail the principles that should underline tax changes in a speech this afternoon. He is not expected to announce a new tax deal today. But when it does come before Cabinet, observers say he will propose a Bill English-style switch: reducing lower income tax rates while introducing some form of tax on wealth gains.
Documents show Inland Revenue staff have already prepared a paper on valuation and capital gains, including possible options for calculation of realised and unrealised capital gains.
Any kind of capital gains or wealth tax would be an uncharacteristically bold move for an election year. But it would be more progressive than today's tax regime; it would better align New Zealanders with major trading partners; and it would certainly align Labour with a bigger proportion of the voting population.
Because the taxation field may be tilted in favour of the 0.01 percent – but that leaves a much bigger team of New Zealanders who could win from lower income tax rates.