A fairer tax system

We have a serious and growing problem of wealth inequality and too many families lack the ability to adequately provide for their daily needs.  

This is all exacerbated by insanely high house prices, the growth of single parent families, drug consumption and obesity.  It’s bad for race relations, undermines social cohesion and will ultimately result in more crime and social costs, much of which will be borne by taxpayers.      

Next month’s budget will need to address these issues.   

Tax is neither “love” nor “theft”.  Governments require a proportion of GDP to protect its citizens, provide essential services, create a prosperous society and help ensure all have the opportunity to succeed.  Some incomes are way overtaxed and there are also gaps in the tax system.

It’s a sad reality of life that new taxes are extraordinarily hard to introduce politically.  Successive governments have relied on bracket creep to increasing the state’s share of national wealth, in order it can look like Father Christmas, either with more spending or so-called tax reductions.  We need to have a mature discussion about tax policy, sans the histrionics that typically accompany any suggested changes or new taxes.    

Unlike many on the right, I don’t believe the most important issue is whether the central and local government spend 25% or 35% of GDP.  The real issue is the quality of spending.  Unfortunately, many of those in charge of spending the taxpayers’ money are rarely driven by the need for frugality and cost effectiveness.  I exclude most ministers of finance over the past 30 years or so who have generally done their best to be prudent, fending off big spending colleagues.  

There is a vast array of interest groups who argue for more spending and claim that most Government departments and agencies are underfunded.   Departments themselves rarely if ever say they are over funded and offer money back to the Crown.  The NZ Taxpayers Union is one of very few organisations that actually wants to trim Government expenditure.     

Tax policy can help, but not solve by itself, some major problems such as absurdly high house prices, income inadequacy and wealth inequality.  In the case of house prices, even if the land was free, houses still cost too much to build.  I suspect the Accommodation Supplement actually supports rental rises in the private sector.  (See my post about housing, which is mostly a supply issue) 

The complex “Working for Families”, effectively allows employers to pay less than would otherwise be the case.  Worse, it creates effective high marginal tax rates for hundreds of thousands of people.  It cannot be abolished in one step but its negative effects could be reduced.  

The median income in NZ is around $55,000.  No one on that income should be paying 30% of their marginal income in tax, as they currently do.  Nor should anyone earning a modest $70,000, face a marginal tax rate of 33%.   Income from labour is way over taxed, capital gains are undertaxed and asset transfer from parents to children, or other recipients, are not taxed at all.  

Taxing term deposits now earning around 1%, when inflation is about the same, is simply not fair and partially drives the push into rental housing, by those with savings.             

The last real reform of the tax system was Roger Douglas’s 1984 budget which slashed the top rate from 66% to 33%, introduced GST at 10% and eliminated a collection of wholesale taxes.  Since then the system has become very complex and thus difficult to change without disadvantaging someone.  

Labour’s decision to re-introduce a top rate of 39% on income over $180,000 is lazy thinking, but politically understandable.  Certainly not transformative.  National’s proposal to index tax brackets was a good, if belated, attempt at fairness.  While defeated they should hold onto that concept.          

Transfers between generations and gifting, are windfall gains for recipients and should be taxed.  Why exempt them while taxing people earning the median wage at 30% with higher effective marginal tax rates for those who receive Working for Families Assistance?  

Capital gains should be taxed in a way that is simple to administer, fair and consistent with rapid economic growth.  Not easy.  

I propose major changes to each category 

Income tax:

There be three tax brackets: 11%, 22% and 33%. The tax brackets should be indexed to median incomes.  

Income levels

$0-55,000                                11%

$55,000-110,000                    22%

$110,000 and above               33%

This would create a massive $8 billion plus reduction in Government tax revenue which would have to be offset by other taxes and expenditure reduction.

Capital gains

Currently, contrary to popular belief, not everyone can avoid being taxed on their capital gains.  Property developers and share traders (as deemed by IRD) pay income tax on their profits, while those holding some offshore shares pay a deemed rate of return of 5% on their shares.  Second home owners can pay income tax on properties sold within 10 years.  

All taxes, particularly capital gains, have technical and political problems.   Taxes on unrealised gains often create cash flow problems, if little or no income is produced, while waiting until the assets are sold can distort investment decision making.  

The Michael Cullen report went over the top by ignoring inflation and created too many compliance costs to be viable operationally and politically.  Rather than bring all assets under one tax regime I propose it be tailored for each asset class.    

This area requires real tax expertise.  The Government should seek advice from the experts about the best way of bringing more capital gains into the income tax net, in way that is consistent with an economic growth strategy.   

Inheritance or asset transfer taxes

All transfers of cash and other assets, other than between life partners, would be subject to tax at the flat rate of 22%.  This would apply to all transfers per annum of $5000 or more.  

It would be paid by the donor, whether living or not.

Taxes for “bad goods”

At present we tax alcohol and tobacco at high rates on the basis they discourage consumption of goods because they are bad for health.  There is a case for extending these taxes, but no change should be made without the most rigorous analysis of the facts including the record of them in other countries.

Environmental taxes:   

Any extension of these taxes (including carbon taxes) should again be subject to the most rigorous analysis.

Expenditure reductions

NZ Super:  The age qualification should be increased from the current 65, to 70, starting in 2022, reaching 70 in 2032.  The increase from 60 to 65 happened without too much fuss.  Now Winston Peters has gone its time leading politicians got real.  People under the age of 70 who cannot work at their normal jobs for physical reasons, could access a means tested benefit along with other beneficiaries.  

Kiwisaver subsidies:  End all KiwiSaver subsidies and make it compulsory at the 3 plus 3% level.  

Corporate welfare:  End any subsidies that could be deemed corporate welfare.  Potential to save at least $1B.    

Conclusion

The proposals would improve the lot of those of average and below income and or wealth, at the expense of the rest.  While the wealthier sections of the population would initially be worse off, they also benefit from living in a less fractured society.  

Declaration:  These are my personal views which have been informed by real life experience including: Press Secretary to the Labour Party leader Bill Rowling, PR Manager NZ Manufacturers Federation, consultant to the NZBR, 25 years as a Government Relations consultant and as chair of the NZTU, which ended earlier this year.      

2 thoughts on “A fairer tax system

  1. Hi Barrie

    In terms of your suggestion of raising the age of eligibility from 65 to 70, for government super, what would you propose doing about the rampant ageism which permeates the employment market, in the absence of policy initiatives to address ageism, glib talk of living longer and healthier is a waste of breath. Oh and you might want to take into consideration that Maori life expectancy is 8 years less than their Pakeha peers.

    Like

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