Taxing wealth: a necessary step, or unachievable pipe dream?
Monday, 29 June 2020
ANALYSIS: The tax system is the biggest single lever politicians have to change the economy.
Just under 30 per cent of Gross Domestic Product (GDP – a measure of the economy), is taken by the government as tax each year. Changing both the amount that’s taxed and where it’s taxed from has huge implications downstream.
Good adjustments can shore up the system and make it run more smoothly, while bad changes can create chaos and distortions.
The Green Party this week announced its major tax policy for the election, the centrepiece was a tax of 1 per cent on wealth over $1 million and 2 per cent over $2 million.
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The tax would be individualised and would only tackle net wealth, meaning while many Auckland homeowners may fear their million-dollar family home being caught up in the scheme, they’d likely be excluded because most homes are owned by multiple people who would each only be on the hook for a portion of its value. The mortgage on the home would likely take those individual fortunes below $1 million.
The Greens say their policy will only touch the wealthiest 6 per cent of New Zealanders, slapping them with a tax that would yield nearly $8 billion by 2021/22.
It’s a mighty amount of income, although it’s still less than a quarter of what the government expects to rake in with GST in the same year (a cool $32b, dropping to $20b if you deduct refunds).
Tax consultant Terry Baucher says the tax is a long time coming.
“I’m coming round to the view that it’s something we’re going to need,” he said.
The tax system needed shoring up, not just to deal with the enormous costs of the Covid-19 economic clean-up, but to also deal with long-term financial challenges like the costs of the ageing population to our superannuation and health systems, Baucher said.
On the most recent forecasts, Treasury thinks the Covid-19 shock will hit tax revenue by $49.2b over the forecast period, before eventually picking up again. But this is only half the problem. Research compiled by the Government’s Tax Working Group reckoned that the rising costs of things like superannuation would create a budget deficit of roughly 1.2 per cent of GDP by 2030 and a massive 4 per cent of GDP by 2045.
That might not look like much, but in real terms it equates to a funding hole of billions of dollars each year, creating a mountain of debt for future generations to pay off.
Baucher said there wasn’t much room to plug that hole with adjustments to existing taxes.
“There’s not much leeway for getting more out of GST; with income tax you could shuffle the rates around, but 38-39 per cent is as high as any government would want to go.
“We haven’t gone about 40 per cent in 30 years,” Baucher said (another one of the Greens’ tax policies is to create two new income tax brackets of 37 per cent for income over $100,000 and 42 per cent for income over $150,000).
The Tax Working Group also raised the issue of the declining tax base. The largest slice of tax income each year, equating to 40 per cent of the total, comes from individual income tax – the stuff that comes out of your wages. This is likely to come under strain in the coming decade as wage stagnation bites, the gig economy takes off, and an ageing population sees fewer people working.
Without thinking about new taxes, plugging the revenue hole would mean a smaller number of income tax payers, paying more and more tax. New Zealanders already pay quite a lot of income tax. Of the OECD countries, only a handful of national tax takes have a greater proportion of income tax payments.
That doesn’t mean a wealth tax is necessarily the way forward. There’s a reason the Kiwi taxman loves an income tax: it’s very easy to collect. The guiding maxim of our tax system is “broad base low rate”. That means that we generally try to keep our tax rates low with minimal exemptions. This ensures high rates of compliance because there's no great reward for the costly practice of stashing your income somewhere the taxman can't get at it.
A full 87 per cent of all tax income is captured by three taxes: GST, taxed at a single rate with few exemptions; company income tax, again taxed at a flat rate with few exemptions; and income tax, paid at progressive rates.
Wealth taxes are inherently more complex. Wealth can mean anything from something relatively obvious, like the equity an individual has in a home to something far more complex, like the value of a small business.
Clipping the ticket on your income is fairly easy because working out how much income you earn and what proportion to pay in tax is so obvious and simple. Most people barely notice it. It’s much harder calculating a wealth tax as the values of the things that make you wealthy go up and down and you don’t necessarily have them valued regularly.
Deloitte tax partner Robyn Walker said the policy would likely run into the same issues as Labour’s now jettisoned capital gains tax.
“It’s an unrealised CGT, which is not something that is popular,” she said.
There would be issues around how wealth was valued.
“You need to be able to have rules which look at the totality of your wealth,” Walker said.
“The wealth could be dispersed in different ways: You own different bank accounts you’ve got a house you own jointly, you could borrow against the house,” she said.
This would be particularly difficult for the owners of small businesses, which might sit on the cusp of the $1m and $2m thresholds. Their small size would mean their owners would be unlikely to have them regularly valued, yet they would qualify as wealth under the scheme.
“The valuation of businesses is definitely not a straightforward process, otherwise we would have seen more lending go out via the business finance guarantee scheme,” Walker said, referring to the Government’s struggling business loan scheme which had paid just $86m in loans to 503 business, well below the $6.25b the Government had estimated it might pay.
Robin Oliver, former member of the tax working group and once IRD’s deputy commissioner of policy agrees.
“The CGT fell over on valuation issues,” Oliver said.
He suggested a way of avoiding complexity around valuations while also taxing wealth would be to go for a straight land tax.
“All we’ve really got in New Zealand in assets is land,” Oliver said.
“What we have is land, what’s untaxed is land.” A land tax would be relatively more easy to implement as land values were independently calculated for rating purposes.
What the Greens propose is in fact a broader version of this. There's a carve-out for assets worth less than $50,000, so you won’t pay a wealth tax on household appliances, which would avoid some of the drama around what sort of assets are captured by the tax, something that kneecapped the CGT.
But the policy would also be buoyed by some arguments the CGT sought to address, including the preferential tax treatment of certain forms of savings like the family home. The tax working group found that savings on owner-occupied housing (effectively the family home) faced an effective tax rate of 11.3 per cent, compared with an effective tax of 55.7 per cent on savings in a bank account.
The Greens’ policy would get the IRD to build an online tool, which businesses would use to value themselves for the tax. It's valuations are likely to be controversial at first, but people could eventually get used to them as they have with rateable values for homes. There's also an opt-out of the IRD calculation. If you don't want the IRD valuing your businesses, you're allowed to provide your own independently audited valuation.
New taxes are never easy – the imposition of GST was certainly difficult but, with all the easy taxes currently reaching their use-by dates, future governments don’t have much choice but to look elsewhere.