The Tax Working Group Report has generally been positively received. Inevitably, some of the responses are based on first impressions or assumptions which are open to challenge. Rather than letting these go unanswered, we have attempted to provide a short list of those comments which in our view do not stand up to critical scrutiny.
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COMMENT: The proposal to cut the top marginal personal rates will increase inequality – it is a hand-out to the rich.
RESPONSE: The proposal to cut the top marginal rates clearly will benefit people currently on those rates. The points made in the Report, however, are that:
- the low top rate threshold ($70,000 pa) combined with gradual wage inflation mean that more and more people are exposed to the top rate. The Government’s fiscal position is predicated on a tax system that is expected, by 2022, to subject the average wage and salary earner to the top marginal rate
- people on the top marginal rate are only a subset of what we might loosely call “the rich”. Most rich people pay tax at a much lower rate, on most of their income. For instance, with the PIE tax rate at 30%, and the trustee tax rate at 33%, there is no reason for income from investment or most businesses to be subject to tax at 38%. Similarly, people who are rich because they hold significant and appreciating capital assets may not pay any tax on their economic income. The current system places a disproportionate burden on people who cannot avoid the top rate, such as more highly paid wage and salary earners
- the Report considers measures which will ensure that a larger sub-set of “the rich” contribute more equitably to Government revenue. This includes imposing a low rate land tax and ensuring that rental property investment is taxed more equitably. A capital gains tax is also a measure which would achieve this objective, and some members of the Working Group supported investigating this option further, and
- the reduction in Government revenue from reducing the top two tax rates and the trustee rate to 30% is modest – only $1.1 billion out of a total tax take of approximately $55 billion. It could be more than adequately funded by denying depreciation on buildings (if it is found that empirically they do not depreciate).
COMMENT: Land-tax would be an anti-competitive tax on NZ’s land based enterprises.
RESPONSE: There are two responses to this.
First, it is proposed to relieve the land tax burden on many or most land based enterprises by imposing a deductible level (say $50,000 per hectare) which would have the effect of excluding from the tax many land based enterprises such as forestry and pastoral farming.
Second, the economists believe that the effect of a land tax is to lower the cost of land by an amount around about equal to the net present value of the future liability. So, while there is a one-off cost for current land owners, for new buyers, the extra cost of the tax is compensated for by a lower cost to actually buy the land. If that’s right, then the land tax will not have any anti-competitive effect on an international scale.It’s also worth noting that NZ raises a comparatively low percentage of its total revenue from land taxes.
COMMENT: An increase in GST would be a better way to raise revenue to pay for an income tax cut than a land tax.
RESPONSE: GST is commonly seen as a regressive tax, on the basis that those on lower incomes spend a higher portion of their income than those on higher incomes. While the reality is that on a life-time basis, GST is generally proportional, using a GST increase to support a cut to the top marginal income tax rates might be difficult to sell. Furthermore, the compensation to lower income earners required to ensure that GST does not increase absolute poverty levels means that the net gain from raising GST might be much less than $1.9 billion.