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BusinessApril 12, 2018

Count me out on the tax-love bandwagon

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Image: Getty

Even if you admire the ends, the who and what of tax is pretty loathsome, argues Danyl Mclachlan.

Last week was tax week at the Spinoff. It celebrated companies that pay tax, interviewed Sir Michael Cullen, argued that tax is love and that we should stop talking about it as a burden, and gave a platform to ACT’s David Seymour who argued that tax is violence and probably made other points in the paragraphs beyond the first that I didn’t bother reading.

But I want to endorse Seymour’s opening paragraph, partially, sort-of, and argue that while the general concept of tax is very worthy our current system is anything but lovable. That it is arguably, a form of violence, and that if you’re concerned about inequality, climate change, pollution and housing affordability you should consider hating our current tax system.

Wait! Isn’t tax the price we pay for living in a civilised society? Isn’t tax how we express our love for each other? Sure: if you have to put it like that: fine. But those homilies leave out the crucial question of who pays tax and who doesn’t, and what is taxed and what is not. Let’s look at that.

Tax is when the government takes a portion of your wealth. Most of us generate wealth by working. If you’ve got a job you pay PAYE on your salary. If you own a business you pay company tax on your profits. That’s where the bulk of the government’s tax revenue comes from, and GST makes up most of the rest.

But the most profitable way to generate wealth isn’t by working: it’s by owning stuff. A bunch of houses, a factory, a farm, shares in a company, the intellectual property for a software application. This isn’t always the case: an accountant working for a consulting firm might be wealthier than a farmer up to their eyeballs in debt, or a guy who owns a Prius and drives for Uber; but generally speaking, the poor mostly work, the very rich mostly own stuff (economists refer to working as labour, owning profitable stuff as capital).

And in our tax system labour is taxed but capital is not: instead owners are taxed on the revenue they make with their capital, not an increase in its value. So someone earning the minimum wage is taxed at 10.5% and they pay about four thousand dollars a year in PAYE (some of which is probably transferred back to them in benefits or Working for Families, after the government keeps a bit to fund the elaborate bureaucracy required to take people’s money then give it back to them).

Contrast that with Apple, which made $4.2 billion dollars in sales in New Zealand last year but paid no tax because they are able to structure their finances in a way that ensured they returned zero profit; or Sam Morgan who sold TradeMe for $700 million dollars and paid no tax (which he personally considered absurd), or Sir John Key who sold his Parnell mansion last year for $20 million: making an estimated profit of about $15 million over the 12 years he owned it, but also paid no tax.

Can you feel the hate yet?

Wealth created by an increase in the value of capital is what economists mean when they talk about capital gains. New Zealand famously and unusually does not, essentially, tax capital gains (although at the height of the residential housing market’s hyperinflation National introduced a “bright line test” so that you pay tax on a property sale if you bought and sold within five years). Over the last 20 years the total value of New Zealand’s residential property increased in value by about $800 billion dollars – it’s worth way more than our share market – almost all of which was untaxed and little of which involved building new houses, creating new jobs or creating any actual value. Instead it constitutes, as many have pointed out, a vast transfer of wealth from the poor to the rich and the young to the old, has locked most young New Zealanders out of the housing market, led to thousands of families living in cars and garages and is still heavily incentivised by our tax system.

Now let the hate flow through you.

Here’s something else to consider. We tax the creation of wealth in a way that’s horribly unfair – but most of us consider wealth creation to be a good thing. Why don’t we tax harmful things? We do, a little bit. Cigarettes are taxed. Alcohol is taxed. There’s an ongoing back-and-forth about a sugar tax. But greenhouses gases aren’t taxed, which is weird when you consider the incalculable harm they’re going to cause in terms of flooding, droughts, hurricanes and other extreme weather events, and that the government will have to meet most of those costs. Pollution is totally untaxed. The good old dairy industry can intensify land use, wipe out native species, flood rivers with excrement while simultaneously emitting vast amounts of greenhouse gases, burn coal – a deadly carcinogen and greenhouse gas – and all of this is completely untaxed.

Most forms of social harm are neutral in the eyes of the tax system. Consider Facebook, a global company which designs its interface to be as addictive as possible, harvests its users private information and fails to keep it secure, is destroying the media ecosystem, functions as a platform for authoritarian regimes to disrupt elections in democratic states, monetises the spread of fake news and makes many of its users feel lonely, alienated and depressed: yet pays close to no tax in New Zealand. Which might change when they start booking their advertising sales revenue here, rather than Ireland as they’ve been doing for many years: but that will merely bring them closer to parity with the media companies they’re destroying and not, say, the tobacco companies which are closer to the Facebook model in terms of profiting from the damage they inflict on our society.

The current tax system is the product of many years of accumulated decisions about how to pay for the costs of the state. Some of them doubtless made good sense at the time; most were influenced by lobbying and political calculation. You can love the ends: the schools, the health system and so on; but the means are pretty awful. So I struggle with the argument that we shouldn’t refer to tax as a burden when for many low income earners, small businesses and working families it is, literally a burden, a burden which is not shared by many of the wealthiest in our society, or those who cause the most harm to us and our environment.

You can’t radically change the tax system overnight. It’s too complex and vital; you’ll cause too many unintended consequences; taxing income is easy, taxing capital and externalities like pollution is harder. But I hope I’ve convinced you we can all hate it, deeply, and call for progressive governments to work towards a system that is fairer and better, a system which is even, if you really insist: more lovable.

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