Photo: NZ Labour Party

Sir Michael Cullen: ‘tax is not a necessary evil – it’s a necessary part of a civilised society’

The former deputy prime minister and chair of Labour’s tax working group talks to Duncan Greive about housing, tax, Bill English and Labour’s big 2017 campaign mistake.

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Whatever room he’s in, Sir Michael Cullen gravitates toward the centre. This is less about his gravitas, which remains strong nearly a decade after he left parliament, but because he’s almost congenitally moderate. He was a counterweight to the economic radicals in the fourth Labour government, and the more conventional thinker in the fifth. He lives in Ohope, was a quiet monarchist for most of his life and happily forwent the deputy prime ministership in the interests of forming a government in 1999.

This sense of duty before ego, and of managing sometimes wildly differing ideologies and competing interests, is what makes him a logical choice to head Labour’s tax working group. A cornerstone, and central controversy, of the party’s campaign in the 2017 election, the group was assembled in December, and is tasked with delivering a set of recommendations prior to the 2020 election. Its findings are expected to be inked into the next Labour manifesto.

Reached by phone, Cullen was as sharp as ever, deeply engaged and less guarded than you might expect, happily offering withering critiques of National’s tax cuts, while also not sparing his own party’s recent work in the area.

This interview has been edited and slightly condensed

The Spinoff: This tax working group is not the first and nor will it likely be the last in New Zealand’s political history. Why will yours be different?

Sir Michael Cullen: Because in the past there’s been some really smart people getting in a room and make recommendations. Quite frequently those are politically difficult to sell, and it oftentimes ends up being not really enacted in the way it needed to. One of the problems is almost anything to do with tax is difficult to sell because no tax is all good or all bad.

We have to start from the assumption that the taxation is necessary, not a necessary evil, it’s a necessary part of a civilised society, for all the many things that we want to do and need to do. But almost any tax has some downside – some have more than others but that may be balanced with the amount of upside with that particular tax.

So it’s always a matter of what you’ve got is always a matter of what people know and hate, but what you change is likely to be seen as threatening to some group or another which will therefore of course make a considerable amount of noise about that.

Do you feel like the parameters in which you’re operating are broad enough for the demands of this moment and what you’re being asked to do?

I think so on the whole. Having a position where the income tax rates and low-GST rates can’t be moved at all is a little bit of a constraint, but not one I find particularly worrying. The main constraint which everyone keeps pointing out is the possibility of any kind of capital gains tax or imputed rent taxation on the owner-occupied home and the land underneath it is ruled out.

The reality is if you made that recommendation anyway you know it’s going to be rejected. No New Zealand government is going to propose that, and very few countries have any form of capital gains tax on owner-occupied housing. We have a very limited amount of taxation on capital income compared with most countries but very very few countries go as far as a totally comprehensive capital gains tax which includes absolutely everything at the same rate.

Would you prefer to have that on the table? I’m thinking about our readership, which is often a younger cohort – their home ownership rates have plummeted, largely because of the rise in value there. So it does feel like another implied wealth transfer, for a generation that’s had a few of them go against it. Do you have a view on that?

I don’t think that capital gains taxation on the family home, the owner-occupied house would make very much difference. We’ve seen the same kind of housing booms in countries which do have the same kind of taxes as in Australia and the United Kingdom and elsewhere.

Otherwise, the fundamental problem around housing I do believe is much more one of a constraint on supplied land and therefore on the supply of housing. The current government is clearly trying to address that in a number of different ways but as with so much to do with housing, and as with tax itself, NIMBYism itself is the kind of disease we nearly all suffer from in some form or another.

In terms of taxes which you will consider and may not have been on the table or even plausible for previous tax working groups, the chief amongst those seems to be environmental or carbon taxes. What are your views on those and how important the environmental flow-on effects of taxes ability to incentivise certain behaviours are?

I’m very careful at this stage in the working group’s process not to talk about my personal views in terms of particular forms of taxes. Obviously there is quite a strong push going on, more in the way of environmental tax and more generally taxes which are designed to change behaviour to behaviours which are considered more in the common interest. Whereas taxation in the past has been seen as much more around the individual.

The problem is if you’re merely concerned with maximising economic efficiency and wealth then that may lead to behaviours which are quite destructive of other values. Which is why we’ve included the living standards framework that Treasury has developed, the four capitals of not just financial, but all the human capital, social capital, and natural capital.

One of the big issues in some of these areas is about whether tax is the answer or more effective regulation? That I think you’ve got to approach on a case-by-case basis. I don’t think you can sort of approach that with a mindset that says we must tax everything that’s bad, that’s the solution to the problem.

Moving to the broader international tax environment, do you feel as though the group has both the scope and the power to assess some of the challenges of the giant multi-nationals, especially those operating in a weightless digital economy?

I think that’s a good point, I think in the broader issues we do. We aren’t precluded from repeating the [OECD’s] detailed work on the base erosion and profit shifting that has been going on, but the group is quite keen to engage on the broader issues around international taxation. We were asked for advice around one of the particular issues around GST on things being imported, so we’re taking that as confirmation that we’re certainly not precluded from considering the wider issues.

Do you consider technologies like blockchain and cryptocurrencies and the challenges that they present to the tax system?

Oh yes, oh yes. We’ve already had one discussion around that. Potentially the blockchain/ cryptocurrency web is a major threat to the tax system, because effectively monetary policy, credit creation, and transactions move entirely offshore and are unseen in the New Zealand system.

Which is quite different to what happens now, even with internet banking. IRD are confident that they can manage those threats. I think it’s very important that we understand that they’re very significant threats – but they’re threats which nearly all countries share. So I think we can assume that if these threats become more serious then there will certainly be international action to deal with it, and we’re seeing signs of that already.

Do you get a sense that within the IRD there is an appetite for change, or for them to be able to evolve policy in practise?

I don’t think you could say IRD is at the forefront of looking at new forms of taxation, particularly in the areas like environmental tax and other behaviour-affecting taxes. As with treasury, they seem to be quite keen at looking at things like land tax and capital gains taxes across the board as they always have been.

The practical difficulties with some of those can be quite serious, not just the political difficulties. I mean take for example, land tax. If you were to levy say, half of one per cent of land value around the country apart from owner-occupied housing or the land under it, people in Auckland would be paying far more tax than people on the west coast for example – because their land values are so much higher. But that doesn’t reflect their actual income or capacity to pay.

Michael Cullen emerges from the Labour Caucus room in 2008. Photo by Marty Melville/Getty Images

It does reflect their wealth, or implied wealth.

They may be wealthy or asset-rich, but they’re only asset-rich because of inflation in land values, as opposed to being necessarily income rich. Unfortunately taxes are paid out of income, not out of assets.

I think you can make the argument that the solution to that, if you are going to ring-fence the mythical family home, is if you can’t pay the tax on it, then sell it and create a more vibrant market motion than we have to this point. It might bring down prices, but a lot of young people would appreciate that.

Yes, but you have to be very careful of how you do that and what the phasing and timing is. The last thing you would really want to see happen is a collapse in house and land values. Don’t forget the value of a house in Auckland is largely the value of the land. A house in Auckland which is the same as my house Whakatane is going to be worth probably three to four times as much. We’re living between a beach and a harbour, we’ve got glorious views, three to four bedroom house, and a valuation of about $700,000. I don’t think that would be typical of a similar type of house in Auckland.

You’d be lucky to get that for less than $3m.

So the difference is the land value, our land value is around $200,000 on this house, and there aren’t many sections in Auckland at that level of valuation. So if you collapse those values you also have to collapse land values. Which would be a massive stress upon the whole financial system – the whole economy can suddenly plummet.

It would be lovely if we could work out some way in which, either through a combination of regulation or taxation, we could level off land value prices and get a gentle downward slope over time in some areas – but that’s going to probably require the power of a highly authoritarian government. It’s kind of easy in theory but fiendishly difficult in practice.

But you can do things. We can get more land opened up. My next thought will have some people horrified, but I do think in New Zealand we do make it sometimes just a little too difficult to replace older housing with more intensified inner-city urban development. We can’t save every house that’s 100 years odd in New Zealand or more than 80 years old.

Obviously it would be at risk straying well beyond the boundaries of tax here, but they are all sort of interlocking.

That’s right, but my point is there is that when we’re looking at this, it’s what effect would tax have. For an awful lot of political angst, the actual impact might not be very big. Whereas there may be other mechanisms which might have more effect dealing with those terribly serious issues in Auckland, Hamilton, Tauranga. I mean, it’s sort of spreading down.

It’s a virus.

Even somewhere like Kawerau now we’re seeing impact on the rental housing market. The sort of downwards drift of inflation from Auckland.

Returning to the workings of the group itself, is your sense that what you’ve been tasked with is evolutionary and modifying, or is there potential for this to end up being something more akin to the reforms of the 80s, when there was a sense that tax and the reality of the behaviours it induced got quite badly out of whack?

I think it’s unlikely you’d see changes as sweeping as the 80s, because that was only enabled under a first-past-the-post electoral system, where the government had a strong majority. The will to change became almost obsessive, if I can put it that way gently. Everything changed even when sometimes it didn’t need to change as much or exactly the way that it did.

I don’t think that we need to repeat that. Under an MMP parliamentary environment you’ve got to always be carrying two or more parties with you, and that makes life difficult; that’s the reason the Australian GST system is such a mess compared with ours – ours passed under a single party first past the post government, the oppositions who opposed it then didn’t make any changes when it got into power. In Australia, it got to the upper house in particular, all hell broke loose, and all kind of stupid changes between cooked chicken and uncooked chicken and takeout chicken and in-restaurant chicken and god knows what else.

Everybody looks at our GST system with saliva dripping down their chin, because it is so simple and straightforward.

In terms of the other jurisdictions that you observe are there some you admire for their innovation and efficacy of their systems and that you’ll be considering? Australia and the US are well known as a total mess as far as taxation goes in terms of loopholes and exemptions and clawbacks and so on – but are there some which you really do admire?  

There are some quite different systems around the world, whether they’re better than others is quite a matter of debate, particularly amongst professionals at the present time.

To take an example, some countries manage to make their tax and transfer system work more effectively to achieve a higher level of income equality, but that requires much higher levels of taxation, and interestingly enough, more universality in some of the transfer payments. That might sound strange, and the New Zealand theory is always that targeting will be most effective.

If you look at the Nordic countries, they tend to tax more heavily – more of their transfers are universal but it nevertheless achieves greater equality.

I don’t think the New Zealand public will buy large increases in taxation. When I put the rate up to 39 percent it was almost like I was destroying western civilisation, in terms of some of the public debate. It was actually a very powerful signal as far as I was concerned, the notion that tax rates were going to come down was not one that I was prepared to put up with. It’s really quite stupid as a fundamental idea, that taxation only comes down, because sometimes it may need to go up.

Raising income tax was something that was explicitly ruled out during the 2017 campaign. Were you watching the election debate and wincing a little?

Yes, I think to be honest, my own political party, the Labour Party, made a mistake in having a tax policy that was so general that it was able to be filled up with all kinds of stories. You draw a very loose outline of a picture and you can draw in some very nasty bits and pieces if you want to, and that’s predictably that’s what happened during the election campaign.

In that situation, where Labour was fighting and clawing its way back into being a contender, I think it was inevitable that there would be some clarifications along the lines of those that occurred.

It doesn’t worry me too much around the income tax rate. I think the fact that we have to look at that in the context of not changing those rates, it’s not actually a huge constraint at the present time. All I would say is that in the longer term, if we’re looking at 25-30 years and at superannuation in particular, we’re going to need more tax income coming in, as the price of a civilised society at that point.

There’s a real issue about where that income is going to come from, and probably it does point to the fact that we will be needing to tax more capital income in the future. Otherwise the burden will fall more heavily upon labour income, and those who are currently in their twenties, in the prime earning eras of their lives, will be finding themselves paying more tax than the other generation did. So they’ll lose out again in that.

Assess the performance, with a particular focus on taxation, of Bill English and the last National government.

Well I think you can sum up his party’s policy for a long time – obviously not under Muldoon, but since then pretty much – as ‘we’ll cut taxes when we can’. And that’s it really, there’s not a lot else, although I have to say I think Judith Collins did quite a good job in the international tax area in the brief period that she was the minister of revenue. It took a kind of crusher mentality to get stuck into that particular issue.

You saw in 2008 promises of big tax cuts, which were then broken in the 2009 budget by the fact of the second and third rounds being repealed, and then broken again in 2010 when tax cuts were reinstated, but with a cut in the top tax rate which was ruled out in 2008, and an increase in GST which was also ruled out in 2008. But still with an unfunded level of tax cuts, and the unfunded bit was entirely at the top end. I mean everyone basically paid for their tax cut by the increase in GST – except people like me, who’re on the top rung, who actually got a real reduction in their taxation.

That, I think is basically, is still their philosophy. ‘We cut rates and we cut them as much as possible at the top, and that will somehow make people work harder, save more, and that will make the economy grow faster’. And the evidence for all those assertions is pretty much zero.

In terms of the new government, is there a part of you that looks at it and remembers the energy and the mandate of the 1999-2000 Clark era and misses that to some extent?

Yes, Yes. I mean obviously, it’s much more fun being in government than in opposition and I’m still a political junkie – not as bad as my wife who is obsessed with watching Question Time on replay in the TV – but I’m deeply interested in political questions. That’s why I’m so happy to be included in this tax working group, so we can produce a report which is actually workable.

One of the problems with previous reports has been they’ve been a bit too theoretical and not practical enough, but I think also having the courage to address some of the longer term issues.

There are constraints in terms of scope, but there are also the political realities of a tripartite coalition that relies on both the Greens and NZ First – does that weigh on you when you’re making considerations?

It doesn’t weigh on me. We’ve been MMP now since 1996 and obviously had to work it pretty hard in government, because we never had less than two parties in government. So that’s life, that’s how you have to live within it, and I do sort of have to occasionally remind the working group that there’s no point in producing the perfect tax system if it’s never going to be implemented.

I hope that the National party will hopefully not rule everything out before we even get a report in, and we’ve come close to that in statements in the last few weeks. Because they have a longer term interest, if they can recognise it, in having a tax system that works. That doesn’t stand in the way of sustainable economic development, doesn’t do environmental harm, does increase social capital and human capital, and does pay for what we want as a civilised society. Just expecting, every now and then, that a party will come into power and fix up the under-spending and fix up the taxing, and then they can just happily go in for another few years and whittle away at the services – it’s not a very profound or aspirational view of life.

No, it’s not. But given what we’re looking at internationally, whittling and growing and muddling along seems preferable in many ways. Do you take into account the international environment? Specifically the fact tariffs, which were for so long something that were themselves being whittled away, are now being very much back on the agenda?

Well I’m just fingers and toes crossed that this is a passing phase, not a new interwar example of tariffs bounding away again and increasing and harming international trade and actually people’s living standards. Because hiking tariffs up, other than in the short term response to bad behaviour – which President Trump hasn’t been able to demonstrate in this case – is just a beggar thy neighbour, and beggars yourself, at the end of the day.

You don’t have to be a believer in neoclassical economics to grasp the fundamental idea of comparative advantage and how it operates. And that’s the difference between the left and the right these days: the left believe that not everybody is a winner when these changes occur, and you have to proactively assist the losers, so they aren’t losers for long. That you can actually adapt to the new environment whatever it is.

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