Following the IRD report that laid bare our regressive tax system, much has been made of the need for a wealth tax. But a bold response would be significantly reducing taxes on work and consumption at the same time, argues Elliot Crossan.
The fact that the wealthiest New Zealanders pay less than half the tax rate of the average Kiwi came as a shocking revelation to many. But this discovery, which came from an Inland Revenue investigation that gathered data from 311 families who hold a staggering combined wealth of $85 billion, shouldn’t really come as much of a surprise.
It is a long-established fact that Aotearoa saw the fastest rise in inequality of any OECD country during the free market revolution of 1984-1993. We know that no serious action has been taken since to tackle those obscene levels of inequality. The Labour government’s economic response to Covid, favouring businesses and homeowners over workers and renters, made the situation even worse – 2020-2021 saw the biggest increase in inequality in the history of our country.
The response from progressive elements in society has been widespread calls to increase taxes on the rich, coming from the Council of Trade Unions, experts such as Max Rashbrooke, and community groups such as Auckland Action Against Poverty. This call has been supported by the Green Party and Te Pāti Māori – the two parties Labour are likely to need the support of to remain in government after October’s election.
There is no doubt that anyone interested in building a fairer, more equal society should be supporting major increases in taxes on wealth, capital gains, corporations and the highest incomes. Largely missing from this analysis, however, has been a discussion of how much tax is paid by ordinary working people in Aotearoa, especially the poorest.
Aotearoa has the most comprehensive tax on goods and services in the OECD. Add to that the fact that there is no tax-free threshold on incomes in this country – Australia has no income tax on the first $18,200 earned ($19,536 in NZD), while the UK has a “personal allowance” of £12,570 ($25,426 in NZD). Meanwhile, if you earn $1 in Aotearoa, you will be taxed at 10.5%.
This is a deeply regressive tax system. It is a huge driver of inequality at both ends of the scale. Extremely low taxes on the wealthy, and alarmingly high taxes on the poor.
Where did this system come from?
The roots of this regressive tax system go back four decades. Roger Douglas, the infamous finance minister of New Zealand between 1984 and 1988, was a radical adherent of free market ideology, despite being a Labour Party minister. In just four years in office, he transformed our economy with staggering speed from a welfare state to a free market “paradise”. The policies of Douglas and the fourth Labour government he was part of, widely known as “Rogernomics”, ensured we went from being one of the most equal countries in the OECD to one of the most unequal. No other advanced capitalist country in this period adhered so closely to the dogmas of neoliberalism – some of the policies pursued were extreme even compared to Margaret Thatcher’s government in the UK.
The fourth Labour government revolutionised the New Zealand tax system. Douglas slashed the top rate of income tax from 66c in the dollar to 33; he reduced company tax from 48% to 28%; and in 1986, he introduced the Goods and Services Tax (GST), initially at a rate of 10%. He abolished inheritance tax and stamp duty.
Prime minister David Lange began to get cold feet at the speed and scale of his government’s reforms, and in 1988, he sacked Douglas from cabinet after the finance minister proposed an even more extreme policy – abolishing progressive taxation altogether, and replacing it with a flat tax. This proposal was never implemented. Yet Douglas’s successor David Caygill did increase the rate of GST to 12.5% in 1989; and 21 years later, National Party finance minister Bill English raised it again to 15%.
Aotearoa is one of the only countries in the OECD that doesn’t tax capital gains. We have no wealth tax either. We have the 12th-lowest top tax rate of the 38 countries in the OECD – Labour introduced a new top tax rate of 39% on incomes over $180,000 in 2021, which is lower than the 45% rate on incomes over £125,140 ($252,868 NZD) in the UK, and the 47% rate on incomes over $180,000 ($195,013 NZD) in Australia. Meanwhile, while our corporate tax rate of 28% is on paper one of the highest in the OECD, in terms of how much profit is actually taken home by shareholders, it is actually the sixth-lowest rate in the OECD.
All of these factors contribute heavily to Aotearoa’s economy rewarding asset ownership rather than work. If you want to get rich, you need to own assets. If you’re an ordinary worker, your options are to take out a mountain of debt to buy a house, or, if you can’t afford that, to rent for the rest of your life, and live in a constant state of instability and stress.
It is work that creates value in our society. It is ordinary workers who drive the economy forward. We saw that highlighted starkly during the pandemic – it was nurses, cleaners, supermarket employees and such who were considered to be essential workers, not CEOs, bankers and landlords. It is work that should pay, not asset ownership. Until we radically restructure our economy to reward work, we will endure a permanent housing crisis and a permanent inequality crisis.
Labour’s timidity on tax
The current cost of living crisis we are experiencing, with inflation at highs not seen in decades, and food prices in particular soaring, has partially been driven by the Labour government’s timid refusal to implement any kind of tax on wealth or capital gains. The response being engineered by the Reserve Bank – recession and austerity – is the regressive alternative.
One way of tackling high inflation is to reduce demand in the economy. Somebody has to reduce spending. The Reserve Bank is attempting to engineer a recession to increase unemployment and reduce wages to tackle this problem, while calling on the government to either increase taxes or reduce spending. The Act Party is campaigning to slash spending on social and environmental programmes, while the National Party leadership are, by railing against Labour’s “overspending”, implying more subtly that they will implement austerity if they enter government in October. In short, the ruling class and their political representatives are gearing up to make the workers pay for the inflation crisis.
Labour could respond by rightly pointing out that their Covid-era spending was eminently necessary, and that instead of now cutting jobs, wages and state spending to compensate, they could tax the rich to reduce the spending of those who can afford it. They could at the very least follow in the footsteps of Boris Johnson’s Conservative government in the UK, and implement a windfall tax on excess profits to dampen inflationary pressures. But Chris Hipkins is following in the footsteps of Jacinda Ardern by being so timid on the question of tax that the right-wing British Tories look like socialist radicals in comparison.
The fact that this Labour government – and the Helen Clark government before it – have been so timid about taxing the rich demonstrates how deeply rooted neoliberal ideology is among the ruling class in this country. In the absence of a coherent alternative, free market ideas have been allowed to run rampant, and Labour has been given no impetus to deviate from them. The only way that is going to change is if a movement emerges for real change.
The case for an alternative
The New Zealand left needs to make a clear, bold case for an alternative to this extremely regressive tax system. We need to build a coalition to force Labour’s hand. We need to demand huge tax cuts for the poor, alongside increased spending on social and environmental programmes, funded by comprehensive taxes on the rich.
Firstly, GST must be abolished. Consumption taxes are infamous for placing a higher share of the tax burden on those with lower incomes. Roger Douglas’s legacy must be reversed. This would reduce all prices by 13% – a huge help during the cost of living crisis. Secondly, a tax-free threshold should be established on the first $25,000 of income. This would mean a tax cut of $2,625 per year for an individual earning $25,000 annually. Work should pay, and all workers deserve to benefit from these tax cuts. They would amount to a huge increase in real incomes for ordinary working families across the country.
These tax cuts cannot be revenue-neutral. There is an urgent need for increased spending to tackle climate change, to build tens of thousands of new state houses, to invest heavily in our woefully inadequate public transport system, to reverse decades of underfunding in our health and education systems, and to give public sector workers such as nurses and teachers the long-overdue pay rises they deserve. Government spending needs to rise to transform our society back towards fairness and equality.
To grant these sweeping tax cuts and increase spending at the same time sounds like an impossible task. But it’s not. As IRD found, the rich pay a shockingly low amount of tax. The combined net worth of the 311 richest families in the country is $85 billion. These families on average hold 276 times more wealth than the average Kiwi household. Meanwhile, the top 5% own 37% of the wealth of NZ – $595 billion for the 93,150 richest families. Core Crown revenue in 2023 was forecast last year to total $116.1 billion. The demand needs to be ambitious – we need to take at least half of that $85 billion into public hands, and tax everyone in the top 5% at a higher rate, to pay for the transformation to a fairer, greener, more equal society.
The ultra-rich have had it far too easy for far too long. We need to increase corporation tax, reinstate a top tax rate of 66% on incomes over $500,000, and reintroduce inheritance tax. To help tackle the housing crisis, we need to introduce new taxes on empty houses and on capital gains. But above all, we need a supertax on wealth. Billionaires should not exist in New Zealand. All wealth over $1 billion should be taxed at 100%. We are a rich nation – it is time to end the disgrace of a society that has poverty amid plenty.
The left can then aggressively debunk National and Act’s mantra that they are the parties that want to cut taxes for ordinary people. They do not. They want to cut taxes for their rich mates, while leaving in place the huge tax burden on low- and middle-income workers. The left must be the ones fighting for actual tax cuts for workers, paid for by those who can afford to pay their fair share and are not remotely doing so.
We must also debunk the myth that right-wingers believe in hard work. They do not. The free market extremists who dominate National and Act believe in an economy where it pays to own assets, not to work hard. The left believes in giving workers a far greater share of the pie, while reducing the wealth of those who own assets instead of working hard. Those who produce the real value in society, the working class, must be rewarded at long last.
The Labour government will need to be kicked into action if we are to see this transformative vision realised – and even the Greens and Te Pāti Māori’s plans to tax the rich do not nearly go this far. A grassroots campaign to tax the rich and cut taxes for workers is needed, uniting unions and community organisations in a fight for a fairer society. It’s time for real action on Aotearoa’s crisis of inequality.
