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OPINIONPoliticsApril 27, 2023

Our unfair tax system has been exposed – will Labour do something about it?

a green piggy bank with a house being deposited in it on a floor of money notes
Image: Archi Banal

Although the outcome of the forthcoming battle over taxes is no clearer now than it was last week, the territory on which that battle is fought has changed forever, writes Max Rashbrooke.

Wednesday’s landmark report from Inland Revenue shows that the 311 of the wealthiest New Zealand families are paying a lower rate of tax than minimum-wage workers. They only pay 8.9% of their income as tax (or 9.4% if you include GST), largely because most of their income is taken as capital gains, which we don’t tax in any systematic fashion.

Many have long harboured suspicions that this is the case. But it’s one thing to suspect a given situation exists, another thing entirely to be able to prove it. 

The wealthy’s veil of secrecy has been pulled aside and we now have, as revenue minister David Parker put it in a speech yesterday, proof of “a fundamental unfairness” in the New Zealand tax system. Virtually every developed country in the world, except us, taxes capital gains. They also tend to tax land, property, house sales or wealth as a whole.

The Inland Revenue report, and the appalling inequity it reveals, has permanently changed the debate on these issues. The knowledge that multi-millionaires pay a lower tax rate than aged-care workers will tilt all future discussions towards greater fairness and towards trying to ensure that those with the deepest pockets pay their fair share. The report will provoke outrage from ordinary people who pay tax on every cent of their income, and expect others to do the same.

The report will also make people think about the revenue lost by not taxing capital gains. The lost revenue from the 311 families in the report – roughly 0.01% of taxpayers – is clearly in the billions of dollars over several years. If we extrapolate out from there to include the rest of the top 1%, some 40,000 people, the sums will be even more enormous.

But as Parker asked rhetorically in his speech, “What, if anything, do we do [in response]?” Here is where things are less clear. The territory has shifted, but tax remains a very hard battle to win, in New Zealand at least.

Having got the data he long desired, Parker’s next move is to introduce a Tax Principles Act, which will enshrine a statement of the values underpinning the tax system – fairness, efficiency and so on – and require reporting against related measures, including the tax rate paid by the wealthiest.

A graph showing mean capital gains on residential properties (Image: IRD)

Whether this will have any lasting effect is unclear. Right-wing groups have already made it clear they dislike including something called unrealised capital gains in the definition of income the Inland Revenue uses. That is, increases in the value of assets that have not yet been sold.

Parker can argue, correctly, that this is income. Not only is it an increase in wealth that its holders can borrow against, it will also eventually turn into conventional income when sold. And if such unrealised gains aren’t counted, the true incomes at the top end will be understated.

But it wouldn’t be hard for a future National government to change this definition. So beyond reporting measures, the real question is whether Labour wants to introduce anything that will deal with the problem their own agencies have identified. 

In particular, do they want to revisit the capital gains tax (CGT) debate? Although there are other options out there – including the Land Value Tax that TOP and others propose – a CGT is something Labour has extensively researched, is probably more politically palatable than the alternatives (though there is little specific polling on these issues) and would directly address the unfairness that’s just been revealed.

Contrary to much political commentary, a CGT was not universally unpopular: polls in both 2014 and 2018 showed around 40% of people in support (more than outright opposed it), despite the lack of a consistent campaign by either Labour or civil society. This suggests that a concerted and coherent push could get it across the line.

On the other hand, Labour remains scarred by the debacle of 2018-19 when it put the issue to a working group, was unable to defend its own policy for the duration, and saw the argument become lost as opposition and misinformation poured into the breach. It’s also unclear that now is the right time for tax rises. 

In the midst of a cost-of-living crisis and a probable recession, the public seems more in the mood for tax cuts than tax increases. Another option, of course, would be a tax “switch”: cutting the bottom rates of tax (or introducing a tax-free threshold) while bringing in a CGT.

Parker obviously favours something along these lines: in his speech yesterday, he said, suggestively, “If you do have a tax switch…” and, later, “There’s many ways to switch things.” But this isn’t Labour policy – which, he was careful to say, won’t be announced until later in the campaign – and it’s not a straightforward exercise either. 

Making the first $5,000 tax-free, for instance, would cost around $1.8bn. That would be a lot of revenue to make up, when a capital gains tax – if it applies at the moment people sell assets – takes a long time to raise much money. And the move would still face many of the usual right-wing attacks. So even with the scale of the problem now plain to see, the prospects for a proper solution remain distant.

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