In the wake of two reports that reveal the shockingly low rates of tax paid by New Zealand’s wealthiest, Bernard Hickey talks to the revenue minister who commissioned them about reframing the debate.
Changing taxes is really hard; increasing taxes is almost impossible. And introducing a new tax has proven absolutely impossible over the last decade in New Zealand. And when we think about the debates around capital gains tax ahead of the elections of 2011, of 2014, and then 2017, you realise just how hard it is to get anyone to agree to a new tax.
In essence, there is a massive problem here with magical thinking. We love the idea that we can have public services, maybe even some initial infrastructure investment, but we don’t want to have higher taxes to do it. And over the years, that’s meant that we have continued to cut taxes, because one way to get elected is to promise a tax cut, and provide services, or more importantly, keep a sinking lid on services. But this wasn’t always the plan.
Way back in the late 1980s, when our tax system was being reformed in a really big way, we slashed income taxes. And we introduced a new type of tax, the Goods and Services Tax. It’s been increased a couple of times since then. But what it’s meant is that we have built what appears to be a very efficient and sensible tax system, broad base low rate, hardly any exceptions, certainly for GST, and a very simple system for PAYE.
But in doing that, we’ve created a massive hole in our tax system, which is now skewing our economy towards a lot more investment in dead land in particular. Our tax system should be progressive – which means as you get higher and higher up the income spectrum, you should be paying a higher percentage of your income in tax – but that’s not the case. Particularly because we don’t have a capital gains tax.
This week on When the Facts Change I spoke with revenue minister David Parker, who thinks about this a lot, and who a year ago asked Inland Revenue to do a study of what the actual wealth and income of our richest people was. IRD went away and surveyed more than 300 families, and found that on average, they were worth a quarter of a billion dollars each, and that collectively, those 300 families created income in the 2020-2021 year of $14.6 billion.
But because there is no capital gains tax, we discovered this group paid an effective tax rate of just over 9%. Why is that? Well, it’s largely because most of their income is structured as capital returns. It might be a purchase and sale of land, or some sort of company. And quite often, there is no tax to pay, there’s nothing to declare. So what that’s meant is that over time, we’ve built a system where those who are the richest and who should be paying a higher percentage of their income in taxes than those on lower incomes have ended up paying less.
The two studies produced this week by IRD and Treasury show that someone on an $80,000 a year PAYE income will effectively be paying 30% of their income in tax, both in PAYE and through GST, because they probably spend about three quarters of the money they earn. Those people who are on lower incomes will actually be paying quite high rates as well. What it means is that now, because of this hole in our tax system, those people who are the richest are effectively paying a third of the tax relative to their income of those on lower incomes. We’ve built ourselves a fundamentally unfair tax system.
And we’ve locked it in for nearly two decades, in that we haven’t been able to introduce a tax on capital gains, or on wealth, or an inheritance tax, all of which are perfectly conventional and in place in other areas. It’s meant that our tax system has been not just economically locked in place, but politically locked in place. Now, we know that in 2017, then opposition leader, soon to be prime minister Jacinda Ardern decided three days before the election to bail out on Labour’s policy of bringing in a capital gains tax in its first term. She promised not to do that, and instead have a tax working group. And then in 2019, when that report finally came back, she promised that in her political lifetime, she would not bring in a capital gains tax. And that’s why we didn’t have a debate about it at the 2020 election.
Now, everyone else in the Labour Party pretty much still wants a capital gains tax to redress this fundamental unfairness in our tax system. David Parker is one of those, but he hasn’t expressed a particular view in this interview about what type of tax change he wants. So he’s been very careful not to say what he would like to do. But this research ordered by David Parker and presented by David Parker this week reframes the debate about tax. Up until now, a capital gains tax has been presented mostly as something that would hit middle New Zealand, that would stop them from being able to buy rental properties and from being able to build up their wealth, from being able to get on the ladder and help their families get on the ladder.
But this research shows that the biggest chunk of untaxed income is actually concentrated around a relatively small number of people earning enormous sums and hardly being taxed at all. For example, if those 311 families had been taxed at the same effective tax rate as someone on a PAYE income of $80,000 per year, they would have paid $3.3 billion extra in tax in the 2020-2021 financial year. Instead, that money had to be borrowed. And those people who earn that money didn’t pay tax on it.
There is a new opportunity here to reframe the debate around whether those on extremely high incomes should pay a fair share, rather than a debate about middle New Zealand paying a capital gains tax. Find out some more from my interview with David Parker, recorded on Wednesday afternoon, just after the release of the two reports from the IRD and Treasury.