Submission to Tax Working Group

Submission to the New Zealand Government Tax Working Group

April 2018

Submitter:  Income Equality Aotearoa New Zealand Inc –Closing the Gap Peter Malcolm   National Secretary

This submission is from the Income Equality Aotearoa New Zealand Inc which is concerned about the high and damaging levels of income and wealth inequality, and poverty in New Zealand

This submission is in six parts:

  • Basic Submission
  • Appendix 1 Answers to questions asked by the Tax Working Group
  • Appendix 2 More details on a fair, socially just tax system for New Zealand
  • Appendix 3 Some ideas for tax systems
  • Appendix 4 Some comments about tax
  • Appendix 5 List of research and reference material.

Submission to Government Tax Working Group

 

Our Basic Submission

Who we are and why are we doing this: We are Income Equality Aotearoa New Zealand Inc –Closing the Gap. We have some 3000 supporters from around the country.

Research clearly shows that significant inequality is bad for any country in terms of health, economics and many other social issues, and that inequality is much worse in New Zealand than it was some 30 years ago.

The tax system has a significant effect on inequality and so our system should be modified to help reduce inequality in New Zealand. Also the current system is unfair and inconsistent (not all income is taxed, very low incomes are taxed, capital gains taxes are minimal and there no inheritance taxes).

Overall we believe that it is possible for all New Zealanders to enjoy a decent life, one where everyone thrives. In particular every child deserves a good start. But we recognise that big imbalances of income and wealth have been deeply destructive, and make the ideal above very difficult to achieve.

 Our vision for New Zealand: A tax structure which incorporates all incomes, wealth, individuals and businesses, is socially responsible, is fair to all, helps us ensure a quality life for all, now and in the future, and is a major influence on helping to reduce inequality.

A tax system which is promoted as,  and recognized as, a positive contribution to public good. It is the price we pay for a civilized society.

It is our belief that the system should provide a higher overall tax take for Government which, together with more generous welfare and income support payments enables all to live decent lives. See appendix 2 re increased tax take and welfare.

Our basic submission:  we need a tax system that: .

  • is significantly more progressive than as at present i.e. with higher taxes for very high incomes and lower or no taxes for those on low incomes
  • taxes wealth, either annually and/or when assets are sold, probably through a universal capital gains tax
  • provides a higher overall tax take for Government (see appendix 2  Preamble  4)
  • together with more generous welfare and income support payments enables all to live decent lives. (See appendix 2 re welfare Preamble no.5)

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Appendix 1

Questions Asked by the Tax Working Group

  1. What Does the Future of Tax Look like to you?

(A) Tax is the price we pay for civilisation. Therefore it will always be important.

Governments need to tax to:

  • have enough money to provide services eg education, health etc
  • have enough money for redistribution of income/wealth to
  1. ensure all can live decent lives
  2. reduce inequality
  • discourage/encourage certain behaviours,  personal,  for example smoking, and environmental, for example recycling and conservation

(B) Sources of Tax.

1)Because of our rapidly changing world and the interests of fairness, equity and ability to pay, the source of taxation must be as broad/wide as possible. This also ensures that in the light of changing circumstances the tax system can be adjusted without significant disruption. Tax should be paid on ALL income or financial benefits accruing to an individual or organisation including capital gain.  We recognise that this includes tax on the capital gain on the family home. While this is excluded through the terms of reference, we believe that the final report should include comments about this. As this stands it does provide a loophole that can be exploited and will not help in making housing affordable. There could be exclusions or exceptions in terms of how such a tax might be levied to make this more politically palatable.  It is noted that overseas where the family home is subject to CGT then there are various mechanisms to alleviate that tax, such as reduced rates, tax free allowance, exceptions  where the proceeds of sale are offset against any new home purchased and only the net gain is taxed

2)Things that can be targeted by authorities to promote or curb the use of. See 1(A) 3 above.

(C)Who Pays and How the tax is paid:

Who Pays:

  • all over 16
  • we believe that everyone should furnish a return so that all income regardless of source is included i.e.  superannuation, benefits, capital gain, gifts, inheritances. This also reinforces the importance of the tax system in terms of a decent life for all.

2.What is the purpose of tax?   See above 1(A) and

To significantly reduce income and wealth inequality.

To have an impact on the price of housing.

To pay for government services, and encourage/discourage some activities. See 1(A)3 above

3.Are we taxing the right things?

Yes but you need to expand the net significantly to include ALL income regardless of source for individuals and organisations.

4.Can tax make housing more affordable?

Yes. Apart from renting, the taxation system must discourage people from using housing as an investment. Housing should simply be there to provide accommodation and people should be encouraged to use other avenues for investment opportunities. This is also one of the reasons why capital gains tax in some form should be levied on the family home.

5.What tax issues matter most to you?

Reducing inequality in both income and wealth.

Reducing accommodation costs—the cost buying “homes”, and reduce the cost of renting.

Looking after the environment—flora, fauna, water, climate change in particular.

Getting rid of poverty.

Producing sufficient income for the Government to properly provide services for all—see Appendix 2 Preamble no. 4.


Appendix 2. More details on a fair, socially just tax system for New Zealand

PREAMBLE

  1. Income and wealth inequality in Aotearoa New Zealand have grown significantly since the mid 1980s. In 2017 the richest one percent gained 28% of new wealth while the poorest 30% got just one percent. Over the last 30 years the ratio of the average top 10% to the bottom 10% has gone from 5 to 1 to 8 or 9 to 1; for the workforce. as a whole the increase is 3.7%

NZ could aim to reduce economic inequality to the level enjoyed by countries, such as Denmark, where the richest tenth have an average income five times that of the poorest tenth, the level NZ had in the early-1980s. Currently in New Zealand that ratio is nine to one

  1. The current low progressivity of our tax system contributes badly to this present situation

 

Income       Times Living Wage     Tax          After Tax income   Income per week   % tax

42,000         1.00                               9,000        33,000                      635                       21.43%

210,000       5.00                               60,220      149,780                    2,880                    28.68%

420,000       10.00                             129,520    290,480                    5,586                    30.84%

630,000       15.00                             198,820    431,180                    8,292                    31.56%

This shows the lack of progressivity in our present tax scales. No one pays more than 32% of their income in tax. Income tax increases most rapidly around $70,000 when the maximum marginal rate cuts in.

Now the current tax rates:       0 to 14,000                  10.5%

14,001 to 48,000         17.5%

48,001 to 70,000         30.0%

Over 70,000                33.0%

Someone earning twice the living wage–$84,000 is paying the same marginal rate of income tax as someone earning $2 million or more.  That does not seem fair or progressive.

Aotearoa New Zealand ranks 115 out of 152 countries in the progressivity of its tax policies (Nigeria is at 114) and 30 out of 35 OECD countries.

  1. Government tax structures should have two major purposes: to provide sufficient funds for Government services and infrastructure, and to control inequality by carrying out a redistributive function of resources to ensure all can be part of a fair and properly functioning society
  2. Government services are the framework for a civilised country and to have these services freely available to all helps significantly to reduce inequality. There is considerable evidence that current government funding for essential services such as health, mental health, education, and welfare is not adequate to meet the needs of our communities. Compared with OECD countries we are a low tax country. 30% of our GDP is from taxation compared with Scandinavian countries at 40% or above. We have very little tax on wealth and we tax high incomes lightly
  3. The way the welfare and tax systems interact has a big impact on low and middle income households. The current levels of income support such as Working for Families, Accommodation Supplement and other welfare benefits are insufficient for individuals and families to live decent lives, and further, the way these are reduced as people’s income increases is very unfair. It means that many people on very modest incomes can lose most of the extra income earned through increased tax rates and/or reduced income support.
  4. If inequality is reduced it will have a significant beneficial effect on poverty–another serious issue in our country

Key data from the 2016 Child Poverty Monitor

  • 14% of children are living in material hardship. That means 155,000 New Zealand children are in households that are living without 7 or more items, from a total list of 17 items which are considered necessary for their wellbeing
  • 8% (or 85,000) of NZ children are experiencing even worse material hardship with households missing out on 9 or more items from the list of 17. This is a new measure for the Child Poverty Monitor following its introduction to government reporting
  • 28% of children are living in low income homes. That means 295,000 New Zealand children are in homes where money is tight and are considered to be in income poverty.
  • More than 8% of children are in severe poverty. That means 90,000 New Zealand children are experiencing both material hardship and living in a low income household
  • While child poverty has been reasonably stable for a number of years, it is significantly worse than the 1980s now. In 1982 the percentage of children in families experiencing income poverty was 14%, compared to 28% now.

What we believe should be introduced into our Tax System

  1. The Principles under-pinning the economics of our society should
  • be fair to all
  • be beneficial to all
  • look after the disadvantaged
  • reduce inequality
  • recognise the importance of individuals, families and children
  • recognise the economic imperatives for New Zealand
  • recognise the importance of all communities in our country
  • look after our environment both natural and “built up”
  • have all New Zealanders accept the need for taxes and their responsibility to pay their dues ie taxation is not theft

This could be used as a “Check-list” against which any tax system could be evaluated

  1. Why Tax Taxation is the subscription that we all pay, for us all to enjoy the benefits of living as a member of a fair and properly functioning society. The overall tax levels must enough so the things that Government provides that affect people most are sufficient for all to live decently and reasonably, ie health, education, justice, welfare and superannuation. Tax structures do have an affect on inequality and inequality is currently too great in New Zealand. and is consequently a serious problem for us all.
  1. Amount of Taxation accrued by Government. Although it would appear that the Government does not seem interested in raising the current level we would suggest that the final report from the Tax Working Group should include comments about this to at least provoke public debate and political action. We believe that there are a number of Government provided services which are severely underfunded such as health, education, welfare, justice and this has a significant impact on the poor and inequality and the economy. See 4 in the preamble above. There has been a prevailing opinion in many western governments in the last 40 years that an undue percentage of GDP in the hands of government will inhibit economic performance and that everyone, rich and poor will be worse off. That has been the prevailing mantra in New Zealand.

There is an increasing body of evidence from leading economists and the examples of other countries, see 4 in the preamble above, which demonstrates that a higher tax rates will not damage the economy or individual initiative. To increase the total tax take does not necessarily impact on the low or middle income groups.

  1. Who pays the Tax: All according to their ability to pay and there must be systems in place to ensure that all, including foreign owned businesses that make profits in New Zealand, pay the tax they owe. NB: There are many stories around the supposed damage that higher taxes accrue and most of them are myths.
  1. What should/could be Taxed:
  • All income

—wages/salaries/transfers/benefits/superannuation/income from trust

—“rents’ on property, money etc

—any realised capital gain (after costs/inflation adjustments)

—gifts above a given figure each year

—inheritances above a certain figure

  • “negative externalities” tobacco, alcohol ie things that are perceived a negative effect on society
  • Wealth see appendix 3
  • Land, all natural resources ie the Georgian “Land Value” tax and other natural resources such as water
  • Business
  • Financial transactions if agreed internationally
  • Trusts including Registered Charitable Trusts. There are large commercial organisations that are operating as Charitable Trusts, gaining cash flow advantages compared with their taxable equivalent organisations allowing them to expand their operations unfairly. Profits retained in the ongoing operations should be taxed at normal rates.
  • Realistic levels of income for overseas companies making profits in New Zealand

We have some real concerns about “consumption” taxes or levies ie GST, fuel, etc. They are all regressive, have most impact on the poor and as a consequence increase inequality

Further Views on Future Taxation not Mentioned Elsewhere

 Tax Scales Indexed to inflation/CPI. This seems a sensible move which would avoid the problems associated with so-called “tax boundary creep”

GST on Food

  • Our current GST system is very simple. What are the implications of removing GST on food items? This must be reasonably easy to determine from experiences overseas. If it would make the collection complex and expensive for businesses/tax authorities then those costs should be compared to the cost of increasing the beneficiary/superannuation (Transfer) payments. With the move towards the Living Wage (which might practically coincide with the introduction of any new tax system) then the costs to the lower income wage groups would be automatically catered for. Remove the tax on food only if there is a proven overall net benefit. Also see above on consumption taxes.

 GST on Imports

  • GST on imports should be lowered to all imports over $40, to avoid discrimination against local retailers.

 Capital Gains Tax

  • There should be a broad based capital gains tax on profits of all assets sold (or disposed of) after an allowance for inflation. There should be a minimum taxable level set. Capital losses to be offset against current or future CGT profits – not other income. Profits should be taxed at income tax rates

It should include the family home (though it is noted that this is outside your brief – but should be commented on in your final report see appendix 2).

Harmful activities

  • There should be a tax on sugar and its substitutes where those substitutes are known to be harmful.
  • Similar taxes should be introduced where recommended by health professionals to avoid societal health costs.
  • Environmental harmful activity (listed by central Government) should be taxed/fined/controlled (rules set by central Government) by the relevant Regional Local Authority. Central government should also be responsible for implementing recycling levies/schemes at the point of importation/manufacture for items such as electronic goods/tyres/plastics/glassware etc.

Superannuation

  • Should be taxed where other income exceeds a set amount (say $60,000–indexed) to be fully offset (at say $100,000). Ie the superannuation is paid gross and then added to all other income for tax purposes

 Land and other Natural Resource

  • Land, and other natural resources such as water could be taxed.
  • There is a land-value windfall tax which is a tax placed on a gain in the capital value of land that results from the actions of central or local government. For example, a Council rezones ‘rural’ land to ‘residential’ thereby increasing the capital value by 900% – say from $1,000,000 to $10,000,000. The gain of $9,000,000 should be taxable. Another is Central government builds a motorway resulting in an increase in land value near access points or central government and local government jointly fund a light rail system resulting in an increase in land values along the corridor.

Appendix 3  Some more specific details required for a better tax system for all

A More steeply progressive tax system for New Zealand is essential if we are to reduce income inequality

Here is an example of a fairer more progressive tax system.

New Tax Rates

Income                                    Tax Rate           Tax Paid on           Amount of Tax

0 to 20,000                              0

20,001 to 40,000                     20%                  40,000                   4000

40,001 to 80,000                     30%                  80,000                   16,000

80,001 to 120,000                   40%                  100,000                 24,000

120,000                 32,000

120,001 to 160,000                 50%                  160,000                 52,000

160,001 to 200,000                 60%                  200,000                 76,000

over 201,000                             70%                  400,000                 216,000

 

Current Rates

0 to 14,000                              10.50%             14,000                   1,470

14,000 to 48,000                     17.50%             48,000                   7,420

48,000 to 70,000                     30%                  70,000                   14,020

over 70,000                              33%                  80,000                   17,020

100,000                 23,920

120,000                 30,520

400,000                 122,920

 

Comparisons

income                 at current tax rates     new tax rates

10,000                  1050                           0

20,000                  2520                           0

30,000                  4270                           2000

40,000                  6020                           4000

50,000                  8020                           6000

60,000                  11,020                        10,000

70,000                  14,020                        13,000

80,000                  17,020                        16000

90,000                  20,020                        19000

100,000                23,920                        24,000

150,000                40,420                        47,000

200,000                56,920                        76,000

400,000                122,920                      216,000

 

Another approach could be continuously increasing tax rates instead of the step function rates above.

Taxation on Families

Some possibilities

  1. Families—add all incomes together, then split into separate incomes according to the number of members in the immediate family (one for each adult and a half for each child under 16) and then tax each unit as individuals as per above

Eg  A 2 adults and 2 children family with a total income of $60,000 is treated as 4 incomes of $20,000, $20,000, $10,000 and $10,000 and taxed accordingly

1 adult and 2 children family would be treated the same

2 adults and 3 children would treated as 5 incomes of approximately $17,000, $17,000

and 3 of $8500 Ie no tax on any of these example

NB the net income for families 2 adults 2 kids with one and a half FT jobs at the living wage is about $60,000 per year   ie no tax to be paid

  1. Many would argue that because in this day and age the concept of “families” is very difficult to define , a better approach might be to treat everybody (over 16) for tax purposes as individuals and have a significant UBI (at least $80 per week) for all under the age of 16.

 Taxation on Individuals

Add ALL cash income ( not assets –assets should be taxed when realized) from all sources including transfers. Some sources may have to contribute only a percentage eg capital gain, inheritance income and spread over a number of years

The alternative would be different tax rates for capital income, but this would be more complex than above. One off incomes could be spread over a number of years with a progressive tax on this with zero tax on the lowest rising to a maximum marginal rate on “income” of some upper figure.

We suggest that if we have strongly progressive tax scales, then we should pay all benefits to all  (the UBI for children to all, GRI and other super schemes to all)  and claw it back from the well-off through the progressive tax scales. Have all adults complete tax returns as we all used to.

Consumption taxes.

Where these affect everybody they need to be kept as low as possible because of the greater effects on the poor.  Perhaps there could be exceptions eg certain foods.

Wealth Tax

It is important  to try to ensure that high wealth holders contribute to the wellbeing of all through the tax system. A comprehensive capital gains tax will capture the returns on wealth. Maybe a better approach might be a small annual percentage tax paid on high wealth that would generate significant revenue.  Its annual cost to individual asset holders would be small enough to not encourage avoidance or tax minimisation strategies.

Another approach is a” deemed rate of return” of property, that encourages assets to be used for productive purposes instead of seeking passive returns by simply holding assets for capital gain.

The OECD has a very good study on wealth taxes. See appendix 4

Tax problems which affect the lowest earners and urgently need fixing:

  1. The amount which can be earned before benefits are severely reduced or stopped completely, should be raised substantially. The allowable earnings in addition to the benefit, before claw-backs set in, are still only $80 a week for a single person, an amount that has not been raised since the 1980s and equates to only a few hours at the minimum wage
  2. The rules and processes for combining benefits and earnings, which are both of course subject to tax, must be revised so that they work effectively and sustainably for all parties concerned and support people as they re-enter the paid workforce. All beneficiaries should be able to access this combination in an efficient, manageable way. That is what the internet and computers are for!
  3. The secondary tax rate levied on additional jobs must be removed immediately, so that the very common combination of several low-paid jobs, often with irregular hours, does not penalize people who are already earning very little in total.

Although it is in theory possible to put in a tax return at the end of the year and receive a refund, this requires considerable skill to achieve and is far too late – the money is needed when it is earned. Labour promised to do this in its manifesto but seems to have been silent about it since. This is all the more urgent because the National led government removed the low earner rebate and it has not been restored.


Appendix 4  Some Comments about Taxation by Experts

 

Capital Gains Taxation

Taxes are most effective if they treat all income as being equal.  NZ does not tax capital gains (unless they are earned by professional property developers) encouraging casual investors to buy property in the knowledge that profits made will not be taxable.   As well as being unfair this distorts capital investment decisions.

IMF mission chief Thomas Helbling told a briefing in Wellington targeting bottlenecks in the housing supply, redirecting savings from property into other investments …….. would help lift potential growth for New Zealand.

A tweak to the country’s existing capital gains tax was seen as addressing both housing issues and supporting savings and other investments, Helbling said.

“There is a sense that the asset allocation in New Zealand households has a bit too much emphasis on housing versus other investments. We think a capital gains tax at the margin would help,” he said. “We think there would probably be benefits in the sense of redirecting savings towards other instruments and deepening the capital markets.”

Progressive Tax Rates

The advocates for lower tax rates on the rich argue that this encourages the rich to invest in economic growth.    Probably one of the most successful investors of all time, American Warren Buffet refutes this on two grounds.   Firstly the issue of fairness.

Warren Buffett has publicly stated that he believed it was wrong that rich people, like himself, could pay less in federal taxes, as a portion of income, than the middle class, and voiced support for increased income taxes on the wealthy. He believes taxpayers in the highest income bracket should pay tax at a higher rate than less-affluent Americans.

Buffet says “last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.  This is wrong and unfair.”

The second issue is the claim that higher taxes on the wealthy discourage investment.   Buffet disputes this.

“Back in the 1980s and 1990s, tax rates for the rich were far higher including my own. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.”

High levels of CEO salaries

One of the obvious sources of inequality is the very high levels of CEO salaries.    This is a matter that is increasingly attracting the attention of shareholders in public companies but is also becoming an issue in state owned entities.

Prime Minister(at the time) Bill English has criticised the Board of the New Zealand Superannuation Fund for approving a 36 percent pay-rise for chief executive Adrian Orr last year, and suggested there could be a shakeup in how CEOs of the largest state entities are paid.

English said he was disappointed with the board’s decision to lift Adrian Orr’s salary to over $1 million in 2016. As finance minister, English opposed the raise as “too large in the current economic climate” and suggested a 2.5 percent hike instead. The prime minister said the raise would be taken into account when it comes to reappointing board members.

The argument in favour of ever higher CEO salaries is that this rewards superior performance and is needed to attract high calibre people.   But it is becoming increasingly apparent modern companies run better with flatter pay structures.

Dean Hall is chief executive and founder of Rocketwerkz, a Dunedin-based gaming studio undergoing rapid expansion and having attracted investment from a Chinese internet giant.  Since moving to the city two years ago, Hall’s company now employs 40 people and is on track to reach 100 by the end of the year.

There is unlimited annual leave, profit sharing, open financial statements, a chief executive who pegs his salary, and Friday sport days.

“Major decisions are open, the company’s financials are open,” Hall said. “We think that helps keep you honest.”

If Hall wants to fly business class, he has to justify it to his staff. His salary is pegged at 10 per cent more than the highest-paid employee.

“We try and keep the salaries realistic, and instead make lasting changes in people’s lives through profit share.”

Hall said he wasn’t driven by money and after his early financial success, “realised I didn’t care that much about money”.

Offering unlimited annual leave wasn’t offering a perk to an employee, he said, but was offered simply “because it works”.


 Appendix 5 . List of some of the research and reference material used.

  1. OECD reports

http://www.oecd.org/social/inequality.htm

http://www.oecd.org/social/inequality-and-poverty.htm

https://data.oecd.org/inequality/income-inequality.htm

https://www.oecd.org/social/Focus-Inequality-and-Growth-2014.pdf

http://www.oecd.org/social/in-it-together-why-less-inequality-benefits-all-9789264235120-en.htm

http://www.oecd.org/els/soc/dividedwestandwhyinequalitykeepsrising.htm

http://www.oecd.org/tax/the-role-and-design-of-net-wealth-taxes-in-the-oecd-9789264290303-en.htm

 

  1. World bank reports

http://www.worldbank.org/en/news/press-release/2018/01/30/world-bank-report-finds-rise-in-global-wealth-but-inequality-persists

http://live.worldbank.org/poverty-and-shared-prosperity-2016-taking-on-inequality

https://www.google.com/search?client=gmail&rls=aso&authuser=0&q=world+bank+inequality+data&sa=X&ved=0ahUKEwii0oTWrKLaAhWP

 

  1. MoSW Brian Perry reports

https://www.msd.govt.nz/about-msd-and-our-work/publications-resources/monitoring/index.html

https://www.msd.govt.nz/about-msd-and-our-work/publications-resources/monitoring/household-incomes/

  1. Recent modelling by Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva shows top tax rates in developed countries could be as high as 57-80% before losses from avoidance etc outweighed the revenue gains. (The paper is here:https://eml.berkeley.edu/~saez/piketty-saez-stantcheva12thirdelasticity_nber_v2.pdf
  2. A New New Zealand Tax system Rob Salmond
  3. The Price of Inequality Stiglitz
  4. Inequality Atkinson
  5. Inequality A New Zealand Crisis  Rashbrooke et al
  6. Capital Piketty
  7. Inequality and the 1% Dorling
  8. People First Economics  Rans  and Baird
  9. The Spirit Level Wilkinson and Pikett
  10. The Conscience of a Liberal Paul Krugman
  11. Utopia for Realists Rutger Bregman
  12. The Equality Effect Danny Dorling
  13. The Broken Ladder. How Inequality Changes the Way We Think, Live and Die Keith Payne