Tax – The Facts

For too many people, taxes are regarded as a cost; a cost that leaves less money in people’s pockets to enjoy the finer things of life.  This view is echoed in the corporate world where it is claimed that taxes detract from the ability of companies to provide jobs and economic growth. For these reasons politicians pander to voter’s antipathy to tax by promising ever decreasing tax rates.

But is this the whole story?  Are people in countries with the lowest tax rates happier than those who pay more tax?

The evidence is quite the opposite.   When international comparisons are made on the quality of community life, the measured levels of health and happiness are always better in countries where the people are more equal.    While it might be presumed that the poor will be better off in a country that is more equal, the surprising discovery from recent research is that in more equal countries even the better off have a better life that they might have in a country plagued by inequality.

In other words everyone benefits, not just the poor, when economic policies that reduce inequality are introduced.   Even the rich are better off by sacrificing some of their absolute wealth in exchange for less inequality.

Denmark has the lowest income inequality among all the OECD countries and studies show that living in neighbourhoods where most people earn about the same can make you happier

Countries such as Denmark tell us two things.   Firstly they detest inequality and secondly they are happy to pay more tax to achieve that.

What is it that the Danes are buying with their higher taxes?   Why do they like their tax structure?  They are in effect paying a “subscription” to belong to a caring society with strong welfare provisions, good infrastructure, successful education and health systems and so on.   Their taxes do not end up with everyone on the same income – far from it.  There is still room for some people to prosper due to hard work or skill.   In fact their welfare system is very focussed on getting people into work.

But there are several ways in which the Danish tax system works differently from ours in NZ.

For a start they tax all income, from all sources.   In particular this means taxing capital income.  New Zealanders are able to buy shares or property, expecting that these investments will increase in value over time.   Unless you are a professional trader in shares or property, this income is tax free in New Zealand.   Not so in Denmark.  Profits earned from property speculation or the inflation in the value of works of art are treated as part of your income for tax purposes.   This seems fair.

They also have very progressive tax rates so that the super-rich pay tax at a higher marginal tax rate than the wealthy now pay in New Zealand.

European settlement in New Zealand was marked by a belief in equality.   The immigrants from Britain in particular wanted to turn their backs on a hierarchical society where wealth and influence were embedded in a class system.   The belief that “Jack was as good as his master” led a world leading social welfare system.   In recent years public policy settings, particularly with respect to taxation, have lost sight of our belief in an egalitarian society.

It is time to tell our politicians that by paying our fair share of tax we will all have a better, fairer and safer society.  Far from being a dead weight on us taxation is a means to us all being better off.  And this means taxing all income, including capital gains.

 We also need to plug loopholes whereby multi-national companies can choose where they pay tax.   For example, by using “loans” that are ultimately from themselves, as well as paying exorbitant trademark fees for the intellectual property of making a hamburger, McDonald’s is transferring income made in New Zealand to their US masters without paying tax on it here .

Google invoices their New Zealand clients from a tax haven outside the country.

Other companies transfer profits by inflated invoices between branches in various countries in order to minimise taxes.

International tax treaties are supposed to stop this behaviour but too often fail to do so.    Individual countries are now taking acting to stop these rorts.  The recent Australian budget has highlighted the action their government is to take to stamp out sophisticated tax dodging by international corporations and we must follow suit.

Tax and Fairness

John Key has been saying that that 12% of households pay 76% of ‘all net tax’ in NZ. But ‘net tax’ isn’t an official measure. It’s an estimate which includes income tax and some benefit payments, but ignores GST, which is worth $24.2b – nearly as much as income taxes. Between 2008-12, the top 10%’s average income increased more ($5600) than everyone else, and faster (4.6%) than most other groups. They are not being taxed more. They are just earning more.

Whether you think income inequality is a bad thing is up to you. But looking at taxes without looking at income is just plain misleading.

One reason for the property boom in New Zealand housing is that the expected capital gains from owning  houses is not caught by taxation if you keep it long enough.   This distorts the market attracting capital to unproductive investment simply because the profits are tax free.

The value of an average home has increased by twice the amount an average worker earns.

The USA is one of the most unequal societies on the planet.  Despite the widening gap between rich and poor American politicians are happy to allow that to continue.  Tax laws favour the wealthy few.   How could that be in a democracy?

The problem is the sophisticated lobby of the wealthy.   American elections are now multi million dollar affairs.    Aspiring politicians try to outdo each other in the size of their campaign war chests.   Politicians of all shades become beholden to the wealthy who can liberally fund election campaigns.   And the lobbying continues right up to the next election.

Oligarchs keep their riches out of state coffers through what Winters calls the ‘Wealth Defense Industry.’ This is the cadre of professionals hired to lobby government and advise ways of hiding wealth, often through keeping it in tax havens. The Wealth Defence Industry represents an army of lawyers, accounting firms, and high paid lobbyists.

Here’s what Americans should be worried about: Extreme wealth is a more powerful political tool than those available to average citizens.  Defending their wealth from taxation means passing the burden of financing a functioning state onto poorer people. In particular, the burden now falls heavily on middle and upper-middle wage earners.

As New Zealanders we must not allow our political debate to be captured by the super wealthy.   Nor should we be afraid to advocate for greater levels of taxation to ensure we return to the fair and more equal society we once had in this country.

So let us talk about this. Over the last 30 years New Zealand has become a much more unequal society. This has had bad consequences for our country. One of the ways of helping to reduce inequality is through a stronger, fairer more progressive tax structure. Above we have canvassed some of the ways of doing this. Please consider these ideas and talk to others about them.