Labour’s tax policy

January 26th, 2011 at 9:38 am by David Farrar

There is considerable merit in having a free threshold as has proposed. I personally think no income should be taxed until a person is earning enough to live on – otherwise you just plough that tax back to them in the form of welfare which leads to inefficient tax churn.

But, and this is crucial, you need to make changes to welfare, WFF, child tax credits etc at the same time as you bring in a tax free threshold. It is worth remembering that many workers do not even pay net income tax until they reach $50,000 income (if they have two kids).

The other issue is affordability. If had proposed a $5,000 tax free threshold when we had massive surpluses in the mid 2000s, then I would have cheered. But the Government is currently borrowing $300 million a week just to finance current spending. And if National had not made changes to ’s spending plans, the deficit and debt would be on a track to be ever-increasing – which would require Ireland or Greece type intervention.

The proposed “rich prick” tax on those who dare to earn a six figure income will not raise anywhere near enough money to cover a tax free threshold of $5,000. And frankly there are limits to how much one can clobber the top taxpayers – recall that the Tax Working Group found the top 10% of taxpayers pay 76% of net income tax. The more you try to clobber them, the more they will avoid tax – or leave. Recall also the finding that of the 100 wealthiest NZers, only half I think were actually paying the 38% tax rate.

Phil Goff should know this. He was part of the Government that got rid of Muldoon’s top tax rate and put in a top tax rate of 33%. And if you recall, that actually led to more tax being collected.

Then we have the so called crack down on tax avoidance:

Labour is also promising to crack down on lucrative tax loopholes used by property investors, saying it will set up an Anti-Avoidance Tax Taskforce to close the loopholes.

Billions were estimated to have been lost by people dodging tax, Mr Goff said. He singled out the ability of investors to offset rental properties against their salary to avoid paying tax.

First of all, one thing I guaanatee is that tax avoidance will increase not decrease if you stick the top tax rate up.

Secondly Goff has missed the boat. The current Government in the last Budget clamped down on several tax avoidance loopholes, plus has funded the IRD to be more aggressive here.

But even more critically, the investment property route to making money has been almost killed off by the Government’s changes to depreciation rates, plus the bubble bursting on house prices. Goff is two years too late with his policy.

I’ve just purchased a new apartment (in fact moved into it yesterday) and one of the decisions I’ve had to make is whether I sell the old apartment or keep it and become a property investor (like Phil Goff is). I’ve done the sums and now you can’t claim depreciation, the interest and other costs well outstrip the income you would get from rent – and any tax reduction on a loss, is less then the actual loss. If I was certain that property prices will increase constantly, then it would be worth doing for the capital gain. But I don’t think that is at all certain.

Up until this announcement, Labour had already indicated they wish to borrow an extra $6b a year or so (if you add up all the extra spending they have called for etc). With this policy that becomes over $7b a year.

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38 Responses to “Labour’s tax policy”

  1. badmac (136 comments) says:

    Should be set at at least $17k but minimum wage makes sense. Would probably save money when ird and welfare staff reductions were taken not account.

    It should however only be done as part of a total overhaul not yet another bolt on or rebate.

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  2. stephen (4,063 comments) says:

    ‘Hundreds of Kiwiblog commenters injured in rush to discredit Goff’s tax policy’

    …to borrow from The Onion.

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  3. ben (2,380 comments) says:

    Good post David.

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  4. slightlyrighty (2,475 comments) says:

    I would have thought that it made more sense to look at creating wealth before you look at re-distributing it.

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  5. lofty (1,315 comments) says:

    @stephen, I certainly will not be injured in the rush to discredit the “policy”, it does it all on it’s own, I just have to step aside while it does so.

    Being a labour voter until the 2nd term of Clarkes dynasty, I have watched Phil Goff morph across the whole political spectrum, from being an able politician to a vote grabbing whore.

    This policy fits into the latter catagory in my humble opinion.

    To call those NZ’rs who have worked hard, saved, and garnered some investments “bludgers” will do him no favours, although I suspect it will raise great cheers from those who actually are.

    Where is the substance and vision for NZ from Labour? Rejuvenantion is what they require, with solid and real growth strategy policies. We will see what the year brings, but I suspect not much.

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  6. peterwn (3,273 comments) says:

    Two things:
    1. higher top tax rates hit high earning employees. as their salaries are internationally benchmarked to some degree, this would merely place upward pressure on such pay rates, much of which is funded by the Government – that is the extra tax income would be recycled into higher executive salaries.

    2. There was a Herald article a few days ago of families finding 3 bedroom houses almost impossible to rent at a reasonable amount with big queues at their ‘open days’. This is just what I considered would happen when the Government cracked down on mum and dad landlords after listening to the likes of Bernard hickey and co talking out of their backsides.

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  7. tom hunter (4,863 comments) says:

    ‘Hundreds of Kiwiblog commenters injured in rush to discredit Goff’s tax policy’

    Oh I don’t know. They’ll certainly critique these proposals, but apart from National Party partisans, most commentators here will probably recognise how inevitable such things are as long as as National runs the status quo. All the government beasts remain in place waiting to be fed, and they will want more; that’s their nature!

    As bad as the reaction to these proposals are now, they’ll look a lot more sensible in 2014/2017 than the budget cuts that will otherwise be needed.

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  8. lofty (1,315 comments) says:

    Well said peterwn..a breath of fresh air.

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  9. malcolm (1,952 comments) says:

    And if National had not made changes to Labour’s spending plans, the deficit and debt would be on a track to be ever-increasing – which would require Ireland or Greece type intervention.

    Good point; under National we’re probably more in the Portugal category.

    All this Labour stuff is interesting, but any word on National’s tax policy, shakeup-the-cancerous-welfare-system-policy, head-off apartheid policy, vision policy, backbone policy, … anything? Anything at all?

    Oh wait, John Key has secured a 2 minute slot on Oprah!

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  10. Falafulu Fisi (2,179 comments) says:

    Phil’s been reading Libz policy. Partially.

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  11. scrubone (3,099 comments) says:

    I do like the idea of a tax free threshold, but DPF is right – WFF wipes it all out far too quickly.

    (an old post of mine)
    http://halfdone.wordpress.com/2010/05/22/how-much-tax-do-familes-really-pay/

    But most amusing is the idea that you could “pay” for such a thing by cracking down on tax cheats… the very tax cheats that will be heartily encouraged by the self same policy. Sort of like losing weight by going to McDonalds every day.

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  12. stephen (4,063 comments) says:

    Being a labour voter until the 2nd term of Clarkes dynasty

    Higher taxes got you voting Labour last time, why not this time? I think last time it was allied with talk of ‘repairing public services’ which wasn’t really a feature yesterday as far as I know, but may come.

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  13. Mark (496 comments) says:

    When Phil talks of the “bludgers” who brought property and avoided paying the top tax rate who should be looking at his own MPs.

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  14. tom hunter (4,863 comments) says:

    … anything? Anything at all?

    Bueler?………Bueler?………Bueler?

    And yes, it was an economics teacher asking that question.

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  15. Pete George (23,576 comments) says:

    Should those who claim they will crack down on tax cheats who exploit loopholes declare their own earnings, tax paid and use of trusts and property investments?

    If Labour wanted credibility on this that’s what their MPs should do.

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  16. lofty (1,315 comments) says:

    Yes Pete of course they should.

    @stephen, for me it is not all about fiscal policy mate.
    Social engineering and covert programs feature high on my list of things to consider, and no I am not a conspiracy theorist.
    It is fair to say that I love my country and I believe we can do a lot better both as individuals and collectively.
    Raw vote grabbing “policies” do not address the illnessess that we are so obviously suffering from (happy to spell that out if you ask)
    All parties in this country are as guilty as each other in their quest for easy votes and power, some worse than others, cue Winstone, Dunne, etc.

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  17. Pete George (23,576 comments) says:

    Fran O’Sullivan gives the Goff tax plans a going over, with a clever headline.

    Goff goes for broke with no-tax proposal

    But the most valuable policy shift is to get some strong focus on skilling up our young unemployed so we don’t create yet another lost generation. This is the kind of activist government we do need to see a bit more of.

    I wonder if Fran has any idea of what is involved in “skilling up our young unemployed”. It is bloody hard – especially when there aren’t jobs for them anyway.

    And National are trying to do that already anyway. As did the last Labour government.

    The most valuable thing that could be done, if it was possible, was private sector job creation. Then the young unemployed and those trying to skill them up would know what skills were required.

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  18. virtualmark (1,528 comments) says:

    But, and this is crucial, you need to make changes to welfare, WFF, child tax credits etc at the same time as you bring in a tax free threshold

    I made the same point to some workmates yesterday when Goff announced this plan. I’ve long been in favour of a “guaranteed minimum income”, with a flat tax kicking in above that threshold. The whole thing could effectively replace PAYE and every benefit. “If I was King” I’d have:
    * Guaranteed minimum income and then a flat rate of income tax,
    * The rate of the flat tax rate would also be the rate applied to company tax, trustee income etc etc (so there’s no incentive for tax arbitrage),
    * A capital gains tax on all assets except your nominated residence, and also at that same flat tax rate.

    That would stimulate economic growth, and be easy to administer.

    But Goff doesn’t have the vision or the balls to come up with an integrated end-to-end plan. All Labour can come up with is a bribe to their support base. This “vote for me and I’ll give you money I take off the people who voted for the other guys” is the classic tyranny of the masses that de Tocqueville talked of. Unfortunately Labour and the rest of the left have become some morally bankrupt they’re happy to promote mob rule.

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  19. malcolm (1,952 comments) says:

    Interesting idea VM, but what about all those who would be happy to bludge in perpetuity on the “guaranteed minimum income”?

    I know that’s possible with the existing welfare system, but that’s a major problem and any new system which doesn’t address that is not much good, IMHO.

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  20. rouppe (971 comments) says:

    Phil Goff:

    Labour is also promising to crack down on lucrative tax loopholes used by property investors

    Every time someone says this, it needs to be challenged. This is not a tax loophole. It is a valid business deduction. Every corner dairy owner, supermarket owner, McDonald’s franchisee, farmer, art investor in fact every business owner can claim expenses against income for their business. Those expenses include a huge variety of things, of which building depreciation and loan interest payments are but two. Well one now, since the former has been scrapped.

    And for those that say that residential rental property is not an investment in the “productive” sector, look at what’s happening at rental property open homes in Auckland right now. All those people who work in the cafe’s, office buildings, engineering firms and public sector have to live somewhere. And not all of them want to buy.

    As regards “state of the nation”, we need to stop being so precious about expensive policies that aren’t essential. Governments all over the world are hacking into spending, our debt is 85% of GDP, we need to look at the big cash-consuming non-productive expenses. Like WFF.

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  21. virtualmark (1,528 comments) says:

    Cheers malcolm,

    My take is that the “guaranteed minimum income” replaces all benefits … pensions, unemployment benefit, sickness benefit, widows benefit etc. Scrap all the benefits. And effectively scrap the whole Ministry of Social Development – IRD would do its job via the GMI.

    I think you’ll find that by far the largest number is the retirees on the pension, and I don’t consider them “bludgers”. That said, there surely must be some bludgers on the unemployment and sickness benefits. This new approach wouldn’t change that. And there’s an interesting conversation to be had around whether you should/could try to change that.

    Note that by:
    * stripping out a lot of costs from the tax collection/benefit recycling mechanism, and
    * reducing incentives for tax arbitrage, and
    * introducing a fairly broad capital gains tax operating at that same tax rate,

    the resulting “flat tax rate” should be pretty low. I haven’t done the numbers on it for quite a while, but I recall it looks something like a $7,600 minimum income and a flat tax rate of 25%.

    I’d vote for that.

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  22. reversespin (69 comments) says:

    Interesting, Peter Dunne (Minister of Revenue) – the guy who KNOWS what he is talking about re: Tax, has put out two statements, following Fool Gaffes speech:

    To summarise……

    1. Cullen dismissed Fool Gaffes tax-free idea years ago. So, Fool, it wasn’t good enough for Cullen – what has changed? More money floating around? Yeah, right.

    2. To pay for Fools tax policy, the top marginal tax rate would have to be 47% (at a $100k threshold) or 52% (at a $120k threshold. Now THAT is a rich-prick tax………

    I wonder where Revenue Spokesman, Stuart Nash is in all of this……searching under the sofa for spare change?!?!?

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  23. KevinH (1,227 comments) says:

    Goff would have to raise the top tax rate to 39% and increase GST to 20% to make many of his promises affordable. I hope Phil knows how to balance a chequebook.

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  24. Kermadec (22 comments) says:

    David says: >> I guarantee… tax avoidance will increase …if you stick the top tax rate up

    A low bottom rate also encourages tax avoidance.

    If the first 5k is tax free, people (including me) will go to great lengths to split their income. They (we) will try to make sure that every child receives a $5,000 salary from their partnership or company.

    A very steep marginal tax rate, as proposed, distorts the market badly.

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  25. s.russell (1,642 comments) says:

    I would have thought that it made more sense to look at creating wealth before you look at re-distributing it.

    Alas, so true. Timid though it may be at least National understands that if you want more wealth you have to go out and create value. All Labour understands is shifting it about: stealing wealth from some (usually the people who created it) to give to those whose main activity is often destroying value.

    I suppose that embracing the idea of any tax cuts at all might be seen as a positive sign from Labour. But overall, this policy is simply sad. Soak the rich, give more to beneficiaries, spend huge piles of money we haven’t got and pay for it with (mumble mumble). This may appeal to the Labour core but I cant see it appealing to anyone with a gram of sense.

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  26. virtualmark (1,528 comments) says:

    Kermadec, I agree … if the first $5k is tax free then my pre-schoolers are about to become earners!

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  27. Bob (497 comments) says:

    If the government, either party, discourages investment in rental properties who is going to supply rental houses for people who need them? It will result in pressure on the government to provide more state houses.

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  28. Hagues (703 comments) says:

    reversespin “Cullen dismissed Fool Gaffes tax-free idea years ago. So, Fool, it wasn’t good enough for Cullen – what has changed? More money floating around? Yeah, right.”

    Not that I agree with Goff, but just cause Cullen dismissed the idea does not automatically mean it was bad. So what if Cullen was against it Cullen was against any sort of tax cut. There are plenty of reasons to argue against it, but making out Cullen was some sort of economic guru where his dismissal must mean the idea was bad isn’t one of them.

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  29. ch123 (647 comments) says:

    “I would have thought that it made more sense to look at creating wealth before you look at re-distributing it.”

    Unfortunately Phil Goff seems to think the only way to decrease the gap between the “rich” and poor is to take a heap of cash from the “rich” and give it to the poor, i.e. create the lowest common denominator. I can’t believe he actually used that tired old adage “the redistribution of wealth” in his speech. We need everyone to be wealthier and giving handouts to those at the bottom from those at the top is not the way to do it. No, I don’t know what the solution is but neither, it seems, do Labour or National.

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  30. virtualmark (1,528 comments) says:

    Bob,

    If the government, either party, discourages investment in rental properties who is going to supply rental houses for people who need them? It will result in pressure on the government to provide more state houses.

    Well this is the whole idea of markets … that they send price signals based on the relative supply and demand, and so incentivise investment as and when it’s needed?

    The problem is that we’ve had a sustained asset bubble in residential housing. Most asset bubbles pop, and prices correct. But with residential housing the asset owners (landlords) don’t want to recognise this, and the asset financers (banks) certainly don’t want to recognise this either. So we are probably in for several years of irrational activity until such time as the market fundamentals catch up with the current market pricing.

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  31. tvb (4,425 comments) says:

    This is shooting in the barrel stuff. All national needs to do is produce tax tables showing where tax rates need to go to pay for labors policies. They have already signal lee taxes will go up so national can say by how much to make it work. They will have to put up middle income rates as well to make the books balance.

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  32. kowtow (8,487 comments) says:

    slightlyrightly is on target with wealth creation. NZ is a low wage economy and always will be with the lack of vision that comes from the left and the lack of leadership from the right (they know what’s needed but are hobbled by the environmentalists and media and a frightened cowering electorate,who on low wages are wedded to govt wealth transfers from rich “bludgers” to the the poor and middle clases).

    Note the cheer Goffs’ use of bludgers got from his party faithful. Then he has the cheek to talk of “one New Zealand”,while playing the class warfare card.

    And yes we really do need companies like F and P (who move their manufacturing to places like Mexico and Thailand or Vietnam etc) Great kiwis eh?

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  33. side show bob (3,660 comments) says:

    I like Virtualmark’s ideas but the ability to tax is an aphrodisiac to any government both socialist and conservative . Forget wealth redistribution, that’s standard practice for these socialist grippers it’s really about class warfare, envy and the ultimate aphrodisiac , power. A low flat tax rate might well indeed bring more into the coffers, I know in my case I would be paying a lot more, but a flat tax rate destroys control this is what the pricks fear the most.

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  34. nickb (3,687 comments) says:

    Whatever changes Goff makes will no doubt do little except pander to bludgers and open up fresh loopholes. Especially if the top tax rate is increased.

    Tax planning will explode again like it did in 2000. Oh well, that is more bread on my table :)

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  35. nickb (3,687 comments) says:

    declare their own earnings, tax paid and use of trusts and property investments?

    Isn’t that what the register of pecuniary interests shows? Apart from income, of course.

    When I checked it pretty much every Labour MP had a trust. Phil Goff included

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  36. oob (191 comments) says:

    kowtow: Note the cheer Goffs’ use of bludgers got from his party faithful. Then he has the cheek to talk of “one New Zealand”,while playing the class warfare card.

    Yep, and there ought to be a personal consequence here for Goff. Sedition? Treason? There’s got to be something he can be charged with. Personally I’d like to see him swing but will settle for a sentence of hard labour: television pictures of Phil Goff doing the first honest day’s work of his life while wearing a prison jumpsuit would be deeply satisfying.

    The top 10% of earners pay a whopping 78% of the total income tax. This is 68% more than our “fair share.” The beneficiariycriminals that comprise the Labour Party constituency can pay for their own damn lifestyle choices.

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  37. ch123 (647 comments) says:

    Yeah I have to laugh/cringe every time I hear Phil Goff talk about making the tax system “fair” and that people on higher incomes should pay their “fair share”. 1) They already pay more tax by virtue of earning more money. 2) They pay a higher proportion of their earnings in tax. 3) They don’t get any of the clawbacks that people on lower incomes do. Although of course Labour are trying their hardest to make as many people beneficiaries as possible so they are so thankful they vote Labour.

    What pisses me off the most is that neither Labour nor National are looking at the long term when it comes to taxation policy. Labour in particular seems to be simply trying to buy votes and are being extremely fiscally irresponsible (but then no surprises there). In about ten years time there will be 1 million people over the age of 65 and growing who the rest of us need to support.

    And yet all the while we keep pouring money into middle class welfare (a.k.a Working For Families). Yes, we need to support those who need it. No, we do not need to provide WFF for such a huge catchment. It’s mad that if you earn something like $50K before tax and have two kids you get more after WFF than you actually earned.

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  38. ch123 (647 comments) says:

    I’d also add I quite like the idea of Gareth Morgan’s minimum income thing but I just don’t think it would work in New Zealand because of the unfortunate welfare state mentality that has been created, especially at the “back of the napkin” rates he was proposing. It would be far too easy for people to decide “screw that, I don’t need to work if I can get that $$ no questions asked” and live of the rest of us for their entire lives. I also don’t think he thought of the consequences of the policy which would mean that we would have to start paying all those people who don’t work but are not included in unemployment figures the minimum income too, i.e. stay at home mothers, students, etc.

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