Remember this when Labour proposes tax hikes

August 3rd, 2012 at 4:19 pm by David Farrar

3 news reports:

Treasury research has found the proportion of all paid by the highest earners fell after the 2001 changes that took the top personal income rate to 39 per cent from 33 percent.

Far from its intended purpose of increasing the contribution by wealthy people to the cost of running the government, the 2001 tax increase spurred the highest income earners to find ways of avoiding tax, the Elasticity of Taxable Income in New Zealand paper found.

It tracks the proportion of income tax paid by different income bands between 1994 and 2008, and finds the top 10 percent of income earners had begun to pay an increasing share of total income tax in the years immediately preceding the tax rate increase and peaked at 38.9 per cent at the time the tax rate increase was announced.

“However, following introduction of the 39 per cent rate, it fell to 33.9 per cent in 2001,” the report says.

This is no surprise. I recall another report that when introduced the rich prick envy tax of 39% on incomes over $60,000 – the number of people earning exactly $60,000 increased something like ten-fold.

It can be as simple as you pay yourself a salary of that amount, as company tax rate is lower, and just let the income stay with your company. Then when you retire you just keep paying yourself a salary a just below the top tax rate, so you never have to pay it.

There is a reason why almost every expert says that a broad base and low rate tax system is best. That’s why I think a land tax is a good idea, but increasing the top tax rate is a terrible idea.

The paper is here, quite readable at 41 pages. Remember this is not a model or projection – this is what actually happened! The three authors are from the IRD, Treasury and the Asian Development Bank.

They find that the share paid by not only the top 10% fell, but even for the top 1%. Prior to the Labour hike the top 1% were 10.2% of taxable income for the seven years up to 2000, and 9.3% for the seven years afterwards. So the top 1% ended up having a lesser share of taxable income after Labour hiked the top tax rate.

Their conclusion:

For the top marginal rate bracket of 39 per cent, the welfare cost of raising an extra dollar of tax revenue was found to be well in excess of a dollar. Furthermore, for the top bracket the marginal tax rate was often found to exceed the revenue-maximising tax rate, for appropriate values of the elasticity of taxable income.

So if Labour in 2014 proposes increasing the top tax rate, don’t think that means more revenue. It may mean less.

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37 Responses to “Remember this when Labour proposes tax hikes”

  1. JeffW (324 comments) says:

    Labour’s goal is not necessarily to take more tax revenue – it is to pander to the voters who think “the rich” owe them.

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  2. Alan Johnstone (1,083 comments) says:

    Haven’t read the article, but I assume it’s a straight forward laffer curve ?

    I think the purposes of rises to the top tax rates aren’t to raise revenue, but to make those on the lower rates feel the “rich” are being punished. I rise of the top rate in the UK from 40% to 50%, cost the revenue service there well in excess of $2bn a year.

    It’s political theater, the only people that suffer are those salaried wage earners on moderate to high incomes ($150k – $250k), the self employed and rich can structure their affairs to avoid it.

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  3. seanmaitland (472 comments) says:

    “It can be as simple as you pay yourself a salary of that amount, as company tax rate is lower, and just let the income stay with your company. Then when you retire you just keep paying yourself a salary a just below the top tax rate, so you never have to pay it.”

    Ummm DPF, hold on a minute – that would mean you would pay company tax for the year it was classed as company income AND then income tax on the net amount when you are retired and drawing a salary – and end up paying around 50% tax in total on the income.

    As a side point, I first starting working out of varsity in 99 when Labour came in, and as soon as I could (2004) I had my net tax down to 10% a year – it was imperative in my eyes to be working on securing my family’s future rather than contributing to Working For Families, sickness beneficiaries, DPB, ACC scammers etc – to me it was immoral to not do that. Since National got the tax rate got sorted out I converted my LAQC to a standard company.

    [DPF: No you get a tax credit for it, and do it as part rdawings]

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  4. dog_eat_dog (763 comments) says:

    Yep, salaries to working shareholders are/were deductible. It’s a bit harder now with the new LTC rules, but the principle is the same.

    And the top tax rate hike was adorable, considering the LAQC regime that operated alongside it.

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  5. thor42 (971 comments) says:

    JeffW is spot-on.
    In fact, the problem is much wider than this. Labour has such a gullible constituency that NOTHING they do actually has to work. All they need to do is “promise, promise, promise” and “borrow, borrow, borrow”. Yes, that will put the country in the poo, but that is of no concern whatsoever to Labour. Their only concern is to get elected so they can wallow in the public trough again.

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  6. YesWeDid (1,044 comments) says:

    Most of this ‘problem’ is solved if the top tax rate and the company rates are the same.

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  7. big bruv (13,571 comments) says:

    YWD

    Most of this ‘problem’ is solved if you lot stop pandering to the bludgers in return for votes.

    The whole bloody country knows the left don’t really care about the so called poor, you are happy to keep them there just as long as they return the favour with votes.

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  8. Vinick (215 comments) says:

    DPF,

    Agree with your conclusion to an extent, but how do you justify implementing a land tax (or for that matter, a CGT) on those who have been highly taxed on their incomes all their life and bought property?

    Where their parents paid high income tax rates and no land tax/CGT, and their kids will pay lower income tax and a land tax/CGT, they will pay both.

    Fair?

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  9. adam2314 (377 comments) says:

    The tax system was invented eons ago.. Added to and subtracted from.. ( more add than subtract )..

    A new clause to cover this, a new clause to cover that..

    Thus we now have a whole industry whose sole purpose is to find loop holes.
    Or to make the payment as painless as possible..

    Always with a cry that the ” Rich ” are not paying enough..
    Which is argueable from both sides and is …

    An industry… Producing … NOTHING … . But fat arses and hot air..

    Today.. We have the ability to raise Tax in a totally different way.

    A way in which not only does every one pay, but a way in which every one pays their FAIR and JUST share.

    A financial transaction tax.. A small and I mean VERY small ELECTRONIC tax on ALL purchases..

    Every one has a ZIP-ZAP card of one sort or another..

    Even Granny.. ( She is always the one at the head of my queue at the Supermarket )..

    OK.. I will go cash only I hear..

    Do we really need cash when money can be transfered at the bump of two telephones ??

    No Cash.. No Income tax.. No Company tax..

    You buy a Rolls Royce.. You pay the same percentage tax.. As a Toyota buyer does..

    Each according to his means..

    A LEVEL PLAYING FIELD..

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  10. dog_eat_dog (763 comments) says:

    You do pay the same percentage tax. It’s called GST. It applies to everyone at the same rate. That’s the whole point.

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  11. adam2314 (377 comments) says:

    It has claw back.. The only one paying the full amount is the end user !!

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  12. adam2314 (377 comments) says:

    With … Which is my point .. so many pencil pushers invovled from the beginning to the end of the collecton

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  13. Colville (2,198 comments) says:

    probably the biggest hole in the GST system is if you can get a cash lump you can spned it on a dwelling that has no capital gains tax and that washes the income nicely.

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  14. ZenTiger (426 comments) says:

    Exactly – companies do not pay GST. A company structure allows people to purchase goods “for company use” and buy them from pre-tax income, and claim the GST back as well. That particular loophole needs to be tightened where it is excessively abused.

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  15. Colville (2,198 comments) says:

    zen tiger, if i buy a bottle of wine out of my compny account then I risk IRD audit and massive penalties.

    Hardy worth the risk

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  16. dog_eat_dog (763 comments) says:

    Zen – there’s an FBT issue or two there.

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  17. adam2314 (377 comments) says:

    Zentiger.. Says..

    ” That particular loophole needs to be tightened where it is excessively abused. “.

    When that loop hole is tightened.. ZHEN.. Another will appear..

    KIS ..Which we all know stands for KEEP IT SIMPLE..

    A… SMALL.. Financial transaction on ALL electronic trans-actions will cover ALL.. If there is no Income tax.. No Company tax..

    It is already being done with GST..

    Then the ” Pencil ” .. Come into their own claiming back monies..

    TIME FOR A CHANGE !!..

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  18. adam2314 (377 comments) says:

    Colville.. @ 8:58

    zen tiger, if i buy a bottle of wine out of my compny account then I risk IRD audit and massive penalties.

    Hardy worth the risk.

    My point exactly .. 8000 people in the Tax department investistgateing your bottle of wne..

    Insanity

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  19. Luc Hansen (4,573 comments) says:

    I keep using the word ‘simplistic’ on almost every post on policy by our genial host, but if the cap fits…

    Since we (DPF and our good selves) are accepting Treasury at its word, how about the fine print that shows that after the much lauded “fiscally neutral” tax “switch” will result in negative tax income deficits year after year after year and the same for the proposed asset sales.

    And there is pretty serious research out now that shows 39% is Lafferby, sorry, a laughably low rate of tax for the high income earners.

    Broad base and low rate, sure, but what is the base? Consumption, so regressive? Or a wealth tax, so reasonably progressive?

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  20. seanmaitland (472 comments) says:

    The problem with a land and or capital gains tax is that you’re simply going to be milking more money out of people who have already paid a lot of tax and rates.

    Until the bottom 50% of the country start paying their way, its never going to be enough – and the bottom 50% will just want more and more and feel more entitled.

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  21. adam2314 (377 comments) says:

    August 3rd, 2012 at 9:53 pm
    The problem with a land and or capital gains tax is that you’re simply going to be milking more money out of people who have already paid a lot of tax and rates.

    Until the bottom 50% of the country start paying their way, its never going to be enough – and the bottom 50% will just want more and more and feel more entitled.

    Do not know where your Land and Capital gains tax came about in this discussion..

    One SMALL transaction tax with no claw back is so simple.. and fair and just..

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  22. dog_eat_dog (763 comments) says:

    If you’re going to have the bottom 50% paying no tax, then cutting income tax completely and making GST higher but with a sliding rebate for lower income earners would make far more sense.

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  23. wreck1080 (3,820 comments) says:

    I AGREE!!!!

    Nuff said.

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  24. adam2314 (377 comments) says:

    I did not say anything about GST..

    Income tax.. Eliminate .. Company tax.. Eliminate.. Gst eliminate..

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  25. Scott1 (482 comments) says:

    seems like a dynamic government could pop down to the local accountant ask for some advice on how to tax minimise – then close all the loopholes that they were advised of. And all those guys who’s income dropped to around $60,000 could get a little visit from the IRD to make sure they could provide all their accounting information in order.

    Nothing much to say about what the tax rates should be but any loopholes that exist in such a system should at least be pretty difficult jumping thorugh hoops and not somthing as simple as discussed above, or to use the loophole you should be running the risk (even if a small one) of very large consequences.

    i have always wondered if what really happense here is that those that know loopholes want them to continue (at least thinking they are benefiting more than average) and those that dont dont know to complain. As a result there is always a net positive support for almost any loophole.

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  26. fish_boy (152 comments) says:

    I would like to see a 66% tax rate on salary in excess of ten times the lowest paid FTE in the company. That is, if the lowest paid worker is on $32,000 and the CEO is paid $640,000 then from $320,001-$640,000 he or she is paying a 66% tax rate.

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  27. Camryn (551 comments) says:

    fish_boy – Yeah, right! Then I just fire all my janitors etc from Company A (which pays my salary) and hire them into Company B, which I then contract to provide services to Company A. In short, your plan will never work. You can’t enforce a Gini Coefficient. The main thing that can ensure that CEO salaries are not “excessive” is good governance… shareholders don’t want to see money that should be going into their dividend disappearing into the pockets of a CEO who is not worth it. If it’s better business to hire more workers, or to pay good existing ones more instead then that’s what will happen. So, as long as shareholders (as owners) are able and willing to be effective, there’s no problem.

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  28. fish_boy (152 comments) says:

    “… Then I just fire all my janitors etc from Company A (which pays my salary) and hire them into Company B, which I then contract to provide services to Company A…”

    Even assuming your complex plan of all manner of contractors to artifically inflate the lowest EFT pay works, which is a big assumption, then all it would serve to do is illustrate the lengths a corporate klepocracy is prepared to go to to protect it’s own feather bedding. Your plan would make it starkly plain to the vast majority of workers in the “contracted” from company B category that they are second class, walled off from the elite 1% and their middle management wannabes. And that realisation alone would serve as a very useful educational moment for the comapny B staff when they next come to vote.

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  29. Maaik (33 comments) says:

    I’m with Adam on this – get rid of cash. The advantages to government wrt managing tax is enormous – once the law has been simplified to close various loopholes, we can replace 80% of the IRD with a single computer program. (Don’t hold your breath here, but you know what I mean.)

    The libertarians and gun-toting survivalists will be crying for blood, because it is a BAD THING when Big Brother knows about your personal financial transactions. Well wake up, folks, this is the 21 century and society is transparent. Just look at FaceBook and Twitter to see how much of what used to be hidden is now public. I’ll not say much about public CCTV cameras either….

    The largest benefit from scrapping cash is the demise of the gangs and criminal fraternity – it is hard to sell drugs or fence stolen goods if the transactions are electronic! This should be enough to make the “stop the bludgers” brigade embrace the initiative.

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  30. F E Smith (3,316 comments) says:

    Your plan would make it starkly plain to the vast majority of workers in the “contracted” from company B category that they are second class, walled off from the elite 1% and their middle management wannabes. And that realisation alone would serve as a very useful educational moment for the comapny B staff when they next come to vote.

    Sure, because the workers of company B simply want to bring the workers of company A down to their level, rather than aspiring to instead obtain a higher paid job.

    Because it is all about envy, isn’t it, fishie?

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  31. Ed Snack (1,801 comments) says:

    There are many problems with financial transaction taxes, like all taxes in the end you personally finish up paying them; corporations don’t pay tax, their shareholders do. FTT’s tend to make transactions expensive and in many studies, a shown to reduce growth.

    Jeffers though has nailed it right at the start, the whole taxation process is a kind of game, with the left indifferent to the underlying reality as long as they can spin it that their schemes will take money from other than their targeted voting demographic. Many on the left also seem to believe that you do not own the fruits of your labour at all, but only have a weak entitlement to that portion the state (as controlled by our benevolent overlords) sees fit to allow you to retain. That portion should be a small as possible because, as everyone knows, individuals cannot be trusted to know what is best for them, an educated elite should exist to decide that and arrange matters so that only the defined “good” items are readily available.

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  32. wat dabney (3,724 comments) says:

    I would like to see a 66% tax rate on salary in excess of ten times the lowest paid FTE in the company.

    Didn’t your parents teach you that stealing is wrong?

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  33. Yoza (1,680 comments) says:

    Another Treasury paper that could double as an Act Party manifesto.

    Here’s an idea, why not just let the wealthy get away with anything they want and let socio-economic forces take their natural course. We will be seeing the introduction of the French solution well before the turn of the 2020s – thirty centimetres off the top.

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  34. UpandComer (525 comments) says:

    hello.

    Would anyone here be willing to provide me information as to where I can find all of this tax information so I can also structure my affairs?

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  35. Ed Snack (1,801 comments) says:

    I’m sure that more radical part of the left would love a French style revolution, the blood would give them enough orgasmic pleasure to last years. And they hope it would leave them on top of the heap to plunder it at will. It is, however, worth recalling what happened to, say, Robespierre, only a Couple of years after the revolution…

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  36. Geoff (10 comments) says:

    Surely this article could be simply re-written as, “Don’t tax rich people, they cheat. Tax poor people, they don’t.”

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  37. burt (8,041 comments) says:

    Geoff

    Perhaps it should be written;

    Tax policies should be fair and reasonable rather than something populist governments use to trick their voter base into supporting them on.

    The key issues is – when you unfairly punish people for doing what they do – they stop doing it. I know that lovers of big government like to ignore that high earners already pay a lot more tax than low earners when they pretend that putting tax rates up on them will give the government more money to spend on their welfare voter base – but this is the real world mate – not some lefty la la land where populist ideas actually work.

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