Morgan on tax

June 8th, 2016 at 2:00 pm by David Farrar

Gareth Morgan writes:

If we close the worst of the loopholes in our income tax system we’ll not have to collect as much tax from salary and wage earners. Taxation will become more fair and capital will become more productive.

I agree with this. I support a tax system with a broad base and low rates. If we broaden the base, then we can lower the rates. What I’m against though is new taxes being imposed, without other taxes being reduced. Labour for example campaigned to both introduce a Capital Gains Tax and to increase income tax.

The report sets out in detail how to close these tax loopholes. In essence we assume that all assets generate a minimum 5% return, and tax on that basis.

I support a comprehensive Capital Gains Tax but this is effectively a wealth tax and politically would be lethal.

If you are retired on a pension and have used your life savings to get a $1 million house, then you will be deemed to earn $50,000 a year on the house and pay $16,500 or so tax on it.

Taxing capital gains is one thing. But assuming all assets produce a 5% return is another.

UPDATE: Gareth has commented below a couple of times.

A hipster tax to fund Tieke recovery

April 28th, 2016 at 3:00 pm by David Farrar

Eric Crampton writes:

It is very, very easy to break a beautiful tax system. Here is the recipe for doing it.

Start by finding some product that seems a little frivolous – a bit of a luxury – and preferably one that’s mostly used by people that the typical voter does not really like anyway. Say, for example, the fancy beard oil used by hipsters to maintain their elegant facial appendages.

Then, find some cause that nobody could object to. Something really motherhood and feijoa pie. Tieke recovery. Who doesn’t love the New Zealand saddleback and support its recovery? Nobody.

Add the two together and propose a tax on hipster beard oil to help fund Tieke recovery programmes. Who could object? Hipsters are at best a mild nuisance, and at worst a looming threat to national identity; beard oil seems the height of frivolous consumption; and Tieke are a perennial entry in Bird of the Year competitions.

The bundle is an economic abomination. If Tieke recovery is the best use of the next public dollar, it is best regardless of whether we tax hipsters’ beard oil. And if a tax on hipsters’ beard oil is the most efficient next tax to impose, then the government should tax it regardless of whether the money raised is used to cut other taxes, fund Tieke recovery, or fund something else entirely.

Many countries have a tax system where hundreds or thousands of different products have different tax rates applied to them. I’m glad we don’t in NZ, and hope we don’t change.

My starting point for anyone advocating a new tax, is that they should identify an existing tax to eliminate or reduce so that overall tax levels on families and businesses doesn’t increase.

Labour defaming Shewan

April 14th, 2016 at 10:00 am by David Farrar

Politik reports:

The appointment of John Shewan to investigate foreign trusts in New Zealand was always going to be controversial. Mr Shewan has a well deserved reputation as an establishment figure in Wellington. So it wasn’t surprising that Labour Leader Andrew Little alleged in Palriament yesterday that the Prime Minister had appointed John Shewan and Don Brash as advisors to the Bahamas Government when it introduced GST and “advised  that its financial services be zero-rated for value-added tax in order to protect the offshore services industry of that country”.

Mr Shewan vigroously denied this to Checkpoint  He said the trip  to the Bahamas had absolutely nothing to do with its status as a tax haven, and any suggestion of that was complete nonsense. We recommended that they modify their proposed regime significantly and simply follow New Zealand’s rules across the board.” Mr Shewan said they did recommend backing an existing exemption, as per international practice, that financial services be exempt from GST.

Dirty and nasty politics from Labour. John Shewan has advised both National and Labour Governments over the years. But now as they are desperate to try and make NZ look like Panama, Little defames Shewan under parliamentary privilege.

As Shewan said on Checkpoint (you can listen here) his work for the Bahamas had nothing to do with income tax or trusts. It was how to have a best practice GST, and the advice was basically to follow the NZ GST model (which is seen as one of the best in the world).

Ding dong the provisional tax is dead

April 13th, 2016 at 4:00 pm by David Farrar

The Government has announced a tax reform package for small businesses:

  • Provisional tax is being reformed, with a new pay-as-you-go option giving up to 110,000 small businesses a way to pay tax as they earn income from 1 April 2018.
  • Use-of-money interest will be eliminated or reduced for the vast majority of taxpayers.
  • Contractors will be able to choose a withholding tax rate that suits their needs, rather than one being set for them.
  • The ongoing 1 per cent monthly penalty will be scrapped from 1 April 2017 for new debt – although immediate penalties and interest charges for late payments will continue to apply.

Like most small business owners, I dislike provisional tax. Your provisional tax is calculated on your previous year, and if you have a better year than expected, then you get whacked with penalty interest for not having paid enough provisional tax earlier in the year.

A pay as you go option is a great idea, and very easy to do with modern accounting software.

“Around 30 to 40 per cent of businesses currently use cloud-based accounting software. This is expected to grow to 85 to 90 per cent in the next 10 years.

“This package allows small businesses to pay provisional tax through their accounting software, rather than having a separate process for their taxes.

“Small businesses are the backbone of the New Zealand economy. We want to help them spend more time focused on their business, not their taxes.”

The package is expected to cost $187 million over four years.

This move will be very popular with small business owners.

Labour and off-shore trusts

April 5th, 2016 at 2:00 pm by David Farrar

Richard Harman wrote in the Politik newsletter:

While the Prime Minister was sticking to his briefing notes at his weekly press conference yesterday on the question of the 11,000 offshore trusts registered in New Zealand, it appears the Clark Labour Government may have enabled their presence here. 
The 2007 rewrite of the Income Tax sets out how overseas people can set up in trusts in New Zealand and pay no tax provided that none of the income in the trust originates in New Zealand.

In 2005 Labour’s Finance Minister, Michael Cullen, tightened up reporting requirements for the trusts but emphasised that their activities would remain tax free.

He said: “”Foreign trusts will be required to have an IRD number, keep records for New Zealand tax purposes, provide certain information when they are first set up in New Zealand or appoint New Zealand trustees, and provide information to Inland Revenue on a regular basis.

Under New Zealand law, foreign income derived by non-residents is outside the New Zealand tax base, and rightly so. The government has no intention of changing that. Because they are not taxed here, foreign trusts that are set up here do not have to file New Zealand income tax returns or keep records if they receive only foreign-sourced income.

As is often the case with the Politik newsletter, you read stuff you don’t see elsewhere in the media.

State income taxes

April 4th, 2016 at 12:00 pm by David Farrar reports:

Yesterday Mr Turnbull outlined what he called a “once in a generation reform” toredesign the tax system for the first time in 74 years.

The plan involves the federal government cutting its own income tax and giving the states the ability to collect their own taxes.

While details have not yet been revealed, some have suggested the federal government could give the states 2 per cent of the income tax rate, which Mr Turnbull said would raise about $14 billion for the states.

When asked whether this was actually “double taxation”, Mr Turnbull said “no”.

He said the plan could mean different states had different rates of income tax, but they already had different rates of land tax, payroll tax and stamp duty.

“The fundamental question is this: Are we sick of the blame game, are we sick of the finger pointing, are we sick of states not being responsible for much of the money they spend?” Mr Turnbull said.

“What we are proposing is that we begin a grown up conversation, a rational conversation, about a solution that does not involve any new or it doesn’t involve any additional tax.”

Mr Turnbull described the plan as a change to the way income tax was allocated.

“It is too easy for states and territories to just go to the federal government ATM and too easy for them to just blame the Commonwealth for not having enough money,” he said.

“It will deliver a better government because people, politicians and parliaments will be more responsible for more of the money they spend.

“They will have to be answerable to their voters for the money they spend.”

The proposal has both good and bad aspects to it.

The good is that there might be competition between states to have the lower income tax rate. People may move to states with a lower tax rate.

Also it would force state government to live within their means, rather than just demand Canberra fund everything.

The bad is that most governments like spending, and over time you may get all states increasing their income tax rates and Australians may end up paying more tax than ever.

You could set a maximum rate for state income tax, but if you do this would become the de facto rate for all.

When will the Herald report on APN’s tax dodging?

March 29th, 2016 at 9:00 am by David Farrar

The Herald has been running a series on multinationals, and the low level of tax they pay in NZ.

But there is one multinational they have ignored.

That is APN, which by coincidence owns the NZ Herald.

The Herald keeps looking at tax paid in relation to revenue, so we should do the same for APN. What are the stats?

  • Revenue – 2014 $843.1 m, 2015 $850.0 m
  • Tax paid – 2014 $9.2m, 2015 $19.8m
  • Tax as a percentage of revenue – 2014 1.1%, 2015 2.3%

But that isn’t the real shocker. Here’s the real hypocrisy.

The 20 companies being targeted by the Herald have all paid the amount of tax they are legally bound to pay. APN HAS NOT.

Look at their annual report:

The Company is involved in a dispute with the New Zealand Inland Revenue Department (IRD) regarding certain financing transactions. The dispute involves tax of NZ$64 million for the period up to 31 December 2014. The IRD is seeking to impose penalties of between 10% and 50% of the tax in dispute in addition to the tax claimed. The Company has tax losses available to offset any amount of tax payable to the extent of NZ$48 million.

On 22 February 2013, the Adjudication Unit of the IRD advised that it agrees with the position taken by the IRD. Accordingly, the Company was issued with Notices of Assessment denying deductions in relation to interest claimed on certain financing transactions. In response to this step, the Company has commenced litigation in the High Court of New Zealand to defend its position in relation to this matter.

APN, the owners of the Herald, are tax dodgers. The IRD has pinged them for $64 million of tax, and penalties of up to 50% (which they generally only do if they think it is in bad faith). And APN are fighting this in court.

How on earth does the Herald have the gall to lecture other companies on the amount of tax they pay, when their own parent company has been found by the IRD Adjudication Unit to have illegally dodged $64 million of tax.

A lower corporate tax rate is how you stop profit shifting

March 21st, 2016 at 12:00 pm by David Farrar

The Herald reports:

A major Herald investigation has found the 20 multinational companies most aggressive in shifting profits out of New Zealand overall paid virtually no income tax, despite recording nearly $10 billion in annual sales to Kiwi consumers.

The analysis of financial information of more than 100 multinational corporations and their New Zealand subsidiaries showed that, had the New Zealand branches of these 20 firms reported profits at the same healthy rate as their parents, their combined income tax bill would have been nearly $490 million.

This is not new. Basically firms sell products to their NZ subsidiaries at a rate which means little profit is made by the NZ subsidiary and lots by the global parent.

This is often justified. If it is the global parent who has paid for all the research and development on a product, and all the NZ subsidiary does is sell it, then you would expect this.

In other cases, it will be less justified.

As why multinational companies engage in profit-shifting, the twenty companies on the Herald list paid effective tax rates of 22 per cent on their non-New Zealand income, considerably lower than our 28 percent corporate rate.

You can not pass a law dictating at what cost a company can see products to a subsidiary. But you can reduce the company tax rate so there is no incentive for companies to have their parent companies pay almost all of the tax where they get a lower rate.

If the OECD can come up with a treaty or agreement to reduce the ability to unfairly profit-shift, that is a good thing. But short of that, there is little individual governments can do.

Every time James Shaw or Grant Robertson demands the Government do something, the response should be “What?”. Challenge Grant or James to tell us what is the law change they would propose that would stop this? Neither of them can. At best they mutter about an inquiry.

Employers should be prosecuted for not passing tax on

March 8th, 2016 at 1:13 pm by David Farrar

Paul Little writes:

If you are one of those people whose employer hasn’t been ponying up their contribution to your KiwiSaver fund, you might be wondering about your retirement plan – such as, will you have one.

It was reported last week that $29.3 million in contributions and penalties is owed to KiwiSaver by employers who have not been passing on workers’ contributions, deducted at source, or not paying their compulsory 3 per cent contribution, a figure, it’s worth noting, that is a meagre third of what Australian employers must contribute to their workers’ retirement.

Of that $29 million, some of it will just be paperwork errors, and some will be deliberate decisions not to pay.

In the first case, they are effectively stealing from staff who would presumably be shown the door were the situation reversed. Employee contributions, however, are Government guaranteed; employers’ contributions are not.

Naturally the Government isn’t interested in making good the money delinquent employers don’t pay – that would reward delinquency. The alternative would be to pursue them through the justice system, but the amounts in many cases will be so small this would not be cost-effective.

I agree it is effectively theft when an employer deliberately doesn’t pass tax payments from staff on, and instead spends them on other activities.

A great example of this is this case from 2011. This nasty employer didn’t even pass on the PAYE from the staff. And they never got prosecuted for it, despite the large amount.

The benefits of a good tax regime

February 19th, 2016 at 12:00 pm by David Farrar

Stuff reports:

The British-born, Auckland-based CEO of a $4.4 billion Australasian company says New Zealand’s tax regime is so far ahead of Australia’s that all his new recruits want to move across the ditch. 

Fletcher Building chief executive Mark Adamson also tipped a bucket on any talk of an Australian infrastructure boom, saying the state of Australian politics has dented his confidence that projects will actually be delivered.

Adamson said that in contrast to New Zealand, Australia charged too much tax, through a system that was overly complex. 

“New Zealand is a very simple tax regime. I take five minutes to fill in my tax return and I’m a fairly complex tax person. The taxes are low and they simply encourage entrepreneurs to swing their bat and try new things,” he said.  

“And [that] is not to say that we don’t have good public services.” 

New Zealand’s tax system was a global leader, he said.

“New Zealand is a great model and the best system I’ve seen and I’ve worked all over the world.

“When we recruit, people spend five minutes looking at the tax regime and they all want to move to Auckland. No one wants to live in Sydney.”

We do have a fairly simple tax system, and IRD generally does a good job through online services of making it easy. Rates are still a bit too high, but we are better off than in Australia.

Labour planning to increase top tax rate

December 16th, 2015 at 12:00 pm by David Farrar

Stuff reports:

Labour had gone into the last two elections promising to lift the top personal rate “and we are looking closely again at that”, he said.

“I think it is core to the kind of fair society I think we should have, that those who earn the most contribute a little bit more to ensure everybody has better opportunities. I never resile from that. The exact detail of that is what we are working on.”

Robertson said 2016 was the year Labour would put forward more concrete policies.

People on the top tax rate pay 33% on income over $70,000 and 15% on top of that on good and services they consume. I reckon that is more than enough.

Those earning over $70,000 already pay 59% of all income tax in New Zealand.

Labour third off the block to announce business PAYE policy or consultation

July 18th, 2015 at 4:00 pm by David Farrar

Stuff reports:

Andrew Little has launched his first policy since becoming leader, proposing changes to the way businesses pay tax.

Flexible tax for business would introduce a pay as you earn element to company tax. Labour also wanted to double the threshold at which businesses are required to pay provisional tax to $5000 and abolish late payment penalties.

The policy is the first the party has announced since the 2014 election. The scheme is voluntary,  and Labour has presented the plan as one open for consultation.

Provisional tax is a plan and I welcome Labour looking at a PAYE scheme for businesses. My Xero accounting package gives me monthly accounts which are accurate. I could easily pay income tax on quarterly profits rather than pay based on my previous year’s profitability which can be very different.

However Labour’s idea is far from a new one. The Government announced a consultation on it four months ago!

In March, Revenue Minister Todd McClay revealed a consultation paper from Inland Revenue which raised the idea of a business PAYE.

And they’re not even 2nd with the idea!

Earlier this week, New Zealand First leader Winston Peters signalled a strikingly similar policy for business tax.

“In the interests of New Zealand we ask the Government to support a much needed change to an oppressive business tax that strangles small businesses especially,” Peters said on Wednesday.

But third is better than not supporting it at all.

Acting Finance Minister Steven Joyce said Labour had simply “cut and paste” the Government’s position.

“Labour announced today it was launching a discussion document on changes to provisional tax for businesses. However it seems to have overlooked that the Government launched its own discussion document containing almost identical proposals back in March,” Joyce said.

“These in turn were based on National Party policy at the last election.”

But again regardless of it not being a new idea, it is still good to see Labour hopefully embracing a policy which will make it easier for businesses.

A plastic bag tax?

July 15th, 2015 at 12:00 pm by David Farrar

Stuff reports:

The war on plastic bags is now a global struggle, and New Zealand should join it.

This week a proposal for a compulsory levy on plastic shopping bags will be debated at the Local Government New Zealand conference. In fact, the time for debate is over. Now we need action.

Plastic bag levies, or even outright bans, are now common throughout the world, because bags are an environmental menace. They break down slowly and so they continue to blight the landscape and kill sea life and animals for many years.  

It has been estimated that the world uses about a trillion single-use plastic bags each year. Millions end up in the ocean where they kill sea life and birds, including endangered species. Cattle deaths from swallowing bags are a problem from Texas to India to Africa. The bags clog drains and cause floods. Light plastic bags can blow for hundreds of kilometres and blight the rural landscape.

Taxes on plastic bags have proved surprisingly effective, as is shown by a major 2014 report for the American Earth Policy Institute.  Denmark brought in its levy more than 20 years ago, and within a year usage had dropped 60 per cent. Ireland’s 2002 levy is  one of the most celebrated: it reduced the average use from 328 bags per consumer, the Institute reported, to 21. 

There can be a case for taxing something, if it has external effects which impose a cost of society as a whole – hence alcohol and cigarette taxes.

However my starting point is always that any new tax must not be used to increase the overall level of taxation (which is too high). So if you was a tax on plastic bags, then I want income or company tax reduced by the same amount that tax would bring in.

Plastic bags do have a negative impact on the environment, so there can be a case for a tax on them. This is preferable to a ban which is highly undesirable. How undesirable – well Eric Crampton estimates it would kill 20 New Zealanders a year.

But be careful of some studies claiming they have led to a big fall in bags used. These may be studies where people self-report use. Sales data is more accurate. The TPA at the Hill reports:

“City revenue figures, meanwhile, show no continuing decrease in the use of disposable bags. In fact, bag tax collections have proven remarkably stable since the nickel-per-bag fee debuted in January 2010,” the report added.

At the time the tax was imposed, D.C. estimated that they would collect $1.05 million in revenues in 2013. The actual haul – more than $2 million. Year-over-year, revenues even increased… by the equivalent of 200,000 bags.

But don’t expect the proponents of the tax to throw in the towel. Brian Van Wye, who works at the D.C. Environmental Department, still denies that the tax is meant to bloat the government’s balance sheet, insisting that the “objective is to change behavior.”

Using that logic, the next step may be for D.C. to double down. After all, if a $0.05 tax isn’t working, perhaps they can increase the per bag fee to $0.10 or $0.25. Since tax-and-spend liberals don’t think their logic is to blame, they have one recourse to this failing policy – more taxes.

That is my fear. That is why any new tax should be offset by tax cuts elsewhere. That reduces the incentive for people to use this as just another way to tax families and businesses more.

The Guardian also reports:

In Northern Ireland, which introduced a compulsory 5p charge on plastic bags last year, there was a 71% drop in consumption. In England, which has yet to implement such a rule, usage rose by 5%. Meanwhile, Wales, which brought in charges two years ago, saw its similarly precipitous fall go into reverse, with a rise of nearly a fifth. It seems the immediate change in behaviour reaped by the new charges is short-lived and it doesn’t take long for old habits to re-emerge.

So it is not actually clear that a tax at such a low level has a significant long-lasting behavioural change.

That said I’m not against such a tax, so long as other taxes are reduced to compensate.

Pollution taxes

June 26th, 2015 at 1:00 pm by David Farrar

The Herald reports:

Environment researchers have made fresh calls for a tax on polluters on the back of an OECD report highlighting rising pressures on our green backyard.

Through its new book, Vanishing Nature, the Environmental Defence Society has put forward an environmental consumption tax and rebate as a key reform, which it argues has the potential to tackle environmental degradation while broadening and rebalancing New Zealand’s tax base.

The lead author, EDS senior policy analyst Dr Marie Brown, said it would also help to reduce wealth inequality, could be designed to cut growth-limiting income and company taxes, and fund climate change mitigation.

My first reaction to any proposed new tax, is I’ll consider its merits if it is proposed not to increase the overall level of taxation, but as an alternative revenue source, which would allow income and company taxes to be reduced. It is good to see that this is the case here, even though they seem to be suggesting only a partial offset.

Dr Eric Crampton, head of research at the New Zealand Institute, said that in principle, taxes on pollution were far better than taxes on income so long as they were set properly – but this was very hard to do.

Simplicity is important – as we have with GST.

Taxes tend to reduce whatever you tax. So if you tax income, you reduce labour. If you have a GST you reduce consumption. If you have a CGT, you reduce capital. So a pollution tax can reduce pollution.

Trotters forgets tax

June 14th, 2015 at 11:00 am by David Farrar

Chris Trotter writes:

Well, here’s an idea (hat-tip to Danyl McLauchlan). Why not make it a rule that a Labour MP cannot take home more than the average wage of, roughly, $55,000 per year. The balance of their income, $95,000, would go to the party. This would guarantee Labour an annual income, from its current 32-strong caucus, of at least $3,040,000 per year, or, $9,120,000 over the three year parliamentary term.

That’s not a bad war chest – and just think of the effect on Labour’s voters! Knowing that their MPs are unwilling to take home more than the average income earner. That they’re prepared to give up two-thirds of their salaries to ensure that, come election time, the party of the workers stands a fighting chance against the party of the bosses. That they’re not just in it for the money, and the perks, and the power. What do you think that would do for building trust and identification?

There’s one problem with Chris’ calculations. He’s forgotten tax.

Perhaps Chris silently yearns for a low tax economy, where high earners can donate most of their salary to good causes, rather than pay it to the IRD. But we are not there yet.

The IRD will take $40,420 in tax off each MP compared to $9,520 for someone on $55,000. So that is $30,900 less money per MP to be tithed which is $2,966,400 less money over a three year term.

Maybe that would convince Labour to champion low taxes though – so they can tithe more of their income to Labour!

EU wants a minimum tax rate!

June 5th, 2015 at 3:00 pm by David Farrar

The Telegraph reports:

It also emerged that they are also pushing plans to introduce a minimum corporation tax rate across the continent in a move that could result in higher taxes on British companies. …

On Wednesday, EU officials will discuss how to tackle tax avoidance and create a system of “fair, transparent and growth friendly” corporation taxation at an orientation debate in the College of Commissioners, a forum used to float ideas, ahead of an announcement in June.

The discussion will include plans to create a basic rate of corporation tax across Europe, reported Handelsblatt, the German business newspaper. The

“Germany and France and demanding a minimum threshold value; we are reacting to that,” one commission source told the newspaper.

A commission spokesman denied the reports. At 20 per cent, Britain has the lowest corporation tax rate in the G7, and among the lowest in western Europe.

How about a maximum tax rate instead of say 25%!

If the EU tries to bring in a minimum corporate tax rate, it would be very good for non EU members!

Tories pledge a no extra taxes law

May 1st, 2015 at 7:00 am by David Farrar

The Guardian reports:

David Cameron will pledge to introduce a new law within the first 100 days of a Conservative government to prevent any rises in income tax, VAT or national insurance in the next parliament.

In an attempt to step up the pressure on Labour leader Ed Miliband on tax, the prime minister will say the new law will help voters to choose between the Tories, who say they have cut income tax for 26m people, and Labour, which, he claims, taxed people “to the hilt”.

A five-year “tax lock”, to be included in new legislation, would guarantee no increases in income tax rates; no increases in VAT, nor an extension of its scope; and no increase in national insurance, nor an increase in its ceiling above the higher rate threshold.

I like this.

We should do this here – pass a law that guarantees no increase is tax rates, GST or ACC levies for five years. That would force Labour, Greens and NZ First to vote for or against it. Yes a future Government could repeal it, but considering NZ should be in surplus, it would be politically more difficult for them to do so.

Bracket creep

March 20th, 2015 at 3:00 pm by David Farrar

Stuff reports:

The average household is more than $1000 worse off in tax payments since 2010 because of “bracket creep”, the ACT Party claims, amid a new push for tax brackets to be linked to inflation.

Today the party’s sole MP, David Seymour, released research showing how much the current tax brackets would have moved if they had been linked to the Consumers Price Index (CPI) – the most commonly used measure of inflation – since National cut income tax and raised GST in 2010.

Inflation has been generally low since then. However, adjusted for inflation, the top tax rate of 33 cents in the dollar would have risen to apply from income above $70,000 to above $73,571 from July 1 2014, research by the Parliamentary Library shows.

The threshold for the upper tax bracket, charging 30 cents in the dollar, would have risen from $48,000 to $50,449.

Over time, households which see their incomes rise around the level of inflation pay more tax as they are pushed into higher tax brackets, meaning their spending power actually falls.

A number of areas of government spending are already tied to inflation, from NZ Super and Veterans’ payments to social welfare payments.

According to ACT leader David Seymour, bracket creep was costing taxpayers hundreds of dollars a year.

Parliamentary Library papers showed that someone earning the average income of $51,674 was now $648.91 worse off over four years. The impact builds over time, with the average income earner $356.10 worse off in 2014 alone.

For the “average” household, those with the average income ($88,956 in 2014) had paid another $1036.07 in tax compared to what they would have if tax brackets were adjusted for inflation annually.

Due to low inflation the impact of fiscal drag or bracket creep has been relatively minor. But over time it certainly does add up, as more and more of your income moves into higher tax rates.

Seymour said this afternoon that the increases amounted to “substantial amounts” and increased tax by “stealth”.

The issue needed to be debated because taxpayers were probably not aware of the way tax was increased.

“We believe we should have the argument, rather than stealthily increasing taxes in a way that most people have never consented to and may not even be aware of,” Seymour said.

While he conceded there would be an impact on tax receipts if tax brackets were increased with inflation,  he said the Government could make the change  because of the range of other spending which was linked directly to inflation.

“Anyone who says the Government is unable to do this is being disingenuous.”

Speaking in the House today, Seymour asked whether the current period of historically low inflation was the “perfect time” to introduce indexing to tax thresholds.

Acting Finance Minister Steven Joyce said the Government had previously announced it would consider a tax cut package in 2017, and indexing tax thresholds could be considered as part of that.

Governments generally don’t like legislating for automatically changing tax brackets because it restricts their options for future tax cuts or spending increases.

But that is one reason I do support it. If the Government is unable to increase its tax take by having a high inflation economy, then they need to maintain tighter spending restraint and also have less of an incentive to have higher inflation.

A lot of the surpluses in the 2000s came from ever increasing fiscal drag, as households every year ended up paying more and more tax as nominal incomes rose.

Advancement of religion should not be a charitable purpose

February 23rd, 2015 at 12:00 pm by David Farrar

The Herald reports:

Food giant Sanitarium appears to be safe from an ongoing Government crackdown on charities that has some sporting bodies worried they may lose their charitable status.

The maker of Weet-Bix and Marmite has a controversial exemption from paying tax on its business earnings as a result of its ownership by the Seventh-day Adventist Church in New Zealand, a registered charity. …

The Internal Affairs spokesman said no sector, sporting or otherwise, was being specifically targeted, but organisations that “no longer meet a charitable purpose” or fail to comply with their obligations will be deregistered.

There were no issues with Sanitarium’s registration, the spokesman said, as “advancement of religion” was considered a charitable purpose under the Charities Act.

That rationale harks back to archaic British law, which some critics argue is no longer relevant in a secular, 21st century democracy.

It isn’t. You should not get tax exempt status because you promote belief in a supreme being, or multiple supreme beings.

The relief of poverty, widespread community benefit and advancement of education are also considered charitable purposes under the Charities Act.

Many churches do worthy things which do help the poor and benefit the community. And they may qualify for charitable status on the basis of their activities. But they should not qualify because they promote religion.

Under half of super rich pay top tax rate

January 27th, 2015 at 4:00 pm by David Farrar

The Herald reports:

New Zealand’s super-rich were found liable for an extra $77 million of tax in the last financial year.

The country’s most well-off have paid hundreds of millions of dollars in extra tax to Inland Revenue since it set up its high-wealth individual unit in 2003.

Those who come under the scrutiny of this IRD division must have, or be in control of, more than $50 million.

According to IRD’s investigation and advice manager Tracey Lloyd, the unit has identified 200 people who met the criteria.

Of these 200 people, 93 declared their personal income in the 2013 financial year as less than $70,000 – the point at which one is required pay the top tax rate of 33 cents in the dollar.

This is why increasing the top tax rate doesn’t increase tax revenue, but merely increases tax avoidance. The best tax system is low rates with a broad base.

Wealth taxes rarely work

January 10th, 2015 at 4:00 pm by David Farrar

MEP Daniel Hannan writes:

I was living in Brussels when François Hollande, the President of France, introduced his 75 percent top rate tax in 2012. Immediately, my quartier began to fill with French exiles, who could commute to Paris in just over an hour. …

Three years on, President Hollande is shame-facedly scrapping the 75 percent rate, having forcibly re-learned an ancient truth: Wealth taxes don’t redistribute wealth; they redistribute people.

The same goes with corporate taxes. Many companies can now choose which country to be based in for tax purposes. Of course they will avoid the high tax rate countries.

Hollande’s tax, levied on incomes above one million euros, has been a miserable failure. Over its lifespan, it raised around $500 million, a tiny fraction of the original projections. Why? Well, the Paris bureaucrats who made those projections overlooked something rather important. Rich people don’t sit around waiting to be taxed. They have all sorts of ways of beating the system, not necessarily involving accountants. The two most straightforward forms of legal tax avoidance are earlier retirement and emigration, and wealthy Frenchmen have made ample use of both.

The same happened in New Zealand. When Cullen’s envy tax of 39% on incomes over $60,000 came in, it didn’t actually increase the tax take. Research shows, it reduced it, as people made moves to avoid it.

The best way to maximize your tax revenue, though, involves neither harmonization nor secrecy. On the contrary, it involves lower, flatter, simpler taxes.

The complexity of a tax system is every bit as damaging to competitiveness as the overall tax rate, yet we take it almost for granted. If there is an American who understands the tax code in its entirety, I have yet to meet him.

NZ does well with a relatively simple tax system. The rates are still too high though, and should come down further.

The benefits of a broad base and low rate

November 18th, 2014 at 9:00 am by David Farrar

Geordie Hooft writes in The Press:

Over 90 per cent of tax revenue is collected from personal income tax, company tax, and GST. Due to the broad application of GST, New Zealand’s GST collections are around 10 per cent of GDP – the highest in the OECD, even though we have the sixth-lowest rate.

Similarly, the amount of tax collected from individuals as a percentage of GDP is the sixth highest in the OECD, even though we have the seventh lowest top personal tax rate (currently 33 per cent).

Some on the left moan that our top tax rate is only 33% and demand the rich be punished more. But unlike most countries we have very few exemptions, and the broad base means that actually wealthy individuals are paying just as much tax if not more than many richer people overseas.

IRD says reduce company tax

November 14th, 2014 at 3:00 pm by David Farrar

Stuff reports:

Inland Revenue has warned the Government may have to consider cutting the company tax rate next year if Australia drops its rate.

In a briefing to Revenue Minister Todd McClay, the tax department said New Zealand’s aging population could result in pressure to raise taxes to pay for health and pensions.

But it said the Government would need to take into account developments in other countries when considering company tax, which was cut from 30 per cent to 28 per cent in 2011, undercutting Australia’s 30 per cent rate.

“Tax changes in Australia should continue to be monitored as they can have important implications for New Zealand,” Inland Revenue said. “A particular focus will be Australia’s White Paper due out at the end of 2015.

“If, for example, there were a substantial reduction in the Australian company tax rate, the question of whether New Zealand should follow suit would arise,” it said.

Many people complain about companies shifting to countries with low tax rates. There is little one can do to stop this, except to ensure our own tax rates are competitive.

NZ 2nd most competitive tax system in OECD

September 26th, 2014 at 3:00 pm by David Farrar

The Tax Foundation assesses the tax systems of OECD countries. They note:

Many countries have been working hard to improve their tax codes. New Zealand is a good example of one of those countries. In a 2010 presentation, the chief economist of the New Zealand Treasury stated, “Global trends in corporate and personal taxes are making New Zealand’s system less internationally competitive.”

In response to these global trends, New Zealand cut its top marginal income tax rate from 38 percent to 33 percent, shifted to a greater reliance on the goods and services tax, and cut their corporate tax rate to 28 percent from 30 percent. This followed a shift to a territorial tax system in 2009. New Zealand added these changes to a tax system that already had multiple competitive features, including no inheritance tax, no general capital gains tax, and no
payroll taxes.

In a world where businesses, people, and money can move with relative ease, having a competitive tax code has become even more important to economic success. The example set by New Zealand and other reformist countries shows the many ways countries can improve their uncompetitive tax codes.

In the digital age, capital and labour are highly mobile. Companies can choose which countries to base themselves in, to sell to the world from.

The top 10 countries are:

  1. Estonia 100
  2. NZ 88
  3. Switzerland 82
  4. Sweden 80
  5. Australia 78
  6. Luxembourg 77
  7. Netherlands 77
  8. Slovak Republic 74
  9. Turkey 70

They also note:

Under this measure, no country has a perfect VAT or sales tax base. New Zealand has the broadest base with a ratio of 0.99

We have the simplest and broadest GST in the world. We should resist exemptions that complicate it.

Secondary tax

August 24th, 2014 at 11:00 am by David Farrar

Stuff reports:

Labour has announced plans to scrap secondary tax for workers with more than one job – but National says it’s already implementing the policy.

In the current system, those with more than one job often pay a higher rate on their secondary income.  It is expected they claim a refund on the wash-up at the end of the financial year.

However, Labour says this is too complex, overpayments are often not claimed back and the system hits hardest those in casual work.

Within five years of taking office Labour would develop an alternative to secondary tax. In the interim, it would implement special tax codes until an Inland Revenue computer upgrade comes online.

I’m not sure you can call this a policy. At best it is a desire. A policy would be an announcement of the alternative. All they have announced is that at some stage before 2020, Labour will develop an alternative.

However, National’s revenue spokesman Todd McClay said they were already going ahead with the policy.

He said IRD’s Business Transformation plan will “address the PAYE system, including secondary tax and end-of-year square-ups.”

And that work is due to be completed by the end of 2015, well before 2020.