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.

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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.

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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.

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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!

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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!

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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.

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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.

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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.

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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.

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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.

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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.


Greens pledge higher taxes for higher welfare

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

Andrea Vance at Stuff reports:

A Green Government would hike the tax rate to 40 per cent on income over $140,000 and use the extra revenue to tackle child poverty.

The party’s $1 billion poverty package includes new tax credits for low-income families and children in their first few weeks of life. These would be extended to the children of students and beneficiaries.

The party has this afternoon launched its election campaign in Auckland and also announced plans to harmonise the trust tax rate with the top income tax rate and crack down on avoidance. Its costings say this would generate and extra $1bn a year.

Under the plans, the Family Tax Credit and the In-work Tax Credit would be scrapped and replaced with a Children’s Credit, worth an extra $60-a-week. It would be extended to those who currently miss out on the In Work credit, which is available only to parents who work more than 20-30 hours a week.

Basically a huge income boost to families not working, funded by a tax hike on some families that are working.

The welfare system is designed so there is an incentive to be in work. The Greens want to remove one of they key incentives.

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T is for Tax

July 12th, 2014 at 4:00 pm by David Farrar

One of the big ones. Tax.

Taxes are one of the most tangible links between the government and civil society. We all pay taxes in some form, and in exchange we expect the government to provide certain goods and services: roads, infrastructure, the courts, law enforcement, education, and support for society’s most vulnerable.
From this perspective, the oft-quoted declaration ‘taxes are the price we pay for a civilised society’, widely attributed to Oliver Wendell Holmes, rings true.
However, it is a common misconception that a dollar taxed is a dollar that can be spent by government on goods and services. In reality, a dollar taxed is a dollar that must be spent on collecting tax, ensuring tax compliance, public administration of policy and, of course, the actual public policy.
Besides, increases in tax rates do not automatically lead to an increase in tax revenue, as illustrated by the Laffer curve. Named after Arthur Laffer, this curve popularised the notion that higher tax rates may actually cause the tax base to shrink so much that tax revenues will decline. Conversely, a cut in tax rates may increase the tax base so much that tax revenues increase.
How so?
Taxes distort behaviour by influencing the personal decisions people make about their work and consumption. For instance, people who would prefer to work longer hours or at a higher pay may work less or refuse a pay rise to avoid being taxed at a higher rate. Higher personal income taxes encourage workers to substitute their preference for work to economic activities that they would otherwise not prefer.
This is known as the deadweight loss of taxation, where the tax system causes individuals to pursue actions they would otherwise not prefer. To gain maximum tax revenue, there must be a careful balance between low rates with a greater tax base, and high rates with a smaller tax base.
There is also the issue of tax incidence, which describes who bears the cost of the tax. For example, increasing the tax on high income earners may not necessarily mean that they bear the cost of the tax. If workers are receiving less money in their pocket, for an equal or greater amount of work, employers may feel compelled to raise their wages to ensure employees receive the same take-home pay. Thus it is employers who bear the burden of a higher rate of income tax.
Taxes are not the price we pay for a civilised society. At best they are the price we pay for a civilised government. But they are also the price of overly bureaucratic procedures, unpredictable outcomes, and the loss of freedom to make our own decisions.


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Herald on Labour’s tax the rich pricks more plan

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

The Herald editorial:

Taxing the rich seems a defining policy of the Labour Party. It plays especially well to its left wing, a point underlined by the Council of Trade Unions’ hearty welcome to the announcement that Labour proposes lifting the top personal tax rate from 33c to 36c for those earning more than $150,000 a year. On other grounds, however, the policy doesn’t make a lot of sense. Not only is it unnecessary but it will surely raise far less additional revenue than anticipated.

Labour says the new top rate would raise almost $200 million in the 2015-16 year, increasing to $350 million a year by 2020-21. 

It won’t. The 2000 tax hike for those earning over $60,000 did not produce any significant extra revenue, and may in fact have reduced it. It will just drive high earning NZers to set up a company (28% tax rate) or to move their tax base overseas.

Nor is much of value likely to come from its plan to clamp down on tax avoidance by internet-based multinational corporations such as Google and Facebook. As welcome as this instinct may be, and as unwelcome as the practice of avoidance is, there is little hope that its approach will yield anything like $200 million a year. 

It won’t bring in $1.If anything, it will see them pay less tax in NZ, as they close their NZ subsidiaries, and just have people deal with say their Australian one.

The only was one can deal with global companies choosing a tax base in a low tax country, is through international agreement. Not press releases.


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Google’s tax in NZ

June 24th, 2014 at 12:00 pm by David Farrar

Stuff reports:

Google’s New Zealand subsidiary reported an annual loss of just over $60,000 and paid just $227,000 in tax in 2013, its latest accounts have revealed.

New Zealand businesses are believed to spend hundreds of millions of dollars annually on Google’s advertising services and software.

Yep, but they buy those from Google, not Google NZ. Google NZ did not invent the search engine we all use.

But Google is one of a number of technology multinationals that book most of their revenues in Ireland, enabling it to take advantage of legal tax rorts that are currently the focus of an attempted-clampdown by the Organisation for Economic Cooperation and Development (OECD).

The subsidiary turned over $10.1 million in 2013, according to accounts published by the Companies Office on Friday.

Google globally actually paid $2.3 billion in tax last year, which was an effective tax rate of 16%. Companies will incorporate in countries with lower corporate tax rates – but they still pay tax there.

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Provisional Tax

June 16th, 2014 at 4:00 pm by David Farrar

Stuff reported:

The much-hated provisional tax system that forces small businesses to forecast their tax liability a year in advance will be overhauled, Revenue Minister Todd McClay has all but confirmed.

McClay said he did not believe the provisional tax system was “fit for purpose”.

A “business transformation” programme under way at Inland Revenue, which the department expects to cost up to $1.5 billion, could allow firms to pay tax on their income in, or closer to, real time, he said.

It would be “wonderful” if Inland Revenue could get to a point when income was taxed only when it was earned, but any changes would need to be balanced against the Government’s needs, he said.

John Payne, head of tax for the New Zealand Superannuation Fund and spokesman for the Corporate Taxpayers Group, said reform of provisional tax was certainly needed.

Provisional tax is a pain. My company’s income and profit can vary greatly from one year to the next. I don’t even know what the year end is likely to be until around 9 months into it. So often my provisional tax has been over-paid, or turns out to be inadequate and you risk penalties.

A system where say every four months you just calculate your provisional profit and pay 28% of that with a final adjustment after year end, would be much easier.


Tax Freedom Day

June 4th, 2014 at 2:59 pm by David Farrar

The Taxpayers Union broke the good yet sad news:

Congratulations New Zealand, as at 10.04am today you are working for yourself. However, the fact the Government accounts for all the money earned until today means it is unlikely New Zealanders will be celebrating. The government has effectively sucked up all of our earnings for the first 154 days of the year.

OECD figures put the current burden of government in New Zealand as 42.2% of GDP. This is larger than the 30% recently quoted by Finance Minister Bill English because it also takes into account crown entities, such as SOEs as well as local government. …

We need to aspire to countries like South Korea, Switzerland and Australia. Tax Freedom day this year fell on 21 April in South Korea, 2 May in Switzerland and 11 May in Australia.

March would be my ideal month for tax freedom day, but I’ll settle for April.

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Tax revenues down

April 9th, 2014 at 1:00 pm by David Farrar

Stuff reported:

Worsening budget deficits raise serious questions about National’s management of the economy and its books, Labour finance spokesman David Parker says.

He was speaking after Treasury today reported that the Budget deficit had continued to worsen. A lower tax take had pushed the books into the red by $1.4 billion, $884 million more than expected.

Parker said for four months in a row the books were worse than predicted, with tax revenues falling short of expectations.

“For the November and December figures Treasury said there were timing issues. They were given a bit of leeway. But now even Treasury admits it doesn’t know why the books are even more in the red.

“Somehow (Finance Minister) Bill English is presiding over a growing economy but not getting the tax revenue that should be coming with it. He needs to explain himself.”

Tax revenues are notoriously difficult to project. Even an individual company can easily find its profit will vary from forecast by 10% to 20%. The Government’s tax revenues are based on projecting the combined profits and hence tax payments of several hundred thousand companies. And that’s just on an annual basis – let alone on the monthly forecasts.

Employers may be hiring extra staff which reduces profitability and tax in the short-term. They may be purchasing assets which increases depreciation.

Or it may be that heightened business confidence and economic growth is not actually being reflected in profitability and tax for structural reasons – which would be more of a concern.

English said the figures reinforced the need for restraint in government spending.

“We remain committed to reaching a surplus next year and Budget forecasts next month will confirm we are on track,” he said.

“It is a challenging task that will be achieved only if we remain disciplined.”

Yep. The Government has limited control over how much tax is paid to it by the private sector. It does however control how much money the Government will spend.  Hence the constant need for fiscal discipline.

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March 4th, 2014 at 2:00 pm by David Farrar

A guest post by Kiwi in America:

The left are totally invested in big government. The power of the state is the mechanism that they use to bring about a just and equitable society. Their goal is to tax the productive sector as much as possible to pay for ever more costly social programmes that they hope will create equality and thus a fairer and happier society. When they run up against the reality that the owners of capital are intelligent and seek the best returns on their assets and that a good percentage of capital is mobile and can be moved to jurisdictions less hostile to enterprise, they show their utter ignorance of how the free enterprise economy works.

A game I love to play with lefties who are employed in the government sector is to ask them who pays their salary. The conversation goes like this:

Me       Who is your employer?

Lefty   The University

Me       Who funds the university?

Lefty   The government

Me       Who funds the government?

Lefty   The tax payers

Me       Who employs the taxpayers who pay the taxes who fund your salary?

Lefty   Pause ….employers

Me       What percentage of employers are private sector companies?

Lefty   Cottoning on to where I am heading – “well the taxes from the employees of the government sector pay as much tax as the private companies and anyway all private company owners do is try to avoid tax”

Me       Actually 85% of the total government tax take comes from the taxes paid by private sector companies, their employees and the self-employed – the productive non-government sector of the economy

Lefty   That’s absolute rubbish and right wing propaganda

If any of you have had this discussion, here are the statistics to back up the claim – that 85% of all tax receipts source from the private sector activity in the economy. Almost all the money that governments expend on government services and benefits come from the pockets of hard working New Zealanders who own, or are employed by, evil capitalist companies. The chart below is a summary only and each line is footnoted – some to government department websites and the rest to supplementary charts that are available below the fold for those interested in seeing how I arrived at the total numbers. Note that the staff numbers for government entities were lifted from the statutorily required Annual Reports that each file in Parliament or from the entity’s own website.

The table provided is embedded below.



Public vs Private Sector


Fallow on tax

February 28th, 2014 at 1:00 pm by David Farrar

Brian Fallow writes in NZ Herald:

Large chunks of the tax base resemble icebergs, drifting north into the warm waters of the global and digital economy.

Policymakers have a term for this: “base erosion and profit shifting” – BEPS for short.

They are grappling with the changing nature of international commerce, where the eternal desire to minimise the tax you pay is assisted by the rapid growth of e-commerce, and by the opportunities presented by countries’ different tax laws and the ability of multinational firms to locate debt funding and intellectual property wherever will maximise the bottom line.

As part of that effort, finance ministers from 20 major economies, meeting in Sydney last Sunday, agreed to adopt a regime for automatic information sharing among tax authorities.

The Organisation for Economic Co-operation and Development (OECD) calls it the Common Reporting and Due Diligence Standard. You can translate that as: “We are going to make your banks tell on you.”

The erosion of the tax base globally is a problem, but so is erosion at home.

Let me give you an example of how you can erode the tax base locally, and legally.

  1. Set up an incorporated society. It can be any sort of incorporated society.
  2. The society doesn’t have to pay income tax but it does have to deduct tax from its employees and pay GST.
  3. Now if you don’t pay that tax, then the IRD can come and liquidate you, which means the society gets wound up.
  4. So set up a limited liability company, and have some of your transactions go through that company instead of the society. You can have the lease assigned to it, and charge management fees. You can also charge your salary through it also, as that then allows you to deduct stuff off tax.
  5. Have the limited liability company spend all its money on behalf of the society, and not pay any tax to the IRD. This means you have more money to spend.
  6. IRD liquidates the company, leaving the society untouched and the IRD ends up out of pocket by say $150,000 – while the society carries on unscathed.

This is all totally legal, using a crafty mixture of corporate tax structures and non payments.

I look forward to political parties putting forward policies on how to stop the erosion of the tax base in this way.

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Opposition to higher taxes broken down

February 17th, 2014 at 4:00 pm by David Farrar

The recent Fairfax poll asked respondents if they support or opposed raising taxes to pay for new spending. 69% said they were opposed and 25% in favour which means the net disapproval was -44%.

I was interested in the breakdown by party vote, which Fairfax kindly supplied. The net disapproval for supporters of each party against higher taxes was:

  • National voters: -59% net disapproval
  • Labour voters: -23% net disapproval
  • Green voters -0.5% net disapproval
  • NZ First voters -55% net disapproval

No surprise National voters are against higher taxes. Pleasing to see NZ First voters just as strongly against. What was fascinating is that most Labour voters are against increasing taxes to pay for new spending. Only 36% supported that with 59% opposed. The Greens were the only party not to be strongly opposed and they were split pretty much down the middle.

Also interesting to look at the demographics of opposition to higher taxes. They include:

  • Under 30s: -38% net disapproval
  • Maori: -50% net disapproval
  • Europeans: -40% net disapproval
  • Students: -32% net disapproval
  • No qualifications: -67% net disapproval
  • Post-grads: -22% net disapproval
  • HH income under $50k: -46% net disapproval
  • HH income over $100k: -32% net disapproval

So three fascinating things here:

  1. More Maori than Europeans oppose raising taxes to pay for more spending
  2. Those with no qualifications at all are far more opposed than the small number of people with a post-graduate degree
  3. Those with household incomes below $50K more opposed than those with HH income over $100k

So if parties go into this election vowing to raise taxes to pay for more spending, they will be seriously out of touch. As we head back into surplus, I want parties to be offering tax cuts, not tax increases.

The detailed results are here, for those interested – Fairfax poll breakdown

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Hehir on UK Labour’s tax plans

February 6th, 2014 at 12:00 pm by David Farrar

Liam Hehir writes in the Manawatu Standard:

The United Kingdom’s Labour Party recently pledged to lift Britain’s top marginal tax rate from 45 per cent to 50 per cent.

The reaction was interesting because it illustrates the way people in politics sometimes talk past one another in political debate.

The policy has been partly framed as a deficit reduction measure and partly as an effort to create a “fairer” economy.

In critiquing the proposals, detractors have focused on the first of these, pointing out that the analysis of Her Majesty’s Treasury is that the higher tax rate only accounted for an additional £100 million in tax revenue.

In isolation, that seems like a lot. Given that the UK Budget deficit exceeds £116 billion, however, the proposal would not meaningfully contribute towards putting Britain’s public finances in order.

It’s a rich prick tax. Would plus the deficit by 0.1% only. They’re doing it to punish.

There are other factors at play, too. In a modern, globalised economy the transnational elite can easily shop around for competing jurisdictions in which to base their economic activity.

The best way to get more companies to pay tax in NZ, is to have lower tax rates.

American President and liberal icon John F Kennedy recognised this when calling for the slashing of the top income tax rate in 1962. Kennedy, no rabid Right-winger on domestic affairs, opined that: “. . . tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now”.

Yet left parties in NZ are promising to increase tax rates.

Polls show that large majorities of the British public would support the move. About 40 per cent would do so even if it raises no revenue.

An envy tax.

For the current generation of progressive leaders, stiff marginal tax rates are not exclusively (or even primarily) a means of raising money for the government to spend. Decreasing the wealth of the rich is considered a legitimate end unto itself – even if nobody else benefits.

That is so sadly true. This is what many proponents of reducing income inequality want – less rich people rather than less poor people.

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