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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Guest Post: 85% OF TAX REVENUE COMES FROM THE PRIVATE SECTOR

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

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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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Labour supporters want tax hikes even if they bring in no more revenue

February 3rd, 2014 at 12:00 pm by David Farrar

Daniel Hannan writes in the Telegraph:

Ponder the graph above. Sixty-nine per cent of [UK] Labour supporters would want a top rate tax of 50 per cent even if it brought in no money.

I’m sure they’d dispute the premise. I’m sure they’d insist that it did bring money in. And, on one level, they’d believe it; it’s human nature to start with the result we want and then rationalise it to ourselves with what look like hard data. I think their rationalisation would be false, obviously – once the behavioural consequences of the tax are factored in, it becomes a net drain on revenue – but I might be subject to my own confirmation bias in the other direction.

Anyway, this isn’t a blog about the statistics – I’ve already posted one of those. No, this is a blog about the mind-set of people who see taxation, not as an unpleasant necessity, but as a way to punish others.

This is amazing. Over two thirds of UK Labour supporters want higher taxes, even if those higher taxes did not produce more revenue for the Government.

I wonder what the percentage would be in NZ?

Envy is an ugly and debilitating condition, but it seems to have an evolutionary-biological basis. The dosage varies enormously from individual to individual, but even toddlers often display a sense that, if they can’t have something, no one else should either. If they had the vocabulary, they would doubtless, like the 69 per cent of Labour supporters, explain that emotion “on moral grounds”. Few toddlers, and few Labour voters, openly admit to being actuated by vindictiveness.

Hannan also touched on inequality:

I accept that there are advantages in homogenous, Nordic-type societies. Huge inequalities of wealth can lead to higher stress levels, higher crime rates and weaker social engagement (oddly, the people who deploy these arguments in support of economic homogeneity almost never extend them to multiculturalism, but that’s another story).

The case against state-enforced equality is not that a narrowing of the wealth gap is in itself a bad thing; it’s that it carries a disproportionate cost in terms of lost prosperity and lost freedom.

Wealth taxes make societies more equal; but they do so by making them less prosperous. We can push plutocrats into shifting their money abroad. We can drive hedgies to Singapore or Switzerland. We can, more prosaically, make entrepreneurs spend more time with their accountants and less creating jobs. We can encourage by far the most common forms of legal tax avoidance: shorter hours and earlier retirement. All these things will make our country more equal. All of them will make it poorer.

And be careful with what you wish for:

Following the credit crunch, inequality fell. City salaries plummeted, average salaries fell slightly, benefits stagnated. In other words, the 69 per cent got their way: Britain became poorer and more equal. Yet, in the event, it was Labour supporters who moaned loudest. There’s no pleasing some people.

The focus should be on economic growth. If you grow the pie, then you get better options as to how to divide it up. Taking more tax off hard working taxpayers so you can give it parents earning $140,000 does not grow the pie.

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OECD says you can’t do special tax rules for digital companies

February 3rd, 2014 at 10:00 am by David Farrar

The FT report:

Proposals for a tax crackdown on digital companies such as Google and Amazon are to be dropped, as governments push ahead with measures affecting the global economy.

Designing special tax rules for internet companies would not be viable, given the growing digital presence in large parts of the economy, an international task force has concluded.

So I’m really looking forward to details of the magic wand that Labour claim they have, that will mean those companies will pay tax in New Zealand based on their turnover instead of their profit.

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Labour jumps the shark

January 28th, 2014 at 8:25 pm by David Farrar

3 News reports:

The Labour Party has put forward a possible solution to force multi-national corporations to pay more tax – ban them from the internet.

It says the Government should first talk with companies like Facebook, but if that doesn’t work it is important to have a backup, something Labour is describing as a credible threat.

Facebook is the world’s largest social network by far, but pays little tax here in New Zealand.

“The Government should always have in its back pocket the ability to ban websites,” says Labour revenue spokesman David Clark.

No they shouldn’t. At all.

But Finance Minister Bill English says “frankly, that sounds nuts”.

“Fine print, he’s going to close down Facebook,” says Prime Minister John Key. “That’ll be interesting.”

Not just Facebook. Labour says Google, Apple and Amazon also don’t pay enough tax, so I presume they are included in the list of sites they might try and ban. Perhaps EBay also?

Why stop there. Fairfax and APN pay no tax, or very little tax, in New Zealand. Maybe Labour will also try and ban the NZ Herald and Stuff websites.

“Paedophile websites are banned the world around,” says Mr Clark.

Oh my God. He is comparing Facebook to paedophile websites. How can anyone think Labour is even close to ready for power, when they come out with this crap.

And as it happens paedophile websites are not banned in NZ. It is illegal to download or upload paedophile images, and browsing such a site may be a criminal offence, but the Government has no power to ban any website.

Putting aside the sheer lunacy of advocating the Government should try and ban Facebook if they don’t pay more tax, isn’t there something deeply malevolent about an aspiring Government making such threats. If you think a company should pay more tax, then you change the law to close down loopholes. But to declare as an MP that you have unilaterally decided Company X should pay more tax, and that you will threaten to ban them from New Zealand unless they voluntarily agree to pay more tax is what you expect from some tin pot third world dictatorship, not a so called serious political party.

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How?

January 7th, 2014 at 3:00 pm by David Farrar

The Herald reports:

Labour says it will tackle “aggressive tax avoidance” by multinationals such as Facebook and Google which it says is costing the taxman hundreds of millions of dollars each year.

How? A magic wand?

Local concerns were fuelled last year when iPhone and iPad maker and iTunes owner Apple reported paying just $2.5 million on $571 million worth of New Zealand sales in 2012. Google and Amazon’s tax bills were also tiny in comparison with their reported sales here.

Economic illiteracy continues. Company tax is based on net profit, not on gross sales. Any comparison of tax to sales is misleading.

Labour revenue spokesman David Clark yesterday said: “We certainly think there’s a lot of aggressive avoidance going on.”

He said the party was continuing a major research project on the issue and would be more proactive than the Government in addressing it through policies likely to be released before the election.

Again how? Are you going to ban them from selling to NZers unless they pay more tax here?

If Labour want to be credible on this they need to specify what actual changes they would make to tax laws, so we can assess whether or not it would result in one extra cent of revenue.

 

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Taxing pot

November 21st, 2013 at 4:00 pm by David Farrar

The Daily Beast reports:

In 2012, voters in Colorado and Washington passed full-on, no-hemming-or-hawing pot legalization by large majorities. Lawmakers in each state have spent the better part of the past year figuring out how to tax and regulate their nascent commercial pot industries, which will open for business in 2014 (until then, recreational pot is only supposed to be cultivated for personal use). The spirit behind the legalization efforts in both states was that marijuana should be treated in a “manner similar to alcohol.

Unfortunately, it’s starting to look like both states are going to treat pot in a manner similar to alcohol during Prohibition. Not only are pot taxes likely to be sky high, various sorts of restrictions on pot shops may well make it easier to buy, sell, and use black-market marijuana rather than the legal variety. That’s a bummer all around: States and municipalities will collect less revenue than expected, law-abiding residents will effectively be denied access to pot, and the crime, corruption, and violence that inevitably surrounds black markets will continue apace.

The lesson here is that is you tax something too much, then a black market prospers.

The upshot of such actions is predictable and depressing. Colorado lawmakers are banking on about $70 million a year (PDF) in taxes from pot and their Washington counterparts have projected new revenues of $1.9 billion over the first five years of legalization. There’s just no way that’s going to happen if a legal ounce of pot is double the price or more of back-alley weed. Even the most stoned pothead isn’t that easy to scam.

It will be very interesting to see what the legal and black market prices are, when the legal market starts. Also what market share each gathers. How much more will people pay for it to be a legal purchase?

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France revolts against new taxes

October 23rd, 2013 at 10:00 am by David Farrar

The Daily Telegraph reports:

A poll on the front page of last Tuesday’s Le Monde, that bible of the French Left-leaning Establishment (think a simultaneously boring and hectoring Guardian), translated into stark figures the winter of François Hollande’s discontent.

More than 70 per cent of the French feel taxes are “excessive”, and 80 per cent believe the president’s economic policy is “misguided” and “inefficient”. This goes far beyond the tax exiles such as Gérard Depardieu, members of the Peugeot family or Chanel’s owners. Worse, after decades of living in one of the most redistributive systems in western Europe, 54 per cent of the French believe that taxes – of which there have been 84 new ones in the past two years, rising from 42 per cent of GDP in 2009 to 46.3 per cent this year – now widen social inequalities instead of reducing them.

I guess this is what people mean when they vow to over-turn neo-liberalism. 84 new taxes!

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The tax system has got more, not less, progressive

October 23rd, 2013 at 7:00 am by David Farrar

Bill English has stated:

Lower income households are paying a smaller proportion of net income tax than they did in 2008, indicating that the tax system has become more progressive since the Government’s tax changes in 2010, Finance Minister Bill English says.

“This should contribute to improvements in income equality in New Zealand, contrary to the Opposition’s completely false claims that lower income households were disadvantaged by the tax changes,” he says.

If you repeat a lie often enough, people may believe it.

  • Households earning less than $60,000 a year, which total around half of all households, are generally expected to pay less in percentage terms towards total net tax in 2013/14 than they were paying in 2008/09.
  • Conversely, households earning more than $150,000 a year – that is, the top 12 per cent of households by income – are generally expected to pay more of the total net tax than they were paying in 2008/09.
  • And only 6 per cent of individual taxpayers earn over $100,000 a year, yet they pay 37 per cent of total income tax. This has increased from the 2010/11 tax year, when those taxpayers paid 29 per cent of total income tax.

Despite this, Labour persist with their rich prick envy tax insisting that those on higher incomes must pay 39% income tax as well as 15% GST!

Using data from the Household Economic Survey, the Treasury earlier this year estimated that this year households earning over $150,000 a year – the top 12 per cent of households by income – will pay 46 per cent of income tax.

But when benefit payments, Working for Families, paid parental leave and accommodation support are taken into account, these 12 per cent of households are expected to pay 76 per cent of the net income tax. And that is before New Zealand Superannuation payments are counted.

12% of taxpayers are funding 76% of the net income tax take, and Labour says this is not enough! What do they want? 90%? 95%? 100%?

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Russel Norman thinks tax is not a burden!

September 19th, 2013 at 11:00 am by David Farrar

This is incredible and should ring warning bells about the attitude of a Government with the Greens in it to taxation.

 

Its horrific that Dr Norman thinks tax is not a burden, and even worse calling it so is right wing.

When the state takes a large proportion of your income, of course it is a fucking burden.  If they didn’t do it, you’d have less more money.

If tax wasn’t a burden, then hundreds of thousands of people would pay extra tax voluntarily. Does Dr Norman wake up every morning and send a donation in to the IRD?

Plus the stupidity of Norman’s comments are highlighted by the fact that he got owned on Twitter by Gareth Richards who pointed out that Dr Norman himself had in the past used the term himself. So in fact Dr Norman was just attacking poor civil servants for using the same term as he had used. He should apologise to the Treasury officials he maligned.

Norman tried to defend his new found view that tax is not a burden on the basis the Government spends tax revenues on some good things. Eric Crampton points out:

Taxes are a bad, public services are a good. Saying the first doesn’t mean denying the second.

Again I’m horrified that we may have a senior economic minister in a future government who does not think taxation is a burden on hard working New Zealanders who fund the tax system. It reflects a neo-marxist view I guess that all income is really the property of the state’s, and we should be grateful they allow us to keep some of it.

Also Eric schools Dr Norman on some basic economics:

More importantly, economists use the word ‘burden’ in a particular way. A few useful notes about Principles-level (maybe intermediate) economics for someone who thinks himself qualified to be finance minister:

‘Burden’ measures the total cost of a tax. The ‘excess burden’ is the amount by which the cost of a tax exceeds the amount collected. Treasury tends to reckon that excess burden is around 20%: it costs us about $1.20 to raise $1.00 in tax. The $1.00 raised is a transfer from the public to the government; the $0.20 is pure loss due to distortions in economic activity consequent to increases in our current mix of taxes.

Also:

Russel Norman suggests only “right wing” economists talk about tax burden. Here is a JSTOR search on “tax burden”. There are 61 pages of search results with 100 results per page. Item number 177 on a date-sorted list is famous Right Wing Economist John Maynard Keynes discussing the Colwyn Report on Natinoal Debt and Taxation. Item 398 is rabid right-winger Nicholas Kaldor’s call for wage subsidies to reduce unemployment (1936).

Burden is just the term used by economists to describe the cost of the tax and to help sort out the difference between statutory and economic incidence. Like “While X writes the cheque to IRD, the burden of the tax falls on Y and Z.” That’s it. It’s the standard term used in the main texts to describe this thing. Richard Musgrave (centre, maybe centre-left) uses it. James Buchanan (right) uses it. Pick a random public finance text, you’ll find “tax burden” or “excess burden” somewhere in it.

Then on Twitter Dr Norman goes further rejecting both the labels burden and distortionary for taxes!

My challenge to all those who agree with Dr Norman that tax is not a burden, to write out larges voluntary cheques today to the IRD. That means it is no extra burden on you, and reduces the burden on the rest of us.

UPDATE: Russel has actually referred to the tax burden in Parliament, as has Metiria Turei. This reinforces that Dr Norman should apologise to the Treasury officials for his attack on them for using the exact same language both Green co-leaders have used in the past.

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France says no more taxes

September 2nd, 2013 at 12:00 pm by David Farrar

The Telegraph reports:

Returning from their summer break, the French are about to discover stinging rises in tax bills in their letter boxes – the result of a series of new levies enacted by President François Hollande as he seeks to plug the French deficit and bring down public debt – now riding at 92 per cent of GDP.

But the extent of the hikes has apparently even shocked the very Socialist ministers who implemented them.

The total tax pressure (taxes and social security contributions) will account for 46.3 per cent of GDP this year – a historic high – compared to 45 per cent in 2012. …

The rich will see the highest rises, following Mr Hollande’s decision to raise the rate to 45 per cent for those earning more than 150,000 euros – effectively 49 per cent due to an additional levy.

This will be an aspirational target for Labour by the time their leadership primary is done!

In a clear damage limitation exercise, a chorus of top Socialists spoke out against any more rises.

Pierre Mosovici, the finance minister, told France Inter radio: “I’m very sensitive to the French getting fed up with taxes We are listening to them.” Laurent Fabius, the foreign minister followed suit, warning Mr Hollande to be “very, very careful” as “there’s a level above which we shouldn’t climb”.

One Socialist told Les Echos newspaper that the hand-wringing was totally hypocritical as “they are crying wolf, but the wolf is us.”

A cunning strategy. Pile on heaps of new taxes, and then claim to be against any more taxes.

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Tax reform principles

July 12th, 2013 at 12:00 pm by David Farrar

Former Senator Phil Gramm writes on his principles for tax reform.

First, under no circumstances should Republicans agree to make the tax system even more progressive than it already is, or to increase the number of people who do not pay income taxes. In 1980, the top 1% and 5% of income earners in America paid 19.1% and 36.9% of total federal income taxes. Today, the top 1% and 5% pay 37.4% and 59.1%. Meanwhile, 41.6% of American earners now pay no federal income taxes.

Sounds like NZ.

Second, government should collect the minimum revenues needed to support and protect a free society and do so in a way that is, as far as possible, neutral in its effect on individual behavior. In its purest form, this means no individual deductions, credits or tax expenditures. No matter how committed Americans may be individually to charitable giving or home ownership, the government should not promote those values through special provisions in the tax code.

Agreed.

Third, Republicans should require all similarly structured firms be treated the same. If sweat equity is taxed as a capital gain for a mechanic who opens a garage with a financial partner, it should be treated the same for a hedge fund or private-equity manager who shares in the gains of his investors.

Likewise a capital gains tax should have no exemptions.

Fourth, business subsidies and credits should be eliminated. Ending subsidies to fund lower tax rates improves the efficiency of capital allocation. The sine qua non of tax reform is a more efficient allocation of investment capital. If the tax breaks that create crony capitalism are allowed to survive, then tax reform failed.

Lower tax rates, not special tax rates.

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Net tax in NZ

July 10th, 2013 at 12:30 pm by David Farrar

net tax small

 

This is a fascinating table from a speech by bill English today showing how highly re-distributive the NZ tax and welfare system is. Basically what this shows is that the top 5% of households pay 47% of net tax in New Zealand. Households up to $60,000 income receive more in welfare on average than they pay in tax, Yes, they are effectively paying no tax.

Now I’m not complaining about this too much. I’m happy to some extent to help working lower income families when they have kids to look after. But when political parties complain that we need to hike taxes on rich pricks, then bear in mind that our tax and welfare system is already highly highly re-distributive. The debate should be on how we allow Kiwis to keep more of their income, not how to take more off them.

Bill English noted:

Estimates of net income tax paid by household income, before and after Budget 2010, indicate the system has become more progressive over this period, Mr English says.

Households earning less than $60,000 are generally expected to pay less, in percentage terms, towards net tax in 2013/14 than they were paying in 2008/09. 

Conversely, households earning more than $150,000 are generally paying more of the net tax than they were in 2008/09.   

“It’s appropriate to maintain a tax and income support system that helps low and middle income households when they most need it.

“But people who call for even greater transfers to low income families, or who call for the top tax rate to be raised, need to be aware of how redistributive the tax and income support system really is,” Mr English says.

Income tax rates should be lowered, not increased.

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NZ lifetime tax

June 18th, 2013 at 2:00 pm by David Farrar

Kiwi Dirt Biker has done a NZ equivalent of the UK site which shows how much tax you’ll pay over a 43 year career.

Housing would be a lot more affordable if we were paying less tax!

He has also done a page which compares your difference in lifetime tax based on the 2007 tax rates and the 2013 tax rates.

If you earn $100,000 a year you’ll end up with $273,000 more cash in the hand than if the 2007 tax and ACC rates still applied.

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The Danish fat tax

May 27th, 2013 at 1:00 pm by David Farrar

Paul Walker blogs a summary of a new report by Christopher Snowdon on The Proof of the Pudding: Denmark’s fat tax fiasco. The findings are:

  • Denmark’s tax on saturated fat was hailed as a world-leading public health policy when it was introduced in October 2011, but it was abandoned fifteen months later when the unintended consequences became clear. This paper examines how a policy went from having almost unanimous parliamentary support to becoming ‘an unbearable burden’ on the Danish people.
  • The economic effects of the fat tax were almost invariably negative. It was blamed for helping inflation rise to 4.7 per cent in a year in which real wages fell by 0.8 per cent. Many Danes switched to cheaper brands or went over the border to Sweden and Germany to do their shopping. At least ten per cent of fat tax revenues were swallowed up in administrative costs and it was estimated to have cost 1,300 Danish jobs.
  • The fat tax had a very limited impact on the consumption of ‘unhealthy’ foods. One survey found that only seven per cent of the population reduced the amount of butter, cream and cheese they bought and another survey found that 80 per cent of Danes did not change their shopping habits at all.
  • The fat tax was always controversial and it became increasingly unpopular as time went on. Objections came not just from business owners, but also from trade unions, politicians, journalists and the general public. It was widely criticised across the political spectrum for making the poor poorer. By October 2012, 70 per cent of Danes considered the tax to be ‘bad’ or ‘very bad’ and newspapers routinely described it as ‘infamous’, ‘maligned’ and ‘hated’. Mette Gjerskov, the minister for food, agriculture and fisheries, admitted in late 2012: ‘The fat tax is one of the most criticised policies we have had in a long time.’
  • Denmark’s fat tax remains the leading example of an ambitious anti-obesity policy being tested in the real world. The results failed to match the predictions of the health lobby’s computer models and the failed experiment has since been largely swept under the carpet in public health circles. Ultimately, Danish politicians weighed the negligible health benefits against the demonstrable social and economic costs and swiftly abandoned it. Few mourn its passing.
  • The economic and political failure of the fat tax provides important lessons for policy-makers who are considering ‘health-related’ taxes on fat, sugar, ‘junk food’ and fizzy drinks in the UK and elsewhere. As other studies have concluded, the effect of such policies on calorie consumption and obesity is likely to be minimal. These taxes are highly regressive, economically inefficient and widely unpopular. Although they remain popular with many health campaigners, this may be because, as one Danish journalist noted, ‘doctors don’t need to get re-elected.’

There are lessons from this regarding all sorts of targeted taxes. They can sound great in theory, but can be a disaster in practice.

Hat Tip: Whale

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NZ First wants a tax cut – for some

April 9th, 2013 at 12:00 pm by David Farrar

Stuff reports:

New Zealand First leader Winston Peters says his party wants to cut the corporate tax rate for exporters from 28 per cent to 20 per cent.

Well firstly it is a good thing that Winston recognises that a lower corporate tax rate is a good thing for the NZ economy. It is.

Commerce is more and more globally mobile. Companies can choose where to locate much easier than in the past. For Internet based businesses, even more so.

So all for lowering the company tax rate. But two big issues for Winston’s proposal.

The first is what spending will he cut, to fund a drop in the company tax rate? If NZ is in surplus, then you can cut taxes. But when we are in deficit, adding to debt is a bad idea.

Has NZ First even costed what their policy would be? That should be the first question from media – how much will this cost, and how will you pay for it?

The second issue is why exporters only? It is an arbitrary distinction. What if a manufacturer produces stuff for both domestic and international markets? Are they at 20% or 28%? Is Fonterra at 28% or 20%? My polling company has some international clients. Does that make me an exporter that can claim the 20% tax rate?

Tax systems are best kept simple. Two separate levels of company tax is a bad idea.

If Winston proposed an across the board lowering of the company tax rate to 20%, what it would cost, and how it would be funded – then people should take it seriously.

Also worth recalling that Winston, as Foreign Minister, opposed the FTA with China, launched a nationwide newspaper and billboard campaign against it. He campaigned against an FTA which increased exports by $5 billion a year. So much for his concern for exporter.s

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The Economist on a FTT

April 3rd, 2013 at 7:00 am by David Farrar

The Economist looks at the history and pitfalls of an FTT:

A group of 11 European Union member states, among them France, Germany and Italy, wants to impose a 0.1% tax on equity and debt transactions, and a 0.01% charge on derivatives transactions. These countries are pressing ahead on their own because other EU members, including financial hubs like Britain and Luxembourg, are opposed. …

The rates proposed sound negligible, but the tax would be imposed at each point in the transaction chain. A 0.1% rate therefore translates into something much bigger as securities move from seller to buyer via financial intermediaries. Even the headline rates are less innocuous than they look. A 0.1% charge on repo transactions, a way for banks to finance themselves overnight, turns into a 25% charge over the course of a working year. A 0.01% tax on a derivative trade sounds small, but is a hefty increase in costs given the large notional amounts involved—up to 18 times more than current costs in the most liquid markets, according to one calculation.

And how have they worked in practice?

After Sweden levied an FTT in the 1980s, 60% of trading volume in the most actively traded share classes moved to London; the tax was repealed in 1991.

It will send capital fleeing offshore.

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Is Labour going to tax on turnover?

March 23rd, 2013 at 4:00 pm by David Farrar

The Herald reports:

Apple’s New Zealand division made sales of $571 million last year but paid only 0.4 per cent of that in tax.

Labour’s Revenue spokesman David Cunliffe said that’s akin to paying nothing at all, and letting a corporation get off “scott free” is something New Zealand taxpayers shouldn’t have to stomach.

That’s because you pay tax on profits not turnover.

Is Labour saying that they think companies should be taxed on turnovers, not profits? I hope they spell this out well in advance of the election!

Should be about as popular as saying it is a no brainer to tax purchases from overseas websites.

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Labour’s iTax

March 22nd, 2013 at 11:19 am by David Farrar

labouritax

Sent in by a reader, in response to my blog post yesterday on David Cunliffe saying it was a no brainer to reduce the threshold on which GST is applied to online purchases from overseas.

 

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The great tax debate

March 12th, 2013 at 11:00 am by David Farrar

Two taxation issues have been getting some publicity of late. They are about fringe benefit tax on company car parks and taxation on long-stay accommodation.

As I have said many times the best tax system is low rate, broad base and as few loopholes as possible.

At this stage, I find the the proposed tax treatment of car parks quite reasonable, but the new tax rules on long-stay accommodation quite troubling. Let’s look at both in turn.

3 News reports:

Finance Minister Bill English is backing a controversial move to make company carparks subject to fringe benefit tax. That’s despite strong opposition from an unlikely coalition of trade unionists and employers.

It’s an unusual union of convenience. New Zealand’s most left-leaning trade union is working with the country’s biggest business association to topple a Government tax bill, with bumper stickers.

“Sometimes we have common causes,” says Unite Union secretary Matt McCarten. “To fight an obnoxious tax like that is one of them. We are united in hating the Government on this one, I’m very pleased to say!”

The Government wants to tax company carparks. Revenue Minister Peter Dunne is proposing a 50 percent hike on the perk, but only in central Wellington and Auckland. He’s got support from the top. 

“It’s going to not raise any money,” says Employers and Manufacturers assistant chief executive Kim Campbell. “It’s picking on Auckland and Wellington. It’s picking on CBD workers, not everybody.”

The proposed law change was announced by the Government on 11 December 2012.

He said public submissions on the proposed salary trade-off changes resulted in adjusted proposals to focus mainly on employer-provided car parks.

A wider set of car parks provided to employees (predominantly in Auckland and Wellington CBDs) will be taxed, through the fringe benefit tax (FBT) rules.

“These changes enhance the integrity of the tax and social assistance systems by providing a fairer, more equal, way of treating those who receive non-cash benefits as part of their remuneration and those who receive only cash remuneration,” Mr Dunne said.

The SOP is here.

Fringe Benefit Tax is designed to remove the incentive for employees to reduce their taxable income by having part of their remuneration in non cash terms.

Rather than (for example) pay someone a $100,000 salary on which they pay $33,000 tax, the employer used to be able to say we’ll give you $90,000 salary and $10,000 of fringe benefits (say medical insurance, superannuation contribution etc). That reduces the tax bill to $30,000 and advantages that employee over someone who is just on $100,000 with no fringe benefits.

Hence without an FBT, you’d get a huge number of employers and employees agreeing on as many fringe benefits as possible to reduce their tax liability. Which is why FBT was introduced in (off memory) the early 1990s.

So now the issue is whether car parks are a fringe benefit. It seems hard to me to argue they’re not. Not all employees travel to work by car, but those who do need to park it of course. There are dozens of private car parks available for hire, but they of course save money if the employer provides one.

The biggest argument against FBT on car parks is that the value is so low, that the administrative cost of doing so is greater than the revenue. But the value of car parking in the two main CBDs (the Christchurch CBD is now basically one big carpark!) is now quite significant, say $3,000 a year. This is why the FBT will only apply to the two big cities – because elsewhere the value of car parking is not great enough to bother.

But $3,000 a year is enough for employers to say we’ll either pay you $100,000 a year and no car park or $97,000 a year and a car park.

So I don’t have a huge issue with the principle of FBT on car parks. I want lower taxes, but you get those by lowering rates – not by having loopholes.

However it may be that the cost of extending FBT is not worth the revenue. Those against would be better focusing on that issue, rather than trying to argue in favour of tax loopholes which are in their self-interest.

The issue of taxing long-stay accommodation I find much more troubling. It is worth noting that this doesn’t come from a law change initiated by the Government, but from the IRD changing its position on what the lawful treatment is.

On 6 December 2012 the IRD Commissioner said:

Under section CE 1(1B), the market value of accommodation provided by an employer to an employee is income of the employee. Equally, the market value of an accommodation allowance paid by an employer to an employee is income of the employee. The employer must account for PAYE.

Issues arise most often in the situation of relocation or temporary accommodation arrangements.

Taxpayers have argued that where the employee is still maintaining a home in another location, employer-provided accommodation or accommodation allowances are not taxable. Taxpayers argue this is because there is no net benefit provided to the employee; the value of any accommodation or allowance received by the employee is nil as the employee continues to pay the cost of their own house.

This is a view I agree with. If you live in Wellington and maintain a house there and your employer says we need you to go to Christchurch for three months, then it is their responsibility to provide accommodation for you and it should not be regarded as taxable income as you are not receiving a benefit from it. It is no different (in my view) from having your employer pay for a hotel room when you stay overnight somewhere on their business. But the Commissioner says:

The Commissioner does not agree with this view. The law does not support a net-benefit approach.

If that is the case, then I think the law needs changing.

The Commissioner acknowledges there has been some uncertainty and inconsistent practice, by both Inland Revenue and taxpayers, regarding the taxation of employer-provided accommodation and accommodation allowances. The Inland Revenue Technical Rulings Manual paragraph 57.11 reflected a net- benefit approach to determining the value of employer-provided accommodation and accommodation allowances. However, taxpayers were advised in September 19981 that the Technical Rulings Manual was being discontinued and that Technical Rulings should not be relied upon as representing Inland Revenue’s views or practice. In addition, the legislation has changed considerably since the relevant Technical Rulings chapter was written.

This is a polite way of saying we’ve changed our mind.

This ruling has been much criticised. David Cunliffe has said:

The Government’s plan to tax accommodation for earthquake rebuild workers is more akin to the actions of a vulture picking over a carcass for every last morsel than it is to sensible fiscal management,  Labour’s Revenue spokesperson David Cunliffe says.

“The Commissioner of Inland Revenue has ruled that employers who send workers away from their usual homes must pay tax on provided accommodation. The ruling seemingly ignores how little remuneration benefit there is to the worker, who must still maintain their family home even though they can’t use it.

I agree with the criticism of the ruling, but would point out the Government (in the sense of Ministers) have no say on this issue. Once a law is passed, the IRD Commissioner decides how IRD will interpret it – not Ministers (thank God). An issue can be litigated in court of course – or Parliament can change the law.

The decision was criticised at the time:

The rule change requiring employers to pay PAYE on any accommodation provision an employee gets when working in another location – particularly the decision to make it retrospective – has taken the tax fraternity by surprise.

Hooft said the move was in contrast to recommendations made by the IRD’s own policy advice division last month.

The Institute of Chartered Accountants (NZICA) said it was “deeply concerned” about the new tax.

It would have a significant impact on industries which relied on itinerant workers, such as agriculture, the film industry, and the Christchurch rebuild effort, the accounting industry body said.

Acting general manager tax, Jolayne Trim, said it was a retrospective law change “of the worst kind”. 

The Herald editorial has been critical:

Auckland firms that send engineers and construction staff to Christchurch for the rebuild have just learned their projects are going to be much more expensive. The Commissioner of Inland Revenue has ruled that employers who send people to work away from their usual home for a period must pay tax on the value of accommodation provided for them.

The decision, which is not confined to the earthquake recovery operation, of course, has astonished tax advisers and no wonder. It defies reason and common sense.

Accommodation provided by an employer is quite properly treated as taxable income when it is a benefit to the employee. But a worker who is provided with free or subsidised accommo-dation away from home is not getting a benefit; he or she still faces the normal costs of maintaining a home without the benefit of being able to live in it.

The commissioner in her ruling last week readily acknowledged that reasoning but “the law,” she said, “does not support a net-benefit approach”. She has not explained why the law does not support it. This appears to be another of those arbitrary decisions that is based on a literal and unreasonable reading of tax law.

Also NBR reported:

However, KPMG tax partner Murray Sarelius accused IRD of rewriting the rules in order to deal with what appeared to be “a few extreme cases on audit”.

The new position was contrary to common practice and “is stretching to justify its position in a way that applies much too broadly. The result penalises the majority of situations where there should not be an issue”.

Now IRD does appear to be backing down somewhat. Last week they said:

“Generally, accommodation payments made by an employer, or the value of accommodation provided by an employer are taxable. However, when an employee temporarily shifts to a new location for work, the payments or the value of the accommodation provided is not taxable.”

Mr Tubb said that this approach will not apply if the person has relocated to take up a new job with a new employer.

“There are a number of factors that the Commissioner will consider in determining the tax treatment of accommodation and whether a person has made a temporary shift.”

“This includes whether they have retained their substantive employment position in the original location or have relocated to take up new employment, for the duration of the transfer, and if their original location has remained the centre of their domestic life.”

What they seem to be saying is that if (for example) your family still live back in (say) Wellington, and that is still your primary home, then providing you accomodation in (say) Christchurch is not taxable. But if you have actually taken up a long-term position in (say) Christchurch and that is now effectively where you live, that may be taxable.

That sounds like an improvement over their original position in December, but is still very uncertain (and tax law should be clear). I think the best solution is for the Government to amend the tax law to say that the “net-benefit” approach should apply.

 

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IRD wins again

March 6th, 2013 at 11:00 am by David Farrar

Hamish Fletcher at NZ Herald reports:

International investors could be scared off by a Court of Appeal decision yesterday which saw Inland Revenue notch up another big win, say tax specialists.

Alesco New Zealand lost another leg of its stoush with the IRD yesterday over whether a funding structure used to buy two other companies was a tax avoidance arrangement.

The amount at issue in the Alesco case is $8.6 million, but yesterday’s judgment could have implications for other tax avoidance disputes with the IRD where hundreds of millions of dollars are estimated to be at stake.

Decisions in these cases were awaiting the outcome of the Alesco litigation, the Court of Appeal said.

University of Auckland Business School senior tax law lecturer Mark Keating called yesterday’s decision a “slam-dunk” for the IRD.

“If there’s an imaginary line that you cross between tax planning and tax avoidance, then IRD have been taking cases that go closer and closer to that line,” Keating said.

“The [corporate] taxpaying community are basically waiting for a case where the IRD overstretch and there were a number of people who hoped and believed that Alesco would be that case.”

Ernst & Young senior tax partner Jo Doolan said yesterday’s judgment was an “alarming result”.

“It reinforces the feeling of many inbound investing corporates that the NZ tax environment is too uncertain. It may discourage them from continuing to do business here,” she said.

I’m sorry, but I just don’t accept the argument that companies will not invest here if they are not allowed to avoid paying tax.

I’m all in favour of lower tax rates to encourage investment. But I’m also in favour of plugging tax loopholes.

I think it is commendable that IRD has been very effective in making sure companies don’t avoid paying tax purely through use of artificial mechanisms that have no commercial basis except tax avoidance. They managed to get the banks to cough up an extra billion dollars or so, and I understand APN (owners of the Herald) are also in court and fighting over $50 million or so of disputed tax.

The best tax system is low rates, broad base and few loopholes.

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IRD confirms the obvious

December 20th, 2012 at 11:00 am by David Farrar

Hamish Rutherford at Stuff reports:

New Zealand has no power to ensure internet giants like Facebook and Google pay more tax, according to an IRD report.

The new report appears to back Revenue Minister Peter Dunne’s claim that New Zealand cannot solve corporate tax loopholes alone, arguing that even law changes would be overridden by international treaties.

Of course it does. NZ simply has no power to tax overseas corporates. If I buy a book from Amazon, can the Govt force Amazon to pay tax in NZ? Of course not.

The issue of tax rates on international companies, especially in the technology sector, has hit headlines since it emerged Facebook paid less than $14,500 in New Zealand last year, or less than 1 cent for every one of its 2.2 million Kiwi users.

That’s a silly comparison. You don’t tax firms on their number of users. You tax them on their profits. It is even sillier when you consider Facebook does not charge a user fee.

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