Kiwiblog

Good news. Tomorrow is Tax Freedom Day. This means everything you have earnt up to tomorrow has gone to the Government to fund its spending, and you get to keep everything from tomorrow onwards.

I’d love tax freedom day to be held in March. That won’t happen anytime soon, but what would be realistic is a goal of having government spending no more than 30% of GDP. I’d like the Fiscal Responsibility Act amended so that a Government has to publicly state what its target or limit for government spending will be. This would not be binding, but would give some transparency over Government policy, and allow a more informed choice between parties.

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

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

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

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

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

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

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

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

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

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

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

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

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

Labour have only two tax policies – remove GST off fresh fruit and vegetables, and reintroduce a rich prick tax.

To help them with their policy development, Cactus Kate has proposed ten tax policies for them:

1. Reduce GST to 10%
2. Require all trusts in New Zealand to be registered with the IRD with the name of the settlor and beneficiaries
3. Farmers, the largest of polluters (according the the numbnuts measuring of carbon) should be taxed per head of animal per year with the cost that New Zealand has to pay to the invisible pie in the sky
4. Anyone with assets or is a beneficiary or settlor of a trust with more than say $500,000 can no longer receive Superannuation.
5. Reduce the deductible amount to 20% of the total interest expense on real property (land) such that land owned by farmers, property “investors” and the like cannot pay less or even no tax by increasing the interest deductions based on leveraging property.
6. Reintroduce gift duty
7. Introduction of a 20% duty for the sale of all property including primary residence and all forms of land.
8. A new top tax rate of 45% on those rich pricks earning over $120,000 and an increase of the current top tax rate for income between $70,001 to $120,000 from 38 cents up to 40 cents.
9. Abolish Marshall clauses (which excludes the shortfall in interest as a “gift”) where the loan is repayable on demand
10. Taxing New Zealand citizens (passport holders) at a 45% deemed disposal rate on expatriating their wealth at the date of departure if they become non-resident and a 15% inbound transaction tax on their assets coming back in even while they are still non-resident.

I’m worried that they may adopt a few of them.

In a follow up to the story I blogged about yesterday, Rebecca Stevenson at the Dom Post reports:

The Council of Trade Unions wants an explanation from Unite on why it failed to pay the IRD more than $36,000 in PAYE on behalf of its employees.

Unite, one of New Zealand’s largest unions, owed IRD over $130,000 for the year ended March 2009 (its most recent filing), including more than $57,000 in unpaid GST. For the same financial year its liabilities outweighed its assets by more than $170,000.

It is the unpaid PAYE that will be causing most concern, as this is in fact money owed by the employees to the IRD, and UNITE has appropriated it for its own purposes. It is the sort of stuff that the newspaper boss Maxwell did – but on a much smaller scale.

Unite head Matt McCarten confirmed yesterday that the union owed money to the IRD but said he had made choices to pay for union campaigns rather than clear the debt. “I don’t shy away from these decisions, I make the calls.”

He said Unite paid $8000 in PAYE each month to the IRD but kept incurring late payment penalties. He claimed not to know exactly how much it owed the IRD.

The late penalties do add up – as many businesses know. But if it was a deliberate decision to keep running campaigns, instead of paying off the debt, then few will have sympathy.

He agreed it was not a good look for a workers’ union to fail to pay its employees’ tax.

I don’t think Matt realises how bad a look it is. The next time UNITE or Matt calls for greater government spending, this issue will arise.

CTU president Helen Kelly said Unite did good work in an area that was difficult and expensive to organise. That required it to juggle its finances. “All unions are always short of resources.”

However, when questioned on Unite’s tax failure, she said: “I need an explanation for that”.

I’m not sure I would say all unions are short of resources. The combined wealth of the union movement puts the Business Roundtable, Business NZ, and the Chambers of Commerce to shame. I did a blog post a couple of years back comparing them.

The Herald reports:

A Ngapuhi leader is calling for a nine per cent economic development tax to be levied on everyone living inside the iwi’s boundary as part of its treaty claim.

Matarahurahu hapu chairman David Rankin said the proposed flat tax rate, which would be administered by the Inland Revenue Department, would “pull Ngapuhi out of a depressed state” and ultimately benefit the entire region.

He would like it to fund social and economic development projects such as aquaculture programmes, and make Ngapuhi as prosperous as iwi like Ngai Tahu and Tainui, which benefit from rich resources in their regions, he said.

Before people get too excited over this, I should point out that David Rankin does not speak for Ngapuhi. He has a long history of saying things which range from the stupid to the even more stupid.

However, there had also been “one or two” members of the Ngapuhi Runanga, who administer the claim, who expressed their strong opposition and threatened to bar Mr Rankin from speaking at Waitangi Tribunal hearings.

So this is clearly not a formal position of the Iwi.

I won’t even bother to speak to the fact that such a tax would never be agreed to. I want to point out the economic stupidity of it.

If you have a 9% tax on economic activity in Northland, that will not help the region – it will kill it. People will leave Northland in their droves if the tax rate in Auckland is 17.5% and in Northland it is 26.5%.

Kevin Rudd is fighting for his political life with his u-turn on an ETS, and his proposed super mining tax both backfiring. A Nielsen poll just out has Labor at 47% on the two party preferred poll and the Coalition at 53%.

The super mining tax appealed to Labor. They thought everyone would support it, as only a dozen companies or so would be paying it. The tax would be a massive 40% of any profits above the risk free rate of return. Yes, how dare a company make a profit greater than what you can get by sticking your money in the bank.

But it has backfired massively. Western Australia especially has seen it as an attack on the entire state, plus (unlike NZ) many Australians know how important the mining sector is to Australia’s prosperity and have rejected the tax.

The Herald reports that Paul Keating once tried to teach Tony Blair how to hate his opponents. He also advised:

Keating also had some tips for Blair on economic issues, telling him that if he ever became prime minister he should avoid income tax hikes at all costs.

“Tony, promise me you won’t raise income tax. It’s death.

“Labour parties around the world have enough to contend with without hanging that round their necks. It’s not worth it.”

Luckily in NZ, Labour is suggesting they will campaign in 2011 on a policy to increase income tax for rich pricks.

Some wonderful quotes from Hansard. First we have the General Debate of 24 Feb 1988:

From 1 April 1988 the rate of company tax will decrease from 48 percent to 28 percent, and that will create an environment in which enterprises can succeed—both New Zealand enterprises and those that are attracted from overseas. That, too, is the path to future sustainable growth.

So cutting the company tax rate to 28% in 1988 was the path to future sustainable growth, yet something he condemns today.

Then we have the Appropriation Bill (No 3) second reading on 10 November 1988:

Let us consider the Government’s track record. It has introduced a new taxation system that is closing off the loopholes that in the past made paying tax a voluntary exercise for many companies and some individuals. The top marginal tax rate was 66c in the dollar when the Government took office, but it is now half that level—33c in the dollar.

And reducing the top tax rate to 33% and closing off loopholes was also laudable according to Phil.

And finally the second reading of the Appropriation Bill (No 2) on 18 August 1988:

Taxation has gone from 48c and 30c in the dollar to 33c and 24c in the dollar. That reduction allows New Zealanders to keep more of their own money.

And an endorsement of dropping the top tax rate to 33% so NZers get to keep more of their own money.

Now to some degree all politicians will have made statements earlier in their careers, which they later change their mind on. However they tend to be fairly minor issues, not something as core as whether reducing the top tax rates is laudable or deplorable.  And these are not statements from when Phil was a Young Labour member, but as a Minister of the Crown.

Now in the budget debate the PM had a great time pointing out the massive hypocrisy in having the Opposition Leader condemn almost everything he had previously praised. And this is quite legitimate – it is not some sort of personal attack – it is highlighting changed policy positions. He then went on to talk about the budget itself.

Now Phil himself, and Annette, took Key’s speech in pretty good humour and were smiling at parts of it. They know that is what it is about. However the same can’t be said of some of the delicate wee flowers in his caucus who within seconds were whining on Twitter.

First Clare Curran complains:

Key starts his speech with a cheap shot. So Prime Ministerial!

That was in response to Key’s opening line that Shane Jones was really happy with Phil’s speech. Good God.

Then Clare complains further:

He’s a comedian. Does he take this country seriously! It’s embarrassing

So the PM is monstering you in the House pointing out (with considerable humour) that everything Phil Goff said is contradicted by what Phil previously said and your response is to complain he is being too funny.

But not just Clare. Iain Lees-Galloway joined in:

John Key thinks he’s on stage. What an embarrasment of a Prime Minister!

Personally I would be embarrassed to be tweeting such whines.

The trifecta was completed by Jacinda Ardern complaining:

hard to tell if this is a budget speech the PM is giving or a pep rally/stand up routine. yet to mention the actual budget.

I’m sorry guys, but it is such a bad look to be whining that your opponent’s leader is doing too good a job of winding his own troops up. Especially when your own leader’s speech was somewhere between awful and really awful (Goff generally has been much better in the house this year but his budget speech was just all over the place).

Finally Clare Curran declares:

Worst budget speech ever

People can watch the video and decide for themselves.

A reader requested this graph. It shows the average tax rate (including low income rebate and independent earner tax credit) at each $10,000 band for April 2008 and October 2010.

A full time worker (without children) earning a bit over the minimum wage at $15/hr has had, over 2.5 years, their average tax rate drop from 19.1% to 12.5%.

A full time worker earning the average wage at almost $25/hr has had their average tax rate drop from 22.7% to 16.0%.

I’ve done some calculations on what the tax cuts mean for working families who get WFF payments. The assumption is one parent working rather than two, which is the conservative scenario maximising tax paid.

The pink line is the standard average tax rate at each $10,000 band.

If you have even just one child you do not pay any income tax until you are earning $42,000! And you keep receiving WFF until you earn $74,000.

With two kids, then your family pays no income tax $50,000 of income. And you receive WFF until you earn $89,000.

If kid number three turns up, then you pay no tax until $56,000 and you receive WFF payments until you income exceeds $105,500.

And for the Catholics amongst us, kid number four means no net income tax until you reach $63,000. And you keep getting WFF until your combined earnings exceed $120,500.

While the tax scale is a bit flatter after the changes in the budget, it is still a highly progressive system when you look at the overall average tax rates at various income levels.

• Those who earn up to $40,000 pay no more than 15% income tax
• Those who earn up to $70,000 pay no more than 20% income tax
• Those who earn up to $110,000 pay no more than 25% income tax

In other words 67% of taxpayers will be paying no more than 15% average income tax.

88% of taxpayers will pay no more than 20% income tax.

The top 12% of taxpayers will still pay 49% of all income tax, which I estimate is over 90% of net income tax!

Out drinking last night, and someone remarked that the official tax calculator (which is very good) assumed people spent all their after tax income. Hence it over estimates the impact of the GST increase.

It was suggested that one needs a tax calculator for people who are good at saving, hence I suggested the name that we need a kosher tax calculator

And Deloittes have such a beast here.

You enter in your income, and how much you spend on goods and services ranging from none, not much, some, half, lots, most to all.

Play away!

Go to www.taxguide.govt.nz to see how you are affected. Quite a neat site with four calculators:

1. Workers with no Government support
2. Workers who get WFF
3. Those on Superannuation
4. Those on a benefit or student allowance

You just insert your income, partner’s income, and the level of rent or mortgage payments and your overall savings are calculated.

Treasury have given some examples of overall change in net income for various persons or couples. You can see which one may be closest to you. In order they are:

1. Foreign owned company has NZ subsidiary earning $8 million and interest expenses of $5.6m and net profit of $400k due to thin capitalization rules. Under new rules taxable net profit increased to $1.52m, so firm is $313K worse off.
2. Professional landlord with 25 properties earning $112,000 and depreciation of $52,000. $15k a year worse off as now pays tax on $112,000 of income not $60K
3. Business owner which makes $120,000 profit but pays salary of $48,000. Has spouse and two children. $8k a year worse off as no longer eligible for WFF.
4. Couple each earning $150K owning 10 properties costing $4m and now worth $6.5m. No tax paid on rental income of around $35K a year due to depreciation. Overall $5,600 a year worse off.
5. Unemployed person on dole pays $100/week rent and gets $36 accom supp. $53 better off.
6. DPB beneficiary with three children paying $300/week rent, $130 better off.
7. Student on student allowance and $100/week rent and $40/week accom supplement. Earns $9K part-time. $140 better off.
8. 19 year old on minimum wage pays $100/week rent. $330 a week better off
9. Retired couple own home, no mortgage or investments. $560 better off
10. Single superannuitant in own home with $10K a year investment income. $620 better off.
11. Sole earner earning $50K and $120/week rent. $830 better off.
12. Couple with two children, earning $80K and $40K with one investment property which generates $2,700 profit and $3,000 depreciation. Property has doubled in value from $300K to $600K. $1,225 better off.
13. Couple earning $50K and $26K with two kids and $300/week mortgage. $1,285 better off.
14. Couple saving for first home both earning $60K, $1,000 a year interest, $250/week rent. $2,100 better off.
15. Couple earning $100K and $40K with three children. $600 a week mortgage. $3,170 better off.

So of the 15 examples, four are worse off. The foreign owned company, the two professional landlords and the company owner who was claiming WFF despite their high income.

The student and the two beneficiaries are marginally better off by $1 to $3 a week. This reflects of course they are not generally (yet) contributing to the economy, but are a net cost on other taxpayers.

A 19 year old on the minimum wage is around $7 a week better off, and those on the pension around $10/week better off.

A sole earner on the average FT wage is $15/week better off.

And those who pay the most tax currently, are of course even better off. They get to keep more of their earnings.

The Government has done a very nice job of not repeating their mistake at the beginning of the year when they over-egged expectations and under-delivered – which had Phil Goff reading out in the House my “B” grade to the PM’s beginning of year statement.

The tax cuts in this budget go well beyond what media had been predicting with a huge drop in the second lowest tax rate, and also a welcome drop in the corporate tax rate from 30% to 28% at 1 April 2011. This will help attract investment to NZ and matches Australia. The tax package gets an A- from me.

The tax rate changes from 1 October 2010 are:

• Up to $14K – tax rate goes from 12.5% to 10.5%
  $14K to $48K – tax rate goes from 21.0% to 17.5%
  $48K to $70K – tax rate goes from 33.0% to 30.0%
  $70K+ – tax rate goes from 38.0% to 33.0%

Workers earning around the average full-time wage ($40K to $48k) will, over 18 months, have had their top marginal tax rate go from 33% to 17.5% – almost halved.

Two thirds of the “cost” of tax cuts goes to reducing bottom two rates and 73% of income earners will have a top tax rate of 17.5%. You keep 82.5% of every extra hour you work.

The table above shows the change in income tax for the various tax brackets. They’ve done a very good job of having the reductions fairly smooth across the board as a percentage of existing income tax paid. Those under $70,000 get the largest percentage decrease.

Note the table includes the IETC for non WFF recipients (80% of people). If you exclude that it does not change the absolute savings but the % savings at $30K is 16.4% and $40K is 16.5%.

This table shows the net savings after impact of GST (calculated at 2% CPI increase). As one can see, people at every income level are left no worse off which was the objective.

However the above table only covers income tax and GST. There are also increases in superannuation, benefit adjustments, the changes to depreciation rules and the crack down on LACQs etc. Treasury has estimated the overall impact of tax changes as a percentage of the average disposable income. They estimate:

1 Households earning under $40K will be 0.7% better off
2 Households earning $40K to $85K will be 0.4% better off
3 Households earning over $85K will be 0.7% better off

Some of the other tax changes are:

• No depreciation claims on buildings with an estimated useful life of greater than 50 years
• LAQCs can not deduct losses at the marginal tax rate and pay tax on profits at lower company rate
• Changes to thin capitalization rules to limit foreign multinationals reducing NZ tax liability
• WFF eligibility to exclude investment and rental losses
• Remove the 20% accelerated depreciation loading for new plant and equipment

The property changes will see crown revenue increase by $2.5 billion over four years or an average $600 million a year.

$119 million of funding to IRD for increased audit and compliance is estimated to bring in $745m over four years or $200m a year.

Almost all of that extra $800m will come from higher wealth households.

This is why overall high income households are forecast to, on average, have only a 0.7% increase in disposable income – the same as low income households. One has to not just look at the income tax and GST changes, but the overall package.

And overall one has to conclude it has met the twin aims of both being fair and being good for economic growth.

Martin Kay writes:

MPs are set for tax cuts of at least $57 a week in tomorrow’s Budget, but some with investment properties could be hit in the pocket by other tax changes.

The latest register of MPs’ pecuniary interests, issued yesterday, reveals 71 of Parliament’s 122 MPs have a concern in more than one property, including several who have investment properties.

Tomorrow’s Budget is expected to lower the top income tax rate from 38 to 33 cents in the dollar, bringing the lowest-paid backbench MP a tax break of $57 a week.

Some will be clawed back through the rise in GST, but Finance Minister Bill English is also expected to curb the ability to offset losses and depreciation from investment properties against other tax.

I’ve done a quick calculation of what the assumed changes will mean for an MP who has one (many have more than one) investment property.

If the improvements are valued at $200,000, then they will be claiming $4,000 depreciation which reduces their tax burden by $1,520 or $29 a week.

So that tax break is down to $28 a week. But what about GST. The TWG estimated GST on average is 5% of income for top decile earners, so for salary of $130,000 it is $6,500. If GST increases by 20% (from 12.5% to 15%) the extra GST will be $1,300 or $25 a week.

So an MP who has one investment property is projected to be just $3 a week better off, or $150 a year.

Remember that tomorrow, as some claim Government MPs are motivated by self interest in supporting a tax reform package.

John Hartevelt reports:

A $300 million tax dodge – by which half the country’s rich don’t pay the top tax rate – will be cracked by changes tipped for tomorrow’s Budget.

Prime Minister John Key said yesterday that tax-avoidance loopholes were being targeted.

The top income tax rate of 38 per cent has encouraged wealthy Kiwis to move their money into family trusts, which pay tax at 33 per cent, or into companies, which attract only 30 per cent tax.

An Inland Revenue sample of 100 of the wealthiest New Zealanders showed that only about half were paying the highest marginal tax rate on their income.

The Tax Working Group says sheltering of income in trusts cost the Government about $300m in tax revenue in 2007.

John Shewan, chairman of PricewaterhouseCoopers and a working group member, said trusts were “breeding like rabbits in the South Island”.

That is a key point to remember – many wealthy people are avoiding the 38% tax rate. And if they have rental property investments, they will probably end up paying more in overall taxation.

“And that’s what happens when you have silly tax rules that provide that incentive. The tax rules have driven people into using companies and trusts.

“People aren’t stupid. The shockingly poorly designed tax package of 2000 has caused all sorts of things to happen.”

Financial author Martin Hawes said he would be surprised if any of the richest Kiwis paid the top income tax rate and, if they did, it would be on only a tiny fraction of their worth.

The lower the tax rates are, the less people try to avoid them.

Mr Key said the Budget would include “a number of areas” in which tax liability was increased.

“You will see we’ve done quite a good job actually of closing down loopholes and making sure there is fairness in the system,” he said.

“We know that roughly half the people on the rich list actually didn’t pay the top personal rate last year, so [we're trying to] get some fairness into the system.”

Mr Shewan said “a great number of wealthy people” would end up paying more tax.

“There is political risk associated with increasing anybody’s tax and some people are not going to be happy with the statements that are going to be made on Budget night.”

Mr Hawes said business people and farmers were among the most common users of family trusts.

“On the tax side, the people who would be affected by any tax changes to trusts will be National Party voters.”

And again it is not about redistributing a small cake. It is about growing a larger cake. Less inventive to avoid tax through trusts and residential property investment. Greater incentive to earn more and save more and invest more in capital markets.

The Dom Post reports:

Prime Minister John Key is urging Kiwis not to be jealous if the rich get more from Thursday’s Budget tax package – because the rich are crucial to the economy.

The top 10% of taxpayers pay 76% of net taxation. Yes 10% pay 76% and 90% pay 24%.

But it is expected to deliver little more than $6 a week extra to low and middle-income earners as across-the-board personal tax cuts are clawed back by a rise to 15 per cent in GST and extra tax from property investors.

Once again – the tax changes are not about redistribution. They are about changing the incentives so there are greater incentives to work, save and invest overall and less of an incentive to invest in property beyond your own home.

Those earning more than $500,000 a year would get a $481-a-week tax cut, and even taking into account their extra GST payments, they will be more than $300 a week better off.

Why choose $500,000 a year – a salary level probably 50 people are on? Why not $800,000 or $1.2 million a year if you really want to get the envy going.

Anyway, some facts:

1. The higher the tax rates, the more it will be (legally) avoided. Hence why only half of the wealthiest 100 NZers are even paying the top tax rate. That NZer on $500K a year may in fact end up losing money through the tax package if his or her income comes through a trust at 33%, as they will have extra GST to pay and no reduction in trust tax.
2. Those who will be hardest hit are those owning multiple residential investment properties. These are not low income people. They will be people in the top tax brackets. They will end up paying more tax overall.
3. Someone on $500,000 a year will still be paying almost $160,000 in income tax and $25,000 in GST. If they shift to Australia that is $165,000 less tax available to fund welfare etc.

The Herald reports:

The cuts are likely to reduce personal tax rates from 38c, 33c, 21c and 12.5c in the dollar to 33c, 19c and 10c.

That would be good.

Mr English said at the weekend that he expected the focus on Budget day to be on people’s cash positions.

“But that is not the purpose of it – to make them a bit better or worse off in cash terms, although of course that is important,” he said.

“The point of the tax package is whether four or five years down the track we can influence the choices that people make.

“What we want to do is tilt the economy. It’s not shock treatment. It’s changing the choices that peoplehave and changing the way theythink about those choices.”

This is what Labour never wants to talk about. To them tax is only about redistribution. And of course that is part of it.

But tax is also about incentives and encouraging people to work and save.

The Herald reports:

The average New Zealand earner’s total tax burden is second-lowest in the OECD when superannuation and other compulsory taxes are counted, according to a new report.

This is not a measure of the overall level of taxation in the economy. It is a measure of the difference between gross pay and net pay. There is a huge difference.

The report also said that New Zealand had the smallest tax wedge for  one-earner married couples with two children earning the average wage, at 0.6 per cent.

The OECD report includes welfare payments made through the IRD (working for families) as negative tax.

This does not mean NZ has low levels of tax. It means we have high levels of welfare delivered to families with children.

Many countries had lower tax rates than New Zealand, but had compulsory superannuation and social security payments that increased their tax wedges.

Indeed, so again not apples and apples. KiwiSaver is near de facto compulsory but not included. The Australian compulsory super is included as part of the “tax wedge” even though the amount deducted goes to you personally, not the Government.

The other aspect not included in the tax wedge is indirect taxes such as GST are not included in the tax wedge:

Green Party co-leader Dr Russel Norman said the report showed the Government was misleading people that New Zealand had high taxes, to justify tax cuts for the highest-earners.

This just shows Russel is trying to misled people, or does not understand what a tax wedge is. It is purely a measure of how much the Govt takes out of your pay. It is NOT a measure of the overall level of taxation in the economy.

Again for those who are really really stupid, the tax wedge:

1. does not include indirect taxes (those with GST are shown to be lower)
2. includes deductions made by the Govt, even though they are going to your own personal super account (ie those without compulsory super are shown to be lower)
3. includes welfare payments made through tax system (tax wedge would be much higher if they were done through WINZ)

So if anyone carries on claiming that a low tax wedge means a low level of overall taxation, they are lying.

The better measure to use is the OECD study of the ratio of overall tax revenue to GDP. Now this does have us (thankfully) in the lower half of the OECD, but not second to bottom.  In 2007 tax was 35.7% of GDP and the OECD average was 35.8%.  Note however that amongst OECD pacific countries the average is 30.4%. Australia is 30.8%.

Again comparisons can be difficult as state government revenue should be featured also.

Maxim have released a comprehensive 102 page report on tax policy by Steve Thomas. Its aim is a tax system that maximises economic growth. It notes:

Growth is affected by tax, which is how the government raises its revenue to do the crucial things we need it to, like paying for a police force or a public education system, building roads and supporting the poorest when they need it.

However, when we try to take too much money out of the economy in tax to fund government spending, we risk undermining the very source of that revenue. Also, if government spending is misdirected or of poor value, then we hamstring the economy’s ability to produce what we need and the amount of tax the government is able to collect.

This relationship between tax and the economy therefore needs to be carefully considered. We need to design the tax system so that it allows the government to take the money it requires, while doing the least amount of damage to the economy and so too our potential prosperity.

This is absolutely right. It is a balancing act between economic growth and funding Government services. To take two extremes – an economy with tax rates of 95% would end up like North Korea, while an economy with tax rates of 5% would not be able to fund much in the way of defence, health or education.

Maxim propose a number of policies:

1. A two step personal tax rate system with a top rate of 27%
2. A corporate tax rate of 27%
3. Aligning the trust and PIE rates to the personal and corporate rates
4. Removing tax incentives for KiwiSaver
5. No land tax or capital gains tax
6. GST from 12.5% to 15%
7. An upper limit for central govt spending of say 30% of GDP
8. A benchmark for core govt expenditure on welfare of around 15% of GDP

For me the key thing is No 7. If one can limit spending as a percentage of GDP, then you get options around tax reform. Maxim note:

A 2001 OECD study found that about one half of a percentage point increase in government consumption (the expenditure to GDP ratio) could cause a 0.6 to 0.7% direct reduction in per capita output.

If we can limit spending so that over time it is under 30% of GDP, then there will be a very significant boost to incomes and jobs.

What I would like is both National and Labour to outline desired limits for spending as a percentage of GDP – then voters could choose between them. The limits probably need to be soft (non legislative) to take account of recessions etc, but a soft limit would still be a huge improvement over no limit.

One can get to a limit without massive spending cuts. If one can retain discipline over new spending so that it grows significantly slower than the overall economy, the ratio will reduce over time.

A very good report.I suggest people don’t just argue the recommendations but read the summaries of research about why such tax changes will be good.

Brian Fallow writes:

“We need to stop the tax system creating the wrong incentives,” said Treasury Secretary John Whitehead in a speech last week.

Citing Inland Revenue data, Whitehead said 1996 was the last year that more people made profits than losses from rental properties, yet the number of such properties had increased significantly since then.

I wonder what the total amount of tax losses claimed in those 15 years has been.

“Now why would increasing numbers of people – rational New Zealanders – invest billions of dollars collectively in an area that is unprofitable?” he said.

“It’s hard to believe it’s not because of the tax advantages. People can claim depreciation against their investment properties – even when most real estate was significantly increasing in value. They can deduct tax losses on property against their other income.

“And if they sell a rental property the capital gain they make is usually untaxed.”

The depreciation is reversed at sale, but you may have had interest free use of that money for a decade or more.

A widely quoted passage of the Tax Working Group’s report in January said that in 2008 the $200 billion invested in rental housing yielded net rental losses totalling $500 million.

That meant that collectively landlords not only paid no tax on their rental income, they were able to escape paying around $150 millon of tax on other sources of income they had.

However, Michael Littlewood, of Auckland University’s Retirement Policy and Research Centre, has cast a lot of doubt on the robustness of the $200 billion figure. …

But if he is right to conclude that the true combined value of residential investment properties could well be less than half the $200 billion stated, how much ice is that likely to cut with policymakers?

I doubt it will change decisions, but it will change estimates of how much revenue the Crown may gain from any changes.

It depends what they are most worried about. If their concern is that New Zealanders are over-invested in property and that that is for tax reasons rather than, say, a shortage of other investment opportunities, then Littlewood’s results are highly relevant.

But if the concern is purely fiscal – how to fund the gap between the $2 billion and change that a GST increase would yield and the cost of comprehensive income tax cuts and compensating adjustments to superannuation, benefits and family tax credits – then the focus would be not on how much is invested in rental properties but on the aggregate $500 million of net tax losses.

A bit of both I’d say, with priority on the latter.

The IRD data charted by the tax working group shows a clear downward trend in net rental income for the past decade, and it was 10 years ago that the Labour Government raised the top marginal tax rate from 33 to 39 per cent, increasing the incentive to shelter income through highly geared property investment.

I sometimes wonder if anyone actually pays the (now) 38% tax rate? Much better to reverse Cullen’s envy tax, and clamp down on loopholes.

Bill English has pointed out how the current tax system allows well off people to in fact pay less tax than low income workers. This is one reason why we should have a flatter system, with less loopholes.

Mr English highlighted in Parliament how the current system can allow a household earning $100,000 a year, with two dependent children, to reduce the tax they pay from $27,500 a year to less than $10,000 a year.

Three easy steps:

1. Forming a company owned by another entity (on the current 30 per cent company tax rate), paying themselves a $48,000 salary and reducing their tax bill by $3000.
2. Qualifying for Working for Families on this reduced salary with two dependent children, they would receive an extra entitlement of almost $8500 a year.
3. Using an interest in a leveraged property investment producing, say, tax losses of $20,000 a year, their personal taxable income is further reduced to $28,000.

So what you then have as tax is:

1. $52,000 @ 30c = $15,600
2. $14,000 @ 12.5c = $1,750
3. $14,000 @ 21c = $2,940
4. WFF credit of -$10,726  (on $28k income)

That means a net tax bill of $9,564 on $100,000 or a 9.5% effective tax rate.

If National disallows offsets for property tax losses then the high income earner paying 9.5% effective tax will end up paying $15,990 tax, or 16%.

Grahame Armstrong in the SST writes:

THE GOVERNMENT is putting the finishing touches to its package of tax cuts and is now confident that low and middle income earners will have more money in their pockets – even after paying a higher GST.

The Sunday Star-Times understands the government has settled on lowering the tax rate for those earning between $14,000 to $48,000 – which represents the bulk of wage earners – from 21% to 19%.

The May budget is also expected to lower the tax rate for those earning up to $14,000 from 12.5% to 10%.

The Star-Times also understands the government will, in one hit, lower the top rate for those earning more than $70,000 from 38% to 33%, rather than doing it gradually.

So that would give up three tax brackets – 10% for low income earners, 19% for middle income earners and 33% for higher income earners.

What would be the reduction in income tax for people at various income levels:

• $26,000 – 13.8% or $590
• $30,000 – 13.1% or $670
• $40,000 – 12.1% or $870
• $48,000 – 11.6% or $1,030
• $70,000 – 6.4% or $1,030
• $100,000 – 9.2% or 2,530
• $150,000 – 10.8% or $5,030

That is pretty well targeted. Those on the minimum wage get the largest percentage increase, and everyone earning under $50,000 a year gets a double figure percentage drop in the tax they pay. And in fact, with WFF, many of these people are net tax recipients anyway, not net tax payers.

What would be the fiscal cost?

• Dropping the 38% rich prick rate  to 33% – $500 million a year
• Dropping the 21% to 19% – $780 million a year
• Dropping the bottom tax rate from 12.5% to 10% – $820 million a year

So total foregone revenue is $2.1 billion.

Now how much extra GST might people pay. Let us assume that on average people spend 90% of their after tax income, and that the GST increase of 2.5% will lead to an average price increase of 2.0% (as estimated by Stats NZ). What is the impact at each income level:

• $26k – $391 more GST and $590 less income tax = $199 better
• $30k -$448 more GST and$670 less income tax = $222 better
• $40k -$590 more GST and $870 less income tax = $280 better
• $48k -$704 more GST and $1,030 less income tax = $326 better
• $70k – $969 more GST and $1,030 less income tax = $61 better
• $100k – $1,304 more GST and 2,530 less income tax = $1,226 better
• $150k – $1,862 more GST and $5,030 less income tax = $3,168 better

So it does indeed look like no one would be worse off (even if you assume 100% of after tax income is spent).

Obviously those at the top tax brackets do best in an absolute sense, but they are also the ones most likely to be property investors, and may in fact end up worse off overall. Also worth remembering two that half of the 100 wealthiest people in NZ do not actually pay the 38% tax rate, so will not in fact benefit from its reductions – they will just not need to operate through their family trust.

I have no idea if this is the package the Government will go with, but it looks pretty workable, and affordable. Most of all, it is not meant to be about just the redistribution of any changes, but the large benefits to the economy of increasing the incentives to work, save and invest and reducing the incentive to borrow and spend – plus the shifting of incentive for investment income from property to other areas.

The reason I support tax reform, is because I want higher economic growth for New Zealand. The media tend to focus just on who will pay more or less tax, but Adolf Stroombergen from Infometrics blogs at interest.co.nz:

The policy options currently on the table involve a change in the tax mix that deliver the same amount of revenue to the government. Whether the total tax take is too high or too low – whether government is too big or too small – is a different issue. The aim of the current proposals for tax reform is to find a better way to collect the same amount of tax revenue. What is meant by a better way? One that is more conducive to economic growth, fairer to those who can least afford to pay, easier to understand, more difficult to avoid and cheaper to comply with and administer.

Compared to GST, income tax is easier to avoid, more costly to administer, more complex and, as a result more unfair. Its interaction with welfare benefits warps the incentive to work and thus impedes economic growth. So what sort of advantages might an increase in GST coupled with a revenue neutral reduction in personal income taxes actually deliver?

GST also covers a wider base, such as tourists, not just income earners.

In some preliminary analysis with an economy-wide model I investigated the impacts of raising GST to 15%. This would raise enough revenue to fund a uniform proportional reduction in all personal income tax rates of about 10%. For example the 38% rate would drop to 34% and the 21% rate to about 19%.

The changes may not look like much, but the wider economic effects are quite dramatic:

1. An increase in employment of 17,500 full time equivalent jobs.
2. An increase in real income of an average $250 per person per year.
3. An increase in real household spending of $420 per household per year.
4. An increase in aggregate household savings of $280m, contributing to a lift in aggregate real investment of almost half a billion dollars per annum.

That sounds all very worthwhile to me. Note those increases to income and spending are not from redistribution – they are from the higher economic growth.

The uncertainties notwithstanding, it is clear that the macroeconomic gains are significant for what is in effect a fairly minor shuffle of the tax mix. One wonders what sort of gains could be generated by more fundamental reform of the tax and benefit system. If the incomes of New Zealanders are ever going to catch up with the incomes of Australians, tax reform is likely to be an important step in the process.

A very good point. It is a pity land tax has been ruled out.