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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Facebook and Google tax

December 1st, 2012 at 4:00 pm by David Farrar

Oh dear. I have already blogged on Labour’s release about tax paid by Google and Facebook. But I overlooked they don’t even know the difference between revenue and profits.

David Clark, ironically a former Treasury staffer, said:

“It’s not just Facebook that funnels revenue through its low-tax Irish counterpart. Google New Zealand does it too. That company paid just $109,038 tax on $4,447,898 in revenue. That’s two per cent, way below our 28 per cent corporate rate.

This is as bad a mistake as Andrew Williams one. These are not statements made under pressure, but ones put out proactively by MPs for the media.

So David Clark thinks tax rates are paid on revenue. Sigh. An article in the Herald gives us some facts:

Clark’s comments that Google NZ appeared to have paid only 2 per cent tax last year was “a bit inept” and misleading, Vandenberg added.

“We get mesmerised by sales figures and people get outraged about how much tax companies should be paying but then you come along and apply a little bit of tax law.”

A company was required to pay tax on profit before tax, not on revenue, Vandenberg said.

Financial statements show Google New Zealand’s revenue last year was $4,447,898 but its profit before tax was only $56,803. It paid $109,038 in tax, making a loss of $52,235.

Facebook New Zealand’s financial statements show revenue of $427,967, a taxable profit loss of $66,696, and $14,497 paid in tax. The company ended up with a loss of $81,193.

So in fact Google paid more in tax than they made in profit, for their NZ subsidiary. Clark wasn’t just wrong with his 2% claim – he was massively wrong.

And Facebook NZ made a loss, yet paid tax (as some expenses are not claimable off tax).

Clark said his point yesterday was that companies were sending their revenues out of the country “one way or another”.

Trying to ignore the fact his statement was factually incorrect and bogus.

And Google are not sending any revenues out of the country. This is Labour xenophobia at play. NZ advertisers have decided to advertise with Facebook Ireland. This is no different from an American company hiring a NZ company to do research for it. Is Labour saying that any NZ company that has overseas clients should be forced to pay tax in the country their clients reside in?

He criticised the way Facebook used its Irish operation, which pays just 12.5 per cent tax, to determine revenue and expenses.

“This ensures the company can put most of its revenue through countries with low-tax systems,” he said.

Wah, wah, wah – it isn’t fair.  Of course they choose to operate from a low tax company. This is why low tax countries attract business.

He called for the New Zealand government to work with other major countries, like Australian, to review international tax treaties and create a fairer system.

Yeah, good luck with that. Unless every country in the world signs up – then companies that can be flexible with where they are based will be based where the taxes are lower.

This is like trying to ban countries from offering higher wages, as people may move to a higher wage country.

UPDATE: David Clark has updated his release to remove the references to tax being levied on revenue, not profit.

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Denmark scraps their fat tax

November 17th, 2012 at 12:00 pm by David Farrar

The Greens will be distraught. Denmark has scrapped their fat tax. The WSJ reports:

Danish lawmakers have killed a controversial “fat tax” one year after its implementation, after finding its negative effect on the economy and the strain it has put on small businesses far outweigh the health benefits.

Nations including Switzerland, the U.K, and Germany have held up the tax, which applies to any food containing more than 2.3% saturated fat, as a potential model for addressing obesity and other health concerns. But in Denmark, it has been a source of pain for consumers, food producers and retailers as the nation’s economy struggles.

“The fat tax is one of the most maligned we [have] had in a long time,” Mette Gjerskov, the minister for food, agriculture and fisheries, said during a news conference Saturday announcing the decision to dump the tax. “Now we have to try improving the public health by other means.”

The failure of Denmark’s fat tax is a demonstration of how difficult it can be to modify behavior by slapping additional duties on products seen by many as essential staples, especially during tough economic times. Products such as butter, oil, sausage, cheese and cream were subject to increases of as much as 9% immediately after the new tax was enacted.

So why was it dropped?

Lone Saaby, director of economic policy at Denmark’s Landbrug & Fødevarer farmers association, said the fat tax “increased border trade as well as administrative costs,” putting Danish jobs in jeopardy. Ms. Saaby’s organization lobbied the government to kill the fat tax and abandon the sugar tax before the impact to employment became too noticeable.

Mr. Giørtz-Carlsen said the fat tax cost his company about €670,000 over one year, and estimates “smaller companies probably had disproportionately higher costs.”

Many want to use the tax system to incentivise what they see as good behaviour. But the more complex you make it, the less effective it is. The best tax system is broad base and low rates with minimal exceptions.

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The tax burden

August 6th, 2012 at 9:00 am by David Farrar

Rob Stock at Stuff reports:

The parliamentarians found it was more difficult to calculate an average tax rate for middle income New Zealanders, but an indicative comparator for someone on an average wage was 17.9 per cent, although Working for Families entitlements would reduce the average net tax rate to 8.4 per cent for a single-earner parent with one child, or 2.3 per cent with two children.

Yep, most people who have children pay little or no tax.

Since the changes in tax rates things will have changed a little, and the wealthiest will have seen their effective tax rates drop on paper at least, because the IRD has been strenuously pursuing them to extract more tax, and the IRD expects to bring in an extra half a billion dollars in revenue from the high net wealth individuals in the next 10 years through its crackdown.

Good – I support a low rate, broad base, with few exceptions.

But actually, when it comes to income taxes, New Zealand is something of a tax haven, because when Working for Families rebates are taken into account, 40 to 50 percent of households “effectively pay no net income tax, and roughly 40 to 50 percent of total net income tax is paid by those in the top 10 per cent income bracket, suggesting that the tax burden falls most heavily on the wealthy”.

Indeed. I’ll be blogging more on this, based on some interesting tax data I got under the OIA from the IRD.

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Remember this when Labour proposes tax hikes

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

3 news reports:

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

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

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

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

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

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

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

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

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

Their conclusion:

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

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

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Six policies economists love

July 21st, 2012 at 9:00 am by David Farrar

Theo Francis at NPR writes:

Tuesday’s show presented the common-sense, no-nonsense Planet Money economic plan — backed by economists of all stripes, but probably toxic to any candidate that might endorse it. …

One: Eliminate the mortgage tax deduction, which lets homeowners deduct the interest they pay on their mortgages. Gone. After all, big houses get bigger tax breaks, driving up prices for everyone. Why distort the housing market and subsidize people buying expensive houses?

We don’t have that in NZ, but we did use to allow depreciation to be claimed despite house prices appreciating.

Two: End the tax deduction companies get for providing health-care to employees. Neither employees nor employers pay taxes on workplace health insurance benefits. That encourages fancier insurance coverage, driving up usage and, therefore, health costs overall. Eliminating the deduction will drive up costs for people with workplace healthcare, but makes the health-care market fairer.

Health insurance is not tax deductible here. Many argue it should be, but the evidence tends to be that it doesn’t help more people take up health insurance, it just provides a tax dodge for people who already have it.

Three: Eliminate the corporate income tax. Completely. If companies reinvest the money into their businesses, that’s good. Don’t tax companies in an effort to tax rich people.

Owners would still be taxed on dividends, but a zero company tax rate would get investment flowing.

Four: Eliminate all income and payroll taxes. All of them. For everyone. Taxes discourage whatever you’re taxing, but we like income, so why tax it? Payroll taxes discourage creating jobs. Not such a good idea. Instead, impose a consumption tax, designed to be progressive to protect lower-income households.

I doubt we’ll ever eliminate income tax, but generally it is better to tax consumption and land than income and capital.

Five: Tax carbon emissions. Yes, that means higher gasoline prices. It’s a kind of consumption tax, and can be structured to make sure it doesn’t disproportionately harm lower-income Americans. More, it’s taxing something that’s bad, which gives people an incentive to stop polluting.

Which we already do, to a degree.

Six: Legalize marijuana. Stop spending so much trying to put pot users and dealers in jail — it costs a lot of money to catch them, prosecute them, and then put them up in jail. Criminalizing drugs also drives drug prices up, making gang leaders rich.

Very true.

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Shewan on taxes

June 30th, 2012 at 9:41 am by David Farrar

James Weir at Stuff reports:

New Zealand should move to a low-level land tax and cut personal tax rates, retiring PricewaterhouseCoopers chairman John Shewan says.

He also says the “elephant” of rising national superannuation costs means a rise in the GST rate to 17.5 per cent in coming years was “almost inevitable”.

Shewan had his last day as PwC chairman yesterday. PwC partner Jonathan Freeman has been elected the new chairman.

Shewan said a land tax rate should be low, perhaps 0.5 per cent of land value each year, and be assessed like a city council rate, with an offsetting fall in the personal tax rate of a few percentage points.

“I still think that is the right thing to do,” he said. That idea was rejected by the Government when proposed by the Tax Working Group, which Shewan was part of. “I regret that,” he said.

High taxes on personal incomes were the most damaging to the economy for growth and jobs. The most efficient taxes were those people could not avoid, such as tax on spending like GST or tax on land “because you can’t hide it”.

I agree with a land tax, so long as other taxes are reduced to compensate. Land tax is both unavoidable, but also encourages better economic use of land, unlike income taxes which actually discourage labour.

New Zealand’s tax system was a “complete wreck” in 1984, but was now one of the strongest and most robust in the world.

The basket cases of Europe, such as Greece, Italy, Spain and Portugal, shared a common thread of poor tax systems, with high levels of tax evasion and fraud. “They regard paying tax as voluntary,” he said.

In contrast, in New Zealand most felt they should pay their fair share of tax. Shewan said he was “very proud” of the tax system here.

It is one of the better ones around, so long as we resist the stupidities such as GST exemptions for fresh fruit and vegetables.

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More tax tracking

June 12th, 2012 at 1:00 pm by David Farrar

Maxim has done some tax tracking scenarios, for four different people or households. They are:

  • Minimum wage earner
  • Median income earner
  • Median income household
  • High income household

The minimum wage earner pays an average 13.5% tax being $3,320. The high income household pays $33,240 tax. Some of the breakdown of what that goes on is:

  • NZ Super $4,745
  • Family Tax Credits $995
  • DPB $857
  • Invalids $622
  • Accom Supp $580
  • DHBs $5,611
  • Primary schools $1,355
  • Tertiary tuition $1,121
  • Secondary schools $1,010
  • ECE $653
  • Student loans $330
  • Tertiary allowances $289
  • Defence $926
  • KiwiSaver $332
  • Debt $1,748
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Tax forecasts

May 22nd, 2012 at 7:00 am by David Farrar

One of the memes being pushed by Labour and the Greens is that the 2010 tax package wasn’t revenue neutral. They assert this because tax revenues are lower than was projected. The problem with their arguments is that tax revenues often differ from what was projected, and there is no way of knowing how much is because of changing economic projections, how much is impacted by a policy change and even how much is just because the forecasts are imprecise.

As an example. Let’s say you forecast GST to be $12.5b at 12.5% and you increase GST to $15% and hence forecast GST will bring in $15b. That extra $2.5b of income is distributed back as income tax cuts. But let’s say once GST goes to 15%, the revenue only goes to $14b. Now Labour and the Greens are saying that $1b less is due to the policy change, and hence the tax switch was not fiscally neutral. They argue that it is purely because of the rise in GST that people spent less, and hence less GST was paid. But the drop in GST might just be because of lower economic growth, or a drop off in consumer confidence etc.

To give you an idea of how dramatically forecasts change over time, I’ve collated the forecasts from the last nine fiscal updates. They tell quite a story. Let’s start with total tax revenue.

The last two columns are best to focus on, as we get a full history. This is the total tax take projected for last financial year and the current one.

Back in the 2008 budget Dr Cullen projected $62.1b in tax revenue for 2011/12. Then by the PREFU it had dropped to $61.2b. It further dropped to $58.3b in the DEFU, which takes accounts of National’s election tax cuts. However those changes were compensated by expenditure reductions – mainly KiwiSaver.

A huge drop occurred between 2008 DEFU and the 2009 budget, with tax revenues dropping $4.3b! Now bare in mind it was in the 2009 budget National cancelled its planned tax cuts for April 2010 and April 2011, so it would have been an even bigger drop without that. This change was pretty much all due to the global financial crisis and recession.

By year end forecasts got more positive, going up to $56.6b, and then the tax switch in the 2010 budget projected it to go to $57.4b. However then forecasts dropped again, dropping to $56.7b and then $54.7b.

Now Labour and Greens say that the difference between 2010 Budget and the latest forecasts is all due to the tax switch. But as one can see over time the wider economy is a far bigger factor in tax projections. Recall how in 2009 tax revenues forecast dropped $4.3b even though National cancelled tax cuts.

Now let’s look just at GST.

This shows projected GST revenues only. Note how they from 2008 to 2009 they went from $13.5b down to $11.3b. Then they were projected in 2010 to go up to $15.8b with the increase to 15%. Just six months later Treasury revised that down to $14.0b, but then this year revised up to $15.0b.  This is still lower than originally forecast in 2010, but again no greater than other variances from year to year.

So when Labour and Greens say the tax switch cost $2b, they are making it up. What they are saying is that there has been $2b less tax revenue than projected. But if the tax switch had never happened it is quite possible the drop in tax revenue would have been the same or even greater.

And for the paranoid out there, this is all my research, taken from going through the last nine fiscal updates. No one suggested it to me, helped me with it, or even knew about it. I did it because I got sick of the uncontested claims about the impact of the tax switch.

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Len’s Auckland taxes

February 13th, 2012 at 9:41 am by David Farrar

After having failed to get the residents of Oamaru, Christchurch, Wellington and Napier to pay for Auckland’s CBD rail loop, Len Brown has proposed half a dozen new taxes as possible ways to pay for the loop.

The proposed taxes include:

  • Regional income tax – new income tax paid only by Aucklanders.
  • Regional payroll tax – new income tax paid by Auckland employers.
  • Regional GST – raising GST in Auckland.
  • Regional fuel tax – raising petrol and diesel taxes across Auckland.
  • Visitor taxes – nightly charge for hotel and motel rooms.
How novel to have a Mayor who is a member of the Labour Party propose to increase GST (in Auckland). I don’t recall that one being in the manifesto in 2010.
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The case for lowering the top tax rate

August 9th, 2011 at 8:38 am by David Farrar

Richard McGrath blogs at Not PC on how if you want the rich to pay more tax, you should tax them less. Recall that only half of our 100 wealthiest New Zealanders pay the top tax rate. Under the Goofynomics plan to have the top tax rate at 39% and the corporate rate at 28%, I’d say the number paying the top tax rate would drop to under 1/4.

McGrath quotes Keynes:

“[T]axation may be so high as to defeat its object, [and] a reduction of taxation will run a better chance than an increase of balancing the budget.”

And then he goes on to give some examples:

  • UK, 1979: Chancellor Geoffrey Howe cuts marginal tax rate from 83% (!) to 60%. Before the cuts, the top 1% of taxpayers were paying 11% of total income tax received. Nine years later, despite the hefty cuts, they were paying 14% of total income tax.
  • UK, 1980s: Chancellor Nigel Lawson cuts marginal rate further, to 40%. By 1997, the top 1% of taxpayers are paying 21% of income tax received. Thus halving the marginal tax rate doubled the income tax receipts from the wealthiest 1%.
  • US, 1920s: Presidents Coolidge and Harding reduced the top tax rate from 73% to 25%. The share of tax paid by earners making over $100,000 nearly doubled between 1921 and 1925, from 28% to 51%.
  • US, 1961: The top tax rate under Eisenhower had crept up to a staggering 91%. The Democrats supported by Kennedy dropped this to 70%. He stated, a few months before a sniper removed the occipital lobes of his cerebral hemispheres: “[T]ax rates are too high today and tax revenues are too low, and the soundest way to riase revenues in the long run is to cut the tax rates…” As a result of the Kennedy tax cuts, those earning over $50,000 increased the amount of tax paid by 40%, and paid 15% of income tax received in 1966, as opposed to 12% in 1963. Total income tax received went up from $69b in 1964 to $96b in 1968.
  • US, 1981: Under President Reagan, Congress reduced the top tax rate from 70% to 50%. Between 1981 and 1988 the top 1% of tax earners increased their share of tax received from 18 to 28%, while the bottom 50% of taxpayers decreased their contribution to income tax received from 7.5% to 5.7% over this same period.
  • Canada, 1990: Top federal tax rate cut from 45% to 29%; share of tax paid by top 10% of taxpayers increases from 29% to 45%.

Goff should know this. He was one of those who voted to lower the top tax rate to 33% in the 1980s.

If you spend all your after tax income, then those on the top tax rate already pay 43% of their income in tax, when you include GST. We’ll leave ACC out of this for now. I think that’s more than enough.

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UNITE’s taxes

July 27th, 2011 at 7:00 am by David Farrar

Paul McBeth reports:

Inland Revenue is chasing unionist Matt McCarten’s Unite Support Services for $150,750 in unpaid taxes after the department forced the company into liquidation last month.

McCarten’s vehicle, which supplied administrative support services to the youth-orientated union Unite, was put into liquidation by a High Court order last month after the IRD pursued it for “failure to provide for taxation,” according to the first liquidator’s report.

As far as I now this is not just unpaid income tax and/or GST. But it includes unpaid PAYE, which is quite horrific as the employer acts in a trustee capacity for the employee who actually pays the tax. An employer that spent the employees’ PAYE on other activities would be lashed by unions as a bad employer.

You also have the hypocrisy of a union (and its spin off the Mana Party) advocating that people should pay more taxes, when they don’t even pay their own taxes, and effectively stole the PAYE tax from their employees.

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Max the Tax

July 19th, 2011 at 4:30 pm by David Farrar

I asked on Twitter whether Labour were likely to use their “Ax the tax” bus in the election campaign. Lots of humourous feedback, but the best retort came within a few seconds from Revenue Minister Peter Dunne who said they were going to rename the bus to “Max the Tax”.

Whale has provided this new graphic. Thanks to Peter for the slogan, which I suspect we have not have heard the last of.

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New maths

July 18th, 2011 at 3:27 pm by David Farrar

In a desperate attempt to justify whacking the “rich” with higher taxes, Rob Salmond comes up with a new form of maths – when a figure is negative you count it as zero, rather than include it in the calculation.

According to Rob if you had assets and liabilities of (for example):

  1. Term Deposit – $200,000
  2. Shares – $100,000
  3. Loan – $50,000

Then your term deposit is only 67% of your net assets ($200,000/$300,000) rather than 75% 80% ($200,000/$250,000).

Hilarious. And desperate.

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Joyce v Cunliffe’s numbers

July 18th, 2011 at 11:00 am by David Farrar

Labour have said that over 15 years their tax package will reduce debt by $8b. Steven Joyce says it will increase debt by $15b. Let’s have a look at where their numbers differ.

First it is worth recalling that what is undisputed is that Labour’s package will result in more debt for at least the next seven years. It is only if Labour win this election, the 2014 election and 2017 election that in their third term would their tax switch start to reduce debt – by their own calculations.

By Steven Joyce’s calculations, it will never reduce debt. At a time when debt is growing massively, Labour is actually proposing to borrow for tax cuts – they very thing they have accused National of in the past.

Now I’m going to go through the differences line by line. Keith Ng has also blogged on some of the differences. Keith, like me, is a former parliamentary staffer for Labour (National for me of course) so we both tend to have a more favourable disposition towards numbers from our own side. But that doesn’t mean one can’t also look at the quality of the argument.

CGT – The $1.6b difference is not hugely significant, both Keith and I agree. This is for revenue over 13 years, so the difference is around $100m a year. Joyce uses a Treasury CGT model developed in 2011, and Cunliffe uses BERL. Joyce makes the point though (which has not been covered much) that getting a CGT in place by April 2013 would be nigh impossible considering the huge number of issues being left to the expert panel. You need time to appoint panel, have the panel do its work, then draft a bill up, and then go through select committee process.

New top tax rate – Joyce has this coming in at $934m less over 13 years. Not a big difference per annum. I would tend towards the lower figure because I think it is inevitable that a top personal tax rate of 39% and a company tax rate of 28% will see massive (legal) avoidance. We already know half the top 100 earners don’t pay the top rate. This policy will probably see it drop even lower.

Loss ring-fencing. The TWG said loss ring-fencing will lead to behavioural changes, so Labour’s policy will only bring in half of what Labour says. Keith Ng basically agrees, so little dispute there.

Anti-avoidance. Labour have just invented a figure of $300m a year from greater anti-avoidance work. Now this is pie in the sky. If Labour announced actual law changes to reduce avoidance, then maybe you can estimate revenue changes. But this is the equivalent of “I hope it happens”. Keith Ng is right that it is probably not realistic to say Labour will not be able to get any extra revenue at all, but when you consider most experts are saying their tax package will make the tax system more complicated, I think avoidance will increase not decrease. In the absence of any specifics around anti-avoidance measures, I think you go with zero.

Agriculture ETS. this is basically an argument about what the price of a carbon credit will be. Cunliffe uses $50 and Joyce $25. Ng backs Cunliffe on the basis that the PCE has said they estimate the price will be $50 by 2030 if there is little international action on climate change and $100 if there is a moderate commitment. Australia’s ETS is priced at NZ$30.

However against that the current international price is 11 euros, which is NZ19 only. And bear in mind this is for the whole period 2013 – 2025. Let’s say the PCE is right and in 2030 the price is $50. Then if you assume linear price increases, maybe an average price is $35 for the period of the forecasts. So around halfway between what Joyce and Cunliffe say. Personally trying to predict ETS revenues more than a few years out is very challenging as it all depends on if a post-Kyoto agreement can be reached.

The first $5,000 tax free zone has a $2.2b difference over 13 years. Keith says:

Everyone earning over $5000/year would get the benefit of the whole tax free threshold. That’s pretty much everyone in the workforce. So if everyone already gets something, how would more people get it?

The cost of a tax-threshold only grows when new people enter the workforce.

So unless Joyce thinks he can create 3 million jobs (and find 3 million workers to fill them) in the next decade, this is a patently stupid and ridiculous result. Common sense would tell you that it is impossible.

This one goes firmly in Labour’s favour.

But Keith misses a key point. It is one I have blogged on many times, but gets so little media attention. Labour’s tax free zone is not just for people in the workforce. They have pledged it will also apply to everyone on benefits, even though benefits are calculated on an after tax basis.

Labour are actually promising to increase all benefits by $10 a week – the first ever increase (beyond inflation) for over 20 years. Tax cuts have never applied to benefits in the past (as they are calculated on an after tax basis). Cullen’s 2008 tax cuts did not. But Labour is saying they will pay people on the dole more money for not working.

Also as superannuation is calculated with a floor linked to the after tax average wage, their tax free threshold will increase the cost of superannuation.

So Keith is wrong when he says the tax-free threshold will only increase in cost when new people enter the workforce. It will increase in cost whenever we get new workers, new beneficiaries or new pensioners.

Now having said all that, National’s numbers do still look a bit high with the cost increasing approx $80 million a year, which suggest an extra 160,000 people per year working (as tax free zone is $500 of foregone revenue), on benefits or retired. So while Keith gets some stuff wrong, National’s numbers may be too high.

On GST there is no dispute, and for R&D tax credits Keith says National’s figures look more robust.

Then finally we have the biggie – finance costs, or the extra interest on the extra borrowing. There can be no debate that one should calculate finance costs, unless Labour has convinced the People’s Republic of China to loan us money at 0% interest. This is an extra $7.5 b of costs. Even if you take Labour’s numbers for some of the items, you will still have billions in finance costs.

Using Cunliffe’s numbers Labour is borrowing for at least seven years. If you go to Keith Ng’s numbers then I’d say (Keith didn’t do formally calculate this) that the borrowing is for at least a decade, and if you think Joyce’s numbers are more realistic (and for the most part I think they are) then Labour’s package is never fiscally positive.

But the up to $15b of extra debt is just the beginning. You see Labour done a big lie, and said it is a choice of asset sales or their tax package. But they have not calculated for any increased borrowing through no sales. If you add on the extra $7b they will need to borrow, then the borrowing figure climbs to up to $22b. Of course there will be over the long term less income from dividends.

But even putting aside the asset sales issue, the big big issue is spending. You see Labour’s debt track is already up to $15b higher – before they even fund a single spending promise. it is impossible to think that Labour is going to campaign on spending no more than National. Labour were increasing spending at $2b a year and National reduced this growth to $1.1b, then $0.8b and finally zero. Each time, to protests from Labour. Let’s say Labour promises an extra $1b a year of spending (they have implicitly already promised many billions through their opposition to spending reductions).

The cumulative debt from an extra $1b/year of spending is:

  • Year 1 – $1b
  • Year 2 – $3b
  • Year 3 – $6b
  • Year 4 – $10b
  • Year 5 – $15b
  • Year 6 – $21b

Basically Labour are going to increase debt with their tax package, increase debt with their spending, and increase debt through not doing partial floats of SOEs.

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The true numbers for Labour’s plans

July 17th, 2011 at 3:07 pm by David Farrar

Cost of Labour’s Promises

Steven Joyce has put Labour’s numbers through the Treasury calculator (found at http://www.treasury.govt.nz/government/fiscalstrategy/model) and found that it is far worse than even Labour were revealing.

Labour’s own numbers revealed that their tax plans would lead to greater deficits and debt for the next six to seven years. They desperately did not want people to know this, so left this document off their website.

But their own numbers were inflated, such as as imaginary $300m a year from reduced tax avoidance (despite them wanting to have an 11c gap between the top tax rate and the company rate). They also failed to take account of interest costs, and over-estimated revenue from some of their measures. The numbers on the CGT itself were largely accurate, but on the rest of their package were crap.

So what does it mean? It means Labour’s package will result in less tax revenue until 2024! And then when you take account of the interest on the extra borrowing, it will result in an extra $15b of borrowing between now and 2025.

But it does not end there. This assumes that Labour will keep to National’s spending track. That they will not pledge one cent extra in spending than National. That there won’t be one cent extra for early childhood education etc.

So the $15b of extra debt is just on the revenue side. Wait until they release their spending plans and see that number increase exponentially.

The problem is not Labour’s CGT per se. The problem is that their promise to remove income tax on the first $5,000 of income is unaffordable. It has no fiscal credibility and can only be funded by increased borrowing.

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Labour’s Numbers

July 15th, 2011 at 1:39 pm by David Farrar

Labour Tax Costs

My column in the NZ Herald focuses on the numbers in Labour’s tax policies. They stuck up masses of data on their site, but the one document they did not stick up was the one above, which shows that it will take seven years for Labour’s tax package to be fiscally neutral. They’d have to win a third term for it to start to bring in more income than they forego. And they also project $300m a year less tax avoidance by waving a wand. In reality an 11c difference between the top personal tax rate and the company tax rate will lead to much greater levels of tax avoidance.

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Labour’s package

July 14th, 2011 at 2:52 pm by David Farrar

Here are details to hand. On radio shortly so won’t have time to check full details of timing, and whether the numbers add up.

  • Cullen’s envy tax of 39% put back on, but starting at $150,000
  • The first $5,000 tax free (which includes increasing benefits by $10 a week)
  • A CGT of 15%
  • Boats will be exempt from the CGT.
  • A farm house will be exempt, but not the farm itself
  • Jewellery is exempt. So if you invest in a start up company which makes money you pay CGT, but if you buy jewellery which appreciates you do not
  • If you are over 55 and have owned a small business for 15+ years then first $250,000 capital gain is tax free.
  • No GST on fresh fruit and vegetables

I’d say tax accountants will be celebrating the extra work, if this came to pass :-)

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Do dairy farmers really only pay 3% tax?

May 18th, 2011 at 2:49 pm by David Farrar

Stuff reports:

Inland Revenue Department figures provided to Labour revenue spokesman Stuart Nash show that, in the latest full year for which figures were available, the average tax paid by dairy farms was $1506 a year, despite an average Fonterra payout understood to be well over $500,000.

The 17,244 registered as being in the sector, including companies, trusts and individuals, paid only $26 million in tax.

This is such a bullshit story, I don’t know where to start. Here’s a few vital facts:

  1. The tax data is from 2008/09 and the Fonterra payout figure is from 2011. Epic fail. As I understand it commodity prices in 2008/09 were much lower, and most farmers in that year made a loss.
  2. The $500,000 is a revenue or turnover figure, not a profit figure. This is not comparing apples and oranges. A company can have a $500,000 turnover and a $30,000 profit. Turnover by itself is meaningless for tax purposes.
  3. The $26m in tax paid in 2008/09 only relates to tax entities classified as dairy farmers. Many dairy farmers are in the unclassified category which paid an additional $1.5b in tax.
  4. Labour and the Dom Post divided the $26m by the 17,244 tax entities registered as dairy farming. Many of these are defunct shelf companies etc. The actual number of dairy farms is thought to be around 11,500.

MAF have some data on the average dairy farm. In 2008/09 they found the average farm had $750,000 income, $529,000 expenses, $235,000 interest and depreciation resulting in a loss of $6,300. Their average tax bill was $18,600 so profit after tax was -$25k.

So the story is a total beatup. They commit two cardinal sins. One is comparing revenue from one year against tax of two years earlier. You’d be thrown of of accountancy school for that. Equally bad is comparing turnover to profit. A mistake that only people who have never worked in business would make.

Having said all that, I am a supporter of a land tax (subject to a reduction in income taxes to compensate). A land tax is near impossible to avoid, very simpleto calculate and provides an incentive for land to be out to good economic use.

If Labour are serious about closing tax loopholes, then they should propose a land tax. It would over time boost NZ’s economic growth as it encourages better economic use of land.

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