Labour’s tax policy

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.

Comments (38)

Login to comment or vote

Add a Comment