A guest post by New Zealand Taxpayers’ Union Economist Karan Menon:
There is no greater job creation programme for accountants than the introduction of a new tax scheme for the wealthy.
But the Green Party’s proposed wealth tax has some key flaws. First, it would be ineffective at raising money. Second, it would be incredibly economically destructive, undermining the Government’s current efforts for economic recovery.
In short, the policy is an annual tax of 1% on net wealth over $1 million, and 2% on net wealth more than $2 million. The money would be used to dramatically hike benefit levels for the unemployed and sole parents. The Greens claim the tax will bring in about $8 billion per year – approximately a third of the total tax revenue of GST.
But as the Prime Minister has pointed out, the Greens’ revenue assumptions are ‘heroic’. It is notoriously hard to forecast tax revenue – especially for taxes on assets, which can be easily shifted out of reach of the Kiwi tax man. With international borders closed, it appears the Greens assume none of the ‘rich’ they want to target will rearrange their affairs, alter behaviour, or move overseas.
But just because a tax won’t bring in as much as the politicians want it to, it doesn’t mean we are safe to support it. For New Zealand’s best and brightest – think Peter Jackson and Peter Beck – running international business and investing here in New Zealand, a wealth tax could change the preferred destination. International entrepreneurs need only spend a few more months of the year elsewhere to obtain tax domicile outside of New Zealand. This means they could avoid the tax entirely.
And the experience in France, which introduced a new wealth tax on real estate in 2018, suggests that many of our best would move. In fact, there was a noticeable effect in the London property market due to French elite moving across the Channel.
Public support for these taxes may be high, but, in private, most people change their behaviour based on tax policies, with the costly assistance of those aforementioned accountants – especially when a lot of money is at stake.
In France, for those who stayed, many under reported the value of their assets. Even former French President François Hollande has been accused of undervaluing his property to evade taxes.
With the economic ruin of COVID-19, capital investment is required more than ever. A wealth tax would see much needed capital investments disappear. Economists call this ‘capital flight’. This would be especially painful right now, where money supply is increasingly unresponsive to decreases in interest rates. We want wealthy investors coming into New Zealand – not to chase them away. We want the James Camerons of the world to choose to live (and invest) here – so their skills and capital can rebuild our economy and create jobs.
And as we’ve seen overseas, when forecasted revenue from the ‘rich’ doesn’t materialise, the tax burden is shifted onto the middle class.
A politically profitable attack on successful New Zealanders is one thing, but to promote a tax that would chase away the very capital New Zealand needs right now to get back to growth is anything but fair – not on the rich, the poor, nor the unemployed who would pay the most.