Douglas vs Seymour

Roger Douglas released:

Muldoon Is Back — Only the Names Have Changed: 

ACT’s proposed KiwiSaver tax exemption risks repeating the mistakes of New Zealand’s protected economic past

ACT’s proposal to make KiwiSaver investment earnings tax-free raises an important question: is this good economic policy, or is it an attempt to win votes by offering another special tax concession?

The proposal brings to mind the Muldoon era, when governments used tax incentives, protectionism and preferential treatment to steer private savings and investment towards favoured sectors of the economy. The names may have changed, but the underlying temptation remains the same: use the tax system to influence economic behaviour for political advantage.

New Zealand has been down this road before.

The lessons of 1970–1984

Between 1970 and 1984, New Zealand operated a highly protected economy characterised by extensive government intervention, import restrictions and policies that favoured selected industries. The financial services and insurance sectors benefited from tax concessions and other arrangements that influenced where household savings were invested.

One significant example was the tax treatment of life insurance premiums and superannuation contributions. Under the arrangements applying to particular products and periods, tax concessions encouraged households to direct savings into favoured financial products.

These incentives helped make certain products more attractive to investors, but they also raised a fundamental economic question: were savings being allocated to their most productive uses, or were tax advantages distorting investment decisions?

Other features of the era included extensive tariff protection, restrictions on competition in some markets and tax arrangements that favoured particular business activities.

The result was an economic environment in which government policy often influenced commercial decisions as much as genuine market opportunities did.

New Zealand’s sweeping economic reforms from 1984 onwards sought to dismantle many of these protections and reduce distortions in the economy.

The lesson: tax loopholes can reward inefficiency

The central lesson from this period is straightforward: when governments favour particular investments through the tax system, they risk rewarding tax advantages rather than economic performance.

In a competitive market, investors should be encouraged to put their money into businesses and assets that generate genuine economic value. When the tax system favours government selected investments, however, it can encourage people to invest for tax reasons rather than because those investments offer the best productive opportunities.

This can distort the allocation of capital, create unnecessary complexity, entrench established interests and leave other productive sectors at a disadvantage.

Tax concessions may benefit those who receive them, but that does not automatically mean they deliver a net benefit to the wider economy.

KiwiSaver deserves better than political tax incentives

KiwiSaver plays an important role in helping New Zealanders save for retirement. But that does not mean every tax concession aimed at KiwiSaver is necessarily sound policy.

Making KiwiSaver investment earnings tax-free would give the scheme a significant tax advantage over other forms of investment. Before introducing such a change, the public deserves clear answers to several questions:

• What would the proposal cost in forgone government revenue?
• Who would receive the greatest financial benefit, and how would the gains be distributed?
• Would it generate genuinely additional savings and productive investment, or mainly shift existing investments into a more tax-favoured structure?
• Would the benefits justify the cost to taxpayers and the potential distortions to other investment choices?

These are questions of economic substance, not political marketing.

If the objective is to improve retirement outcomes, the policy should be assessed against credible evidence about its impact on savings, investment, retirement incomes and the wider economy. A tax exemption should not be accepted simply because it sounds attractive to voters.

The politics of a familiar mistake

The danger is that New Zealand could repeat an old mistake under a new name: using selective tax concessions to win political support while presenting them as economic reform.

The Muldoon era demonstrated the risks of an economy in which government intervention and preferential treatment shaped investment decisions. The reforms that followed reflected a recognition that economic performance improves when incentives are less distorted and capital can move towards its most productive uses.

ACT should explain why its proposed KiwiSaver exemption would produce a better result than the targeted tax incentives of the past. It should demonstrate that the policy would improve New Zealand’s economic performance, rather than simply provide a tax advantage to one category of investment.

New Zealand does not need to return to an era of politically driven economic incentives. It needs a tax system that is fair, transparent and focused on productive investment.

Muldoon may be gone, but the temptation to use tax policy for political advantage remains. Seymour and Prebble should take heed of the lessons of history before asking New Zealanders to pay for another round of special treatment.