Envy taxes will make all Kiwis poorer, writes Bruce Cotterill

Revenue Minister David Parker argues that Inland Revenue’s report shows the “fundamental unfairness” of New Zealand’s tax system. Photo / Mark Mitchell

OPINION:

“Rich people”. The term conjures up a variety of thoughts. Many will run to the immediate vision of the “Trumpesque” character — brash, arrogant, sometimes even obnoxious.

While that description may apply to a few, the great majority of our wealthy people are considerate and respectful of others. Most are bright and some can be quite charming. That’s how they became successful.

In New Zealand, we don’t have a great attitude towards wealth and wealthy people. But then, we don’t have a great attitude towards success either. In fact, our collective distaste for tall poppies is a longstanding and negative part of the Kiwi culture. Motor racing great Denny Hulme, who died in 1992, summed us up perfectly. “New Zealand is like a lawn,” he once said. “If one blade of grass is higher than the rest, New Zealanders get 50,000 lawnmowers and chop the whole lot level again.” With the benefit of hindsight and social media, it has become worse.

In the 1980s, our business high-flyers flew visibly. We had Bob Jones, Tony Gibbs, the Fletchers, Fay, Richwhite, Myers and the like. But with the exception of Jones, we wore them down and ultimately they and their successors retreated to the shadows. As a result, our wealthy people tend to hide away or leave our shores.

But where would we be without them? You see, the great majority of our very wealthy people get to where they are because they do something extraordinary. Simply put, they do things the rest of us don’t do. They take risks we won’t take, think of things we don’t (or can’t) think of, and build things we cannot conceive.

They are variously productive, creative, constructive and accumulative. Mostly their success comes as a result of doing things very well over a long time. They make their money from the land and from the movies, from our construction sites and from technology. They sell us our cars, jewellery and sports equipment, the packaging that wraps around it, and the transport that moves it all around.

Those who operate on the spectrum of envy and jealousy don’t like them much. Many of our politicians fall into this category. There’s even a phrase for it — “the politics of envy”.

But we underestimate them at our peril. Elected officials don’t build our cities, property developers do. Can you imagine our cities without the developers who visualise something better, who borrow millions and build our urban landscapes and heavenly skylines? Every time the economic cycle dips, a few of them go broke. They take thousands of people and millions of dollars down with them. There’s a reason this happens. The risks they take are huge. But if they pull it off, the rewards are huge too. And that’s okay. And whether they succeed or fail, they usually leave the city behind them looking better than it did before they arrived.

Then there are the technology entrepreneurs who make our book-keeping easier, our purchases more streamlined, or even our sports viewing more engaging. The brilliance of the creative minds whose work entertains us on the big screen and those who conceive and make the toys our kids play with. They are people who change our lives for the better and they make plenty of money in the process. And that’s okay too.

They’re also the people who keep our charities running. If you think that building and running hospitals is the government’s job, consider the following.

Starship Children’s Hospital would not exist or operate without the contributions from our wealthy. These are the same people whose contributions make sure that our swimming pools get built and our universities get their new buildings.

Many of our young athletes, golfers, motor racers or cyclists would not have made it to the world stage without the generous contributions of our wealthiest people. Surf life saving clubs wouldn’t have inflatable rescue boats and communities would be without their netball courts or basketball gyms.

Even the Breakers had their record-breaking series of basketball victories in Australia thanks to a generous and committed benefactor.

I’d like us to be better at celebrating all of our successful people, including those who are our wealthiest. But sadly, the aforementioned politics of envy has been on display this week and seems set to continue. In a week when the Aussies made it easier for us to join their economy, I’m puzzled that our Government, led by Revenue Minister David Parker, has chosen to declare war on that small portion of our population who are deemed “wealthy”.

Parker’s tax review, supposedly of New Zealand’s 350 wealthiest people (although only 311 participated), presents a major signal that we should all be concerned about. The most staggering aspect of the review was that they chose to include “unrealised gains” in their assessment of income.

Since Wednesday’s announcement, I’ve been asked what “unrealised gains” means in this context. Simply put, it means the increased value of an asset that you own, but have not yet sold. Such assets may include property, shares, a business or a farm. To this writer’s knowledge, there is not a country in the world that seeks to regard unrealised capital gains as assessable income for the purposes of calculating tax. Doing so would mean that a taxpayer has to find or borrow money from another source in order to pay the tax on the increased value of an asset which they continue to own.

Imagine you buy a few shares. In my view, the intent of Parker’s analysis and his subsequent interview comments suggests, despite the fact that you may choose to hold onto those shares for the long term, you may be asked to pay tax on any gains made in a 12-month period, even though you haven’t sold them. Most people would have to sell a few shares to pay the annual tax bill. The end result would be that your little nest-egg disappears over time. This is the opposite of encouraging savings. It discourages savings. In fact, it discourages anyone who wants to do better.

Of course there is a flip side that this Government doesn’t seem to be talking about. What if we make unrealised losses on our investments? Is the government going to allow us to claim a tax deduction on unrealised losses?

But back to Parker’s review. It compared tax paid by our wealthy few, on all income, including that which is unrealised, to come up with a percentage of tax paid against assessed income. The result was 9.4 per cent. This was the headline number that the Government and many media commentators jumped on. However, if unrealised income was excluded, the result was 30 per cent.

They then compared that to the tax paid by an average person earning $80,000 per year. That proportion was 22 per cent. They did include the GST that middle-income earner paid, although it’s not clear whether they included GST in the tax contribution of the higher-spending, wealthy person. Their analysis didn’t appear to include an assessment of whether the $80,000 earner had a few shares, an old sports car that had gone up in value, or heaven forbid, their own home which might have appreciated as well.

In other words, so desperate are they to demonstrate that the wealthy aren’t paying their way, that they have analysed the figures on one basis for the wealthy — including unrealised gains — and a different calculation for everyone else. The result is a misleading deception which in my view is designed to move public opinion further against our tall poppies.

And we all know where this is heading. They’re not going to come up with a new tax for the 300-odd uber-wealthy survey participants. They’re likely to use this study to come up with a new tax for the top 10 per cent of Kiwis, those who already pay just under half of the country’s personal tax bill. And they’ll base that tax on what they think the top 300 should be paying. And you know who will carry the can.

The great shame here is that New Zealand’s tax policy is already well-regarded internationally. We sit in the middle of the OECD’s tax-to-GDP analysis. And the Tax Foundation’s “International Tax Competitiveness Index”, which measures the extent to which a country’s tax system is competitive and neutral, suggests that we have things about right.

Competitive means that marginal rates are kept low, to attract capital rather than pushing capital elsewhere. That’s important for a small country.

Neutral means that our system doesn’t favour consumption over saving, as happens with investment taxes and wealth taxes.

In 2022, New Zealand ranked third in the world for tax competitiveness. As Auckland University’s professor Peter Davis said on social media, “with all the beefs about levels, inefficiency, unfairness of NZ’s tax system, turns out it is the third most competitive in the world ... and we still manage to maintain a decent society with essential services.”

The moves being considered would represent a major and aggressive change to our tax policy. And despite the minister’s protests to the contrary, they don’t do press conferences like the ones they did this week, if they are not considering such revisions.

The Tax Foundation suggests that uncompetitive tax structures will drive people and their capital away. At a time when our productive young people are leaving for brighter pastures, the risk our Government is taking is that we will also lose many of our wealth creators, and with them, the contributions to the communities they serve. I’m sure many of our wealthiest people will happily pay a bit more tax. But we should be cautious. If we continue to abuse those people with lopsided commentary and poorly structured debate, they too will leave our shores. And they will take their money, their ambition and their generosity with them.

- Bruce Cotterill is a company director and adviser to business leaders. He is the author of the book, The Best Leaders Don’t Shout. www.brucecotterill.com