Brian Fallow: Green Party wealth tax - wrong answer to a real problem

Greens co-leaders James Shaw and Marama Davidson. The party says its wealth tax would raise $7.9b in its first year. Photo / Mark Mitchell

COMMENT:

The wealth tax at the heart of the Greens' poverty action plan is the wrong solution to a genuine problem.

But at least they are offering voters a tax policy. So far there is silence from Labour and a pledge from National of no new taxes in its first term.

Yet the need for more tax revenue is inescapable.

And not just for the reason the Greens focus on. As unemployment climbs and businesses fail, many middle class families are about to discover the hard way — as beneficiaries or the Welfare Expert Advisory Group or the Child Poverty Action Group could have told them — that the welfare safety net is slung very low.

It took a long time for the unemployment rate to get back towards pre-GFC levels in the last cycle. The current shock is much more severe and so will be the associated economic and social scarring.

There is also the need to pay interest on the debt the Government is piling up. Interest rates won't stay this low indefinitely, or it will be a very bad sign if they do.

And there is the longstanding issue of the fiscal costs of an ageing population. That problem has been deepened by the exceptionally harsh tax treatment of private retirement saving we have had for the past 30 years and which the Greens' plan would make worse.

But there are good reasons why successive reviews of the tax system, including the most recent one chaired by Sir Michael Cullen, have rejected a wealth tax.

As a general rule it is better to tax flows, like income, spending or the combustion of fossil carbon, rather than stocks like wealth that have to be valued. That is especially so if the tax would be, as the Greens propose, annual rather than based on actual transactions when assets change hands.

Their estimates of how much a wealth tax would yield — $7.9 billion in 2021/22 rising to $9b two years later — would have to be seen as rickety.

The data on wealth — both how much there is and how it is distributed — is notoriously poor. The model the Greens rely on draws on Statistics NZ's household economic survey (HES), but it only enquires into household net worth every three years and is subject to sampling error.

The other data source is the Reserve Bank's aggregate estimate of household balance sheets, but it gives no information about how wealth is spread among households. The Greens have grossed up the distributional results of the HES, especially for wealthier households, to reach the aggregate numbers from the Reserve Bank and then lopped off a third to allow for inevitable avoidance behaviour.

Valuation issues are particularly difficult for businesses. The sharemarket intercepts relatively little of New Zealand's commercial life. There are a lot of unlisted companies and even more unincorporated businesses.

But never fear. We are blithely assured that "To minimise compliance costs for businesses IRD would build an easy on-line tool that allows a business owner to estimate the value of their business. Individuals who have significant interests in a business could opt out of using this tool and provide their own independently audited business valuations if they prefer."

The policy could undermine what the Greens want to achieve on climate change.

Farmers' co-operation is vital if New Zealand's greenhouse gas emissions are to fall. These days farmers often feel underappreciated and put-upon. An annual wealth tax kicking in above a $1 million threshold and doubling above $2m would not go down well.

Officials pointed out to the Cullen review that wealth taxes, in the dwindling number of jurisdictions which levy one, are normally based on the net wealth of households rather than individuals.

The Greens say that on their version, couples who own their assets jointly would only start paying the tax if they jointly have over $2m in net wealth, such as a $2m house. A minefield of potential complexity lies there.

The Reserve Bank data reminds us that the lion's share of households' net wealth is housing.

Full credit to the Greens for putting up a tax policy - but it isn't the answer. Photo / File

On the principle of broad base, low rate, the Greens' wealth tax would apply to owner-occupied housing. In this it differs from the capital gains tax recommended by the Cullen tax review, whose terms of reference — for obvious political reasons — excluded a tax on the family home.

Owner-occupied housing is the most tax advantaged asset class. But it is included in the tax base for local authority rates, raising the issue of double taxation.

As for those who are asset-rich but cash-poor, "Some people particularly retired people, may have a high-value home but only modest income. These people will be able to defer payment of the net wealth tax until the home is sold, just as many councils already allow with rates relief." Another potential area of double taxation arises from the inclusion of retirement savings vehicles like KiwiSaver in the calculation of whether someone's net wealth reaches the $1m threshold at which the wealth tax would kick in.

It would only compound the disincentives the tax system already imposes for retirement saving. The taxed-taxed-exempt treatment, introduced by Sir Roger Douglas more than 30 years and only slightly mitigated by the tax treatment of KiwiSaver, has contributed to a business sector which is capital shallow and over-reliant on bank financing, with poor productivity and accordingly low incomes. Making that bad situation worse would be perverse.

In addition to the wealth tax, the Greens also propose two new brackets in the income tax scale: 37 per cent for incomes over $100,000 and 42 per cent for incomes over $150,000. They reckon that would raise $1.3b in the 2021/22 year.

The Treasury reports that in the tax year just passed, there were 219,000 people whose taxable income was in the $100,000-$150,00 range, 6 per cent of all taxpayers, and that they contributed 18 per cent of the income tax take.

Another 122,000 people earned $150,000-plus and the $8.7b they paid was 24 per cent of the income tax take.