Liam Dann: Life’s not fair - does our tax system have to be?

The Lion King’s Scar has been teaching our kids for the latest 30 years that life isn't always fair. Photo / Disney

OPINION:

“Life’s not fair, is it,” as The Lion King’s Scar has been teaching our kids for the latest 30 years, with his villainous opening line in the 1994 Disney blockbuster.

Spoiler alert, things don’t end well for Scar.

As I recall, Scar starts out advocating free market libertarianism but ends up overtaxing his population into financial ruin - such is often the case with authoritarian regimes.

King Simba returns to save the day and it turns out good government does enable us to make life a bit fairer than it is in the wild.

At least, I think that’s what The Lion King was all about.

I haven’t seen it in about a decade. But there were a few years, when my children were small, during which I must have watched it about 100 times.

Obviously, they don’t let the story get bogged down in the complexities of various taxation regimes.

Last week’s tax debate would have been greatly improved by Elton John leading spontaneous musical numbers every time things got a bit dry.

Anyway, that line from The Lion King came to mind as I pondered the idea of fairness this week.

Our increasingly centrist Government allowed Revenue Minister David Parker free rein to indulge in some old-school rich-baiting, after the release of the IRD and Treasury tax reports.

Rich-listers weren’t happy, with one complaining that the presentation made them look like “criminals”.

National leaders Christopher Luxon and Nicola Willis seemed to hedge their bets a bit. Luxon argued the current system was already “broadly fair”.

Willis blamed the unfairness on big capital gains the rich made off the back of Covid stimulus - for which she blamed Labour.

It was left to Act leader David Seymour to fly the neo-liberal economic flag and bluntly state the facts of life in a Scar-like fashion.

“You can’t tax your way to prosperity,” Seymour said (quoting Winston Churchill).

Life isn’t fair and you do have to create wealth before you can spend it.

Both Scar and Seymour are right.

There are some simple rules that tax regimes should follow. Being fair is one of them, but it isn’t top of the list.

The first thing a tax regime has to do is generate enough revenue to run a functional government and stable society - so we can generate more wealth and exercise some economic choices (such as trying to make life fairer).

If you make fairness the most important part of the tax system, you run the risk of making everyone equally poor together.

I’m not a hardcore neo-liberal.

But I think it is worth considering the Laffer Curve and the notion of “trickle-down economics”.

It’s long been recognised that if you tax people too much, they become less productive - even in ancient times, kings noticed that starving workers weren’t at their best.

But in the 1970s, an economist called Arthur Laffer quantified it all with a curve which plotted economic growth on a curve, with 100 per cent taxation at one end and zero taxation at the other.

He argued you could actually boost economic growth by cutting taxes - i.e. that the optimum point for growth was at the low tax end of the curve.

The idea took hold and underpinned the thinking of Reagonomics (and Rogernomics in New Zealand).

The idea has been hotly disputed in mainstream economics, and Laffer’s low tax arguments are broadly out of favour - but I don’t think that the curve itself is wrong.

We’re just still arguing about where the optimal point on it is.

I do think tax can be used to incentivise pathways for capital that are good for society and disincentivise ones that are bad.

The reason for a capital gains tax shouldn’t just be fairness, it should be to enhance the productive end of the economy and shift investment away from passive wealth - like property.

I think our opportunity to implement a broad capital gains tax has sailed, for this generation at least.

If the plans proposed by the Michael Cullen Tax Working Group in 2018 had been put in place, the timing would have been very good.

Former Labour Finance Minister Micheal Cullen, pictured in 2008, responds to National's election tax policy announcement. Photo / NZME

The tax would only have been applied to realised gains from April 2021.

So the way things have played out with the Covid stimulus boom and bust - almost no one would have had any capital gains to pay on anything yet.

We’ve had a long gentle lead into the new system.

Anyway, there is still scope for revenue-neutral tweaks to make the system fairer. I hope both major parties make some.

How about some inflation-adjusted bracket creep at the lower end to throw $50 or so a week back to low-income workers?

That could be offset with tweaks to the brackets above $100,000 and $150,000.

I’d like to see GST removed from fresh fruit and vegetables. Balance that one up with a sugar tax.

Critics have said it’s too hard and there’ll be arguments about food categories. That seems a weak excuse for not doing things.

Stats NZ has a food price index with baskets of all sorts of food categories - just start there.

And let’s see some lower taxes in areas that will encourage the kind of business investment that will turbo-charge the economy.

More generous breaks for R&D, for depreciation of capital investments, that kind of thing.

Ugh... depreciation! The trouble with tax talk is that it does all get a bit dry. Might be time for that musical number.

Hakuna Matata!