Labour is promising a new top tax rate of 39 per cent for people earning more than $180,000 a year – a tax which will only affect 2 per cent of New Zealanders.
The new tax would impact those earning $200,000 a year roughly $23 a week – $1200 a year – but would generate up to $500 million a year.
COMMENT:
Labour's tax policy might be a political winner but it does not shift the dial on New Zealand's economic challenges in the post-Covid world.
Based on Budget projections the Crown will borrow an additional $100 billion in the next three years to cover Covid costs.
The new top taxrate of 39 per cent on income above $180,000 is expected to raise $550m a year.
It would take more than 180 years to pay off the new debt with this new revenue.
That's not to dismiss the extra money - which could help fund housing and hospitals and schools.
But it is just half the extra $1.1b in tax that the Crown would get from legalising cannabis, according to a report released today by economic think tank BERL.
In this perspective, and against the billions being borrowed, it highlights how far this move is from a transformational policy.
"It's symbolic," says Professor Craig Elliffe from the University of Auckland Faculty of Law.
It was a case of doing something that would likely appeal to some of the voting base, he said.
"But I think it's a shame because it's just not dealing with the major issues."
Elliffe was a member of Tax Working Group which last year recommended that a capital gains tax was the most efficient way to grow the country's tax base.
It was estimated that would have raised more than $8b across the first five years.
The proposal was rejected by the Government with Prime Minister Jacinda Ardern ruling out any capital gains tax while she was in power.
With an ageing population and less public appetite for spending cuts, Elliffe has argued that a more radical tax policy was needed - even before the Covid crisis began.
He remains an advocate of some form of property tax - pointing out that New Zealand is the only country in the OECD that does not have one.
Ultimately there are only three meaningful ways to deal with Crown debt: raise more tax revenue, cut spending or grow the economy more rapidly.
The third option - which relies on GDP growing faster than debt and reducing its relative size - remains the preferred option for both major political parties.
But it is easy to promise greater productivity and economic growth, it is harder to deliver.
The last National Government achieved it largely via an immigration boom with some help from strong tourism and dairy export growth.
These options are now limited by the pandemic.
Tweaks to personal income tax rates won't do anything to boost economic productivity, Elliffe says.
In fact, they may make it worse because they will see time and resources diverted to what the experts like to call "tax planning" and the rest of us call tax avoidance.
Professor Craig Elliffe. Photo / Chris Gorman
The wide gap between the new top tax rate at 39 per cent and the corporate tax rate would likely be sufficient to see a significant increase in tax planning, Elliffe said.
"The tax planning industry - for want of a better word - will be rubbing their hands together with joy because it will result in additional work as people use trusts or corporate entities to divert their income."
That was an issue the tax working group had worked hard to avoid, he said.
"It is a shame. All we are doing is taxing a small group of relatively highly taxed people in the population and we're continuing to ignore the elephant in the room."
The only other policy signalled by Labour for this campaign was a commitment to implementing a Digital Services Tax (DST) - targeting big tech companies like Facebook and Google - if the OECD does not reach agreement on a multilateral plan for taxing them.
That could bring in an extra $30-$80 million a year.
Elliffe said New Zealand shouldn't be fearful of implementing its own DST, if the OECD could not reach an agreement, as 37 other countries were already doing the same thing.
