IRD will open the books on about 400 of the wealthiest New Zealanders and answer a question people here and overseas have been asking for decades: do they pay their fair share of tax? Video / NZ Herald
OPINION:
The Green Party’s proposed wealth tax plays to greed and envy. It blithely proposes that everyone can be lifted out of poverty by imposing a heavy wealth tax on a mere 0.7 per cent of the population.
What the supposed 0.7 per cent think about that is of noconsequence. Their views are apparently of zero value.
But why seek to fund the policy out of such a discriminatory tax? Why not fund it out of an increase in general taxation? Civil society can agree to that without predating on the very, very rich.
It seems as if the philosophy behind the wealth tax proposal is that it is fine for a political majority to tax or otherwise take property from a minority without compensation or consent. But such a philosophy is uncivil, with likely unintended consequences.
One of the unintended consequences is that the very, very rich and their capital are internationally mobile. They do not have to stay and be fleeced.
Taxing capital inevitably reduces its availability. That affects everyone. Less capital per worker means less productivity per worker. That means lower wages relative to prices.
That is why taxing capital is not a free lunch for workers, or anyone else.
The venerable benefit principle of taxation is not predatory. Under this principle, taxes are levied on those who will benefit from the spending their taxes fund. That does not preclude taxation by general consent to help those most in need, just as it does not preclude charitable donations from rich and poor alike.
Under the benefit principle, it is the benefit as assessed by those who pay that tax that counts. To seek their general consent respects their human dignity. Predation does not.
One problem with proposing a tax on the basis that it will only hurt a small minority is that once in place it is easy to increase the scope of the tax. The Green Party’s assertion that its tax will only affect 0.7 per cent looks problematic, right from the outset.
New Zealand Herald editorial cartoon by Daron Parton.
Figures obtained from Statistics New Zealand show that over 8 per cent of two-person households over the age of 65 have net assets in excess of $4 million. What then is the basis for asserting that it will only affect 0.7 per cent?
Moreover, it seems that the proposed 1.5 per cent annual wealth tax on trusts would apply to the first dollar of such wealth, not just to amounts above $4m.
The following illustrative example shows how penal the Green Party’s proposal is in principle towards retirement savings.
People build retirement savings out of tax-paid income. They pay tax again each year on the income from that saving. When they spend those savings after retiring, they pay GST on that spending. (Any increase in the rate of GST is essentially a wealth tax on retirement savings.)
To these three layers of tax, the Green Party would add a fourth, at a very penal rate.
Suppose someone holds their retirement savings in a government bond portfolio worth $1m and that the wealth tax will apply to this portfolio. Suppose it earns 5 per cent a year. That gives a modest taxable income of $50,000. If that is the person’s only taxable income, income tax would take $6800 under the Green Party’s proposed tax rates. Now add the wealth tax at 2.5 per cent. It would take half of the $50,000. The sum of these two taxes is $31,800 which is 64 per cent of pre-tax income.
This is still not the full picture. Suppose inflation is 2 per cent pa. This is effectively a 2 per cent tax on bondholders. It reduces the purchasing power of a $1m bond portfolio by $20,000 in a year. That loss is the government’s gain. The sum of these three taxes is now $51,800 a year – over 100 per cent of taxable income.
Now add GST at 15 per cent to the equation. If the individual spends $40,000 a year (GST exclusive) on consumer purchases and household maintenance, the GST component adds $6000, taking GST-inclusive spending to $46,000.
The upshot is that funding GST-exclusive spending of $40,000 costs this person $97,800 in the first year. They have to sell bonds each year to get the cash to pay the taxes, and inflation reduces the purchasing power of what is not sold. This person has no bond portfolio left from age 80 if they retire at age 65.
How might the Green Party respond to such critique? It might suggest deferring the wealth tax for cash flow reasons.
But the government would have to charge interest at a penal rate on the deferred taxes. Otherwise, no one would pay the tax and the Green Party would not get the $12 billion of revenue it wants in its first year.
Another response must be that it would only tax the very, very rich. That might be the unworthy intention, but it is unlikely to be the reality even at the outset, let alone in the fullness of time.
The bottom line is that sound tax principles are important. If the government wants more revenue, raising it by general taxation should be the default option.
Dr Bryce Wilkinson is a senior fellow at The New Zealand Initiative.
