“We’re not a high taxer, for a start,” Rashbrooke said.
“If we taxed at the rates of Germany or the Netherlands, our Government would have another $20 billion to $30b to fund public services better.”
What makes this even more disconcerting is that our tax system places a disproportionate onus on the poorest members of society.
“We have a GST tax that really hits hard on the poorest families and makes up a lot of the tax take overall, and the poorest families also pay tax on every cent they earn. So our tax system asks a lot of people at the lower end and, conversely, at the upper end, a huge amount of income in capital gains isn’t taxed at all. We also don’t have a wealth tax, and we don’t have inheritance or land taxes that are very common in other countries.”
Viewed in a vacuum where time sat still and none of the current market conditions changed at all, this would be fine. But that’s not how the world works. With every passing day, New Zealand’s population becomes a little older and a little more dependent on the tax revenue generated by those younger than them.
“We’ve got an ageing population and potentially fewer people who are earning regular salaries,” warns Rashbrooke.
“It’s going to get harder and harder to fund what we need our governments to do just through income tax. And it’s going to become more and more obvious that there’s this huge untaxed source of income and wealth … And that’s going to create a necessity for changing the tax system.”
As much as rich people like Elon Musk are single-handedly trying to repopulate Earth to stop the current rate of population decline, it’s becoming increasingly apparent that the maths simply won’t make sense in the not-so-distant future for many developed countries.
Super problem
New Zealand isn’t alone in this regard. We’ve seen the uncomfortable reality of these conversations boiling over on the streets of France, where politicians dared to raise the age of superannuation from 62 to 64.
Much like the debate about a capital gains tax, New Zealand will eventually have to come to terms with the reality that the current pension age (65) is not fit for purpose at a time when people are living longer and working until they’re older.
What’s most staggering about our superannuation system is how utterly untargeted it is, taking no account whatsoever of the personal circumstances of the New Zealanders receiving the money.
“Super is our biggest welfare system,” Sense Partners economist Shamubeel Eaqub told The Front Page earlier this year.
“And while universality is simple and it’s easy, the reality is it’s not targeted at all to those who need it. It’s extremely expensive. We are spending billions of dollars on welfare for the elderly who have not paid enough taxes for these services.”
Eaqub didn’t mince his words when explaining the concessions we make as a society to maintain this status quo.
“It’s outrageous that we have welfare for the well-heeled older people, but we penny-pinch when it comes to looking after those people who are truly poor and truly vulnerable, many of whom include children living in poverty.
“It’s an absolute outrage that we have a super system that’s kind and generous, and yet it’s paid for by a mean and stingy welfare policy.”
New Zealand is currently suffering from a state of dissonance between the country it wants to be and what it’s willing to pay for. It’s a bit like going to the dollar store and hoping to buy an authentic pair of Gucci loafers.
“We have expectations that we are going to have a society, welfare system, safety net and health system that’s Nordic in nature, but we don’t want to pay for it with Nordic taxes, which are more like 40 per cent of GDP,” says Eaqub.
“If we want to have a society that is well-knit together and looks after everyone, we are going to have to pay more taxes. We can’t square the circle where everyone wants low taxes and better services. It does not exist in any reality.”
The problem with the political system is that introducing new taxes is incredibly difficult, given there’s always an alternative willing to kick the can a little further down the road in exchange for public favour.
What this means is that government spending goes up year over year, decade over decade, but the revenue earned simply doesn’t track at the same rate.
In an excellent article published in his weekly newsletter, New York University Stern professor Scott Galloway used a colourful turn of phrase to describe this process in the United States.
“Politicians get elected by telling us we can have our cake and eat it, too,” Galloway wrote.
“The only thing that’s passed for bipartisanship over the past four decades is reckless spending. Democrats want more social spending, Republicans want lower taxes. Okay, let’s compromise – do both and f*** over our grandkids.”
Galloway concluded that, by clamping down on tax evasion and avoidance by the richest, the government could take some steps to plug the giant revenue hole.
Last week’s IRD report gave us our first glimpse of how the ultra-wealthy can limit the percentage of tax they pay on their actual incomes, paying about half the percentage paid by the average Kiwi.
As Galloway stressed, these people aren’t criminals in any way. “Tax avoidance is legal and, from the taxpayer’s perspective, I would argue it’s moral,” he said.
“The government is not a charity, and nobody should cough up taxes they aren’t legally obligated to pay, or the entire system loses its democratic footing. Prisoners of war have an obligation to try to escape; citizens of capitalist countries have an obligation to pay the lowest legal tax.”
What’s immoral, he argues, is a system that allows this to happen in the first place.
The onus now rests on governments to do something about it. And if they don’t, it pays to remember that the grandkids are the ones who will have to look after them one day.
