ANALYSIS:
National's finance spokeswoman Nicola Willis described the Government's tax backdown as "Labour's day of shame" in the house.
Shame might be over-egging it - but it's certainly highly embarrassing. Indeed, Minister of Revenue and Associate Minister of Finance David Parker admitted it was embarrassing on his way into the debating chamber.
Less than 24 hours after news broke that the Government was taxing KiwiSaver and managed fund fees, the Government announced it would make a U-turn and drop the policy following a serious public backlash.
When Willis sought to interrogate Finance Minister Grant Robertson on the backdown in the House, leader of the House Chris Hipkins intervened, noting the matter was outside Robertson's portfolio - a marginal call, as Parker had, minutes earlier, said both Robertson and himself had been involved in the backdown.
Parker said the backdown was the decision of "[him]self and the Minister of Finance, as was the decision to put them in in the first place".
On any ordinary day, Robertson, never shy of taking questions, would have answered Willis' questions for the sport of it. On Wednesday, he let Hipkins have Willis divert her question line. The symbol was clear: the Government is getting behind the backdown to the point where it will not expend an ounce of energy defending the original proposal.
The policy's short life was a disaster from start to finish.
It wasn't announced, giving the appearance it was being introduced by stealth, and the Government didn't seem to understand that people would be upset at a tax on their retirement savings.
This is no small tax. It would hit three million people with KiwiSaver accounts, 15 times more than the 200,000-odd hit by Labour's top tax rate or investment property changes.
People were understandably worried. The day the tax change was introduced to Parliament, research was published showing that in less than 30 years the number of retirees who own their own homes will drop from 80 to 60 per cent. A growing number of New Zealanders are worried about security from the housing crisis in retirement. You can forgive people for getting upset that the Government tried to hurt their best efforts to get ahead of its own housing crisis.
Labour actually gets this. Announcing the U-turn, they mounted an offensive manoeuvre pointing to the Key government's decision to axe KiwiSaver subsidies, which would have hit balances. Ministers would rightly question where that judgment was at Cabinet the day before.
Parker and ministers knew people were interested in the policy before Cabinet on Monday because the Herald asked him about it.
The Herald explicitly asked Parker about the proposals ahead of the Cabinet meeting. He didn't discuss them at that time - apparently because the official decision had yet to be made. Why this didn't raise flags that people would be interested in the scheme is beyond us.
The best argument against the Government's political management is actually made by government ministers themselves.
Parker feels the tax was misrepresented as a tax on KiwiSaver rather than a tax on KiwiSaver fees, pointing to a headline in the Herald which focused on the $103 billion value that KiwiSaver balances would be reduced by, rather than focusing on the fact the tax hit KiwiSaver fees.
It's an interesting question.
The tax levies a charge on KiwiSaver fees, which are charged on KiwiSaver funds. The money used to pay the tax would have come from KiwiSaver funds, but via the fees they charge.
The tax is not a tax directly on KiwiSaver funds (despite the Government's accusation, no one has described it thus), but the money the Government planned to take would have come from funds nonetheless, and the Government's own regulator argued the tax would have made those funds smaller. So it's not a tax on funds - but, it's also not not a tax on funds.
Parker, having read this in the policy's Regulatory Impact Assessment should have been prepared that people would be worried the Government was coming for their savings because that's exactly what they were told by their regulator.
The other area of concern for the Government was the decision to focus on the amount the tax would cost savers, rather than the amount it would earn.
Parker and the Government look at the definition of tax as how much revenue it received ($225 million a year - rising by 10 per cent a year, twice the rate of overall GST revenue, which rises by about 5 per cent a year after 2026, when the tax takes effect.
Unsurprisingly, the Herald and many commentators chose to examine the policy from how much it would cost people rather than how much the tax would earn the Government.
The David Parker of April this year appears to have understood this better than the Parker of Tuesday.
In his famous tax speech of earlier this year, Parker lauded former finance minister Bill English who himself managed to sell an increase in GST as a "tax switch" because he cut income tax at the same time.
Parker said that while he did not agree with the "switch" concept, "the way he carried that debate was a master class in the politics of changing the tax mix".
The switch worked because it argued people would be no worse off under the proposals.
By contrast, this tax did not work because it took thousands of dollars from vulnerable, renting retirees and the only reason the Government could give in favour of it was that it was more elegant from an accounting perspective. You can hardly blame savers for thinking that elegance was not worth $20,000.
Labour believes the way to make people's lives better is generally by using a larger and more muscular state. We saw the best of that during the pandemic.
At its worst, and the worst was on display this week, the party puts too much emphasis on increasing the size of the state, and neglects to ask itself what it's taxing people for. If no one can articulate a good reason for why the Government is taking citizens' money, can you really blame them for getting upset?
The other concern for the Government is the fact debate became dominated by the Financial Markets Authority's (FMA) projection the change would cost KiwiSavers $103b in lost savings by 2070 and managed fund users $83b.
Again - the Government should have been aware savers would care about the compounded effects of the change, because it used compound figures to sell its own changes to KiwiSaver policies in 2019.
Announcing a measure to "slash" fees, Robertson and then-Consumer Affairs Minister David Parker argued the changes would earn people $143,000 over 47 years of savings.
It's hardly surprising then, people were interested at what the FMA believed the scheme would cost savers over a 44-year timeframe.
Parker's only other defence for the policy, that it made the tax system is more fair is true if you look at KiwiSaver funds and managed funds, but it's not true if you look at the Gordian Knot that is the tax treatment of residential housing.
KiwiSaver is a form of saving that anyone - even people who aren't employed - can access. The barrier to entry for investment in residential property is a deposit of hundreds of thousands of dollars and often an income of more than $100,000.
Evening up the tax treatment of one of these forms of savings only makes the unevenness between them greater. If raising fees on the most egalitarian savings vehicle ignores the most unequal savings vehicle, then you can't really argue the policy is about fairness.
The David Parker of Wednesday seemed to understand this. Parker was asked if he agreed with people that residential property was treated unfairly from a tax perspective.
Walking into the House, he answered, "they'd be right - they'd be right on that, but we haven't got that fixed yet".
Will Labour get another chance to change the tax system?
The dust-up has apparently not dented Parker's standing in Cabinet, but Labour will face a difficult battle on tax.
Not only is increasing tax difficult at the best of times, but after committing not to introduce taxes beyond what it campaigned on at the 2020 election, Labour proceeded to break its promise in spirit if not letter, multiple times this term, most obviously in its extension of the bright line test, the removal of interest deductions for landlords, and now, on GST.
The party needs to regain the public's trust on tax.
It won't do that through stealth taxes on their savings.
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