Revenue Minister David Parker has previously poured cold water on tax rumours. Photo / Mark Mitchell
OPINION
On the second of May last year, then-Prime Minister Jacinda Ardern made an unusual flub whilst being interviewed on the AM Show.
Standing in the lobby of the Cordis hotel, rather than her usual weekly interview from the Beehive Theatrette, Ardern was pressed on her views on a wealth tax.
She refused to give a firm commitment not to introduce one beyond the 2023 election. Eagle-eyed viewers would have noticed this opened up a gap between her promise on a capital gains tax, which was never to implement one whilst leader of the Labour Party - and the fact that she made the same commitment regarding a wealth tax during the 2020 campaign.
Something appeared to have changed. Ardern was quite specific. No wealth tax this term, but after that... who knows?
Thanks to Wednesday’s Budget dump, we can now guess that Ardern was at that time considering possibilities for such a tax. She was true to her word, as of May, “we are doing no further work”.
But come 19 July of that year, ministers were receiving briefings on the revenue strategy for the next Budget, warning of how much money would be needed to fund the state, and where it might come from, including the idea of a wealth tax.
Those papers were wide-ranging - as they should be - but they were more wide-ranging than most.
They explained the economic rationale for Labour needing to look at a wealth tax and hint at the political reasons why they eventually decided to kill the idea.
The proposal, representing $10.6 billion worth of tax hikes and cuts, is perhaps the most progressive economic policy Labour has ever come close to implementing. The papers show ministers were still working on the policy in early April, considering phasing its implementation. At times, it approached the progressive boldness of the Green Party policy.
But by the time the Budget went to Cabinet on April 11, the policy was killed.
The economic issues that drove Labour to a wealth tax haven’t gone away. And Chris Hipkins’ decision to rule one out while he is leader of the Labour Party poses as many problems for him as it solves. Budget papers make this clear.
Budget papers from July 2022 spell out the bind that Labour and any government will find themselves in.
“Revenue growth, largely as a result of fiscal drag, has helped fund growing expenditure demands. It could continue to do so. However fiscal drag is likely to involve greater trade-offs, particularly distributional trade-offs, than it has in the past,” officials warned.
Put simply, the increased costs of the state - costs that are increasing fast thanks to inflation - have been funded by inflation dragging people into higher tax brackets.
Every government has learned to live with this. They bask in an increased tax take for a few years before eventually resetting the tax brackets in the form of a tax cut, resetting the clock for another cycle of fiscal drag.
Treasury’s assessment is that the time for this reset may be now - and that it’s unrealistic to continue relying on this drag to fund the state. Back in 2010, less than 25 per cent of taxpayers had income taxed in the $48,000 bracket. By 2021, more than 40 per cent did.
On July 19, Treasury offered ministers a choice: “We could explore new or specifically expanded tax bases. For example, taxing capital gains, land, or greater use of corrective taxes and user charges”.
It appears ministers took up Treasury’s offer, along with an offer to look at aligning other tax rates, from which the policy of lifting the trust rate from 33 to 39 per cent emerged.
This may have led the Government to consider adjusting the tax brackets, giving people an effective tax cut.
But other advice makes clear why this wasn’t an option. A deteriorating economy was putting pressure on tax revenue, making it difficult to cut taxes without also cutting spending. In November, Robertson was warned that “under central forecasts and projections, over the medium term, it may be challenging for the Government to maintain operating surpluses and achieve its OBEGAL [the Crown’s operating balance before gains and losses] fiscal rule” - put simply: it meant the economic position threatened the Government’s promise to get back to surplus.
The Budget papers show that not one, but two distinct forms of wealth tax were considered by the Government. The first was something called a “minimum tax”, and seems to have survived for as long as Jacinda Ardern was leader. Shortly after Hipkins took over in 2023, things moved on to a “net wealth tax”.
This appears on the agenda in November when Treasury and the IRD asked ministers whether this was the track they were comfortably going down.
Ministers gave it three priorities: first, to raise revenue, second, to be distributional in that it would tax those “with high ability to pay”, and finally, that it would address “uneven taxation... How high-wealth individuals can have relatively light taxation” (primarily due to the non-taxation of most capital gains).
A 50-page paper from December 13 sets out how that would work.
Essentially, people who are wealthy are suspected to pay a lower rate of tax on their income than ordinary people, who earn most of their income from salary and wages (this was confirmed in April of this year in an IRD research paper).
What the “minimum tax” would have done would have compared someone’s ordinary taxable income - the income they actually paid tax on, and their “deemed income” - a calculation of that person’s actual income, including income not currently subject to tax.
If a person’s “deemed income” was higher than their taxable income, then the minimum tax policy would make that person pay tax on that income... easier said than done of course, and hundreds of Treasury and IRD papers spell this out: angsting over trusts, wealth held overseas, transferring assets to children, and other assorted tax minimisation ploys.
Treasury warned this idea was novel.
“Under a minimum tax regime, a person with high wealth pays tax on the greater amount of either their ‘deemed income’ (calculated as a percentage of their net worth) or the taxable income they have under existing income tax rules,” the paper said.
“Only four OECD countries have taxes based on net wealth, and none of these are minimum taxes. This is a reduction from 12 countries in 1990. Part of the reason for the repeal of these types of taxes has been due to efficiency and administrative cost concerns, compared with the little revenue they generate,” they said.
The tax would hit people with wealth of $5m or more, about 25,000 people representing 0.5 per cent of Kiwis, who hold about $300b in wealth - about 26 per cent of the total wealth in the country.
Officials even explored how many people might flee the country to avoid such a tax (as many as 8 per cent or 2,000).
This idea was what was on the cards as we headed to Christmas 2022.
By February 2 2023, Ardern had gone and Hipkins was in charge.
Officials were still working on a minimum tax, looking at ways it would treat farming (eventually it was decided not to exclude agriculture).
That changed in a matter of weeks, and on February 16, Robertson and Revenue Minister David Parker had instructed officials to work on a “net wealth tax” - a completely different way of taxing wealth.
Officials seemed to like the idea, saying it had “a number of benefits, and it will simplify the design and implementation process”, but warned it would be difficult to work up by Budget day.
The framing of the tax was the same: it would kick in at $5m.
The difference is that instead of working out what a person’s deemed income was, it would simply tax that person’s wealth at 1, 1.5, or 2 per cent (ministers eventually decided on 1.5 per cent).
Also in February, the Government - perhaps reflecting the new leadership of Hipkins - began seriously looking at very large packages of income tax relief.
This finally connected that first briefing of July 2022, warning that bracket creep could not be relied on for additional revenue, with the idea of actually resetting the clock on bracket creep by changing the tax brackets.
In 2022 the focus had been on avoiding bracket creep for additional revenue by implementing a wealth tax - what became more apparent in February 2023 was that this revenue could be used to address the bracket problem by giving every income earner a large tax cut.
Officials looked at four different options - one of which was essentially the same as what National currently offers, adjusting the income tax thresholds by about 10 per cent.
The idea that was seized upon was a $10,000 tax-free threshold, similar to what is offered in Australia and many other countries. Every dollar earned up to $10,000 would be completely untaxed. It would mean tax cuts for about four million people worth $1050 in almost all cases - $20 a week.
The politics of it were ideal for Labour - $1050 is more than anyone currently receives from National’s bracket adjustment policy. It came with a massive price tag - about $4b in its most expensive year, roughly double the cost of National’s bracket changes.
The cuts compared favourably even with Act’s rather more radical tax package, which offers cuts of $1,236 for the average income earner.
The tax cuts had the potential to blow National’s package out of the water, promising tax cuts National could simply not afford, but only because it raised the revenue for those cuts by slapping a tax on the super-rich, rather than cutting spending.
But as time dragged on towards the post-Easter Cabinet meeting on April 11 at which the Budget would be finalised, the tax proposals appear to have hit multiple snags.
Treasury warned they would discourage investment and risk-taking, noting in an earlier paper that they would reduce the effective rate of return from a “risky” investment to something akin to buying low-risk government bonds. Eroding the risk premium for innovative investment, Treasury warned, would harm the economy.
On the last day of March, the Government appeared to be getting cold feet and received advice on whether it would be possible to phase the implementation of the net wealth or have its implementation contingent on fiscal conditions.
“In practice, such a rule would mean that the intended start date of 1 April 2024 could be delayed in response to “economic conditions”.
But this raised fiscal sustainability problems. The tax was a “switch”: the tax cuts needed to be introduced close to the tax hikes, or risk blowing a multi-billion dollar hole in the Government’s books.
Treasury was also worried that giving tax cuts to millions would fuel inflation - and that this would not be offset by tax hikes on the rich who were more likely to have saved their now-taxed money rather than spent it.
Three proposals emerged for phasing the tax package. One accounting for $10.6b worth of tax switches, was still on the table on April 4. But exactly a week later, on April 11, it was dead.
The challenging politics of wealth taxes was evident from the start.
On paper, they look brilliant. A tax cut for four million people, paid for by taxing 25,000 - a number so small they could barely win an electorate seat, let alone cross the 5 per cent threshold and enter Parliament.
Those benefit-cost numbers are the kind that many ministers would kill for.
But there are challenges too. The December paper warned the people in the gun were concentrated in the politically untouchable farming sector, representing just under 35 per cent of all fortunes over $5m.
This seems to have put Labour off - even though that figure is based on Household Economic Survey figures, which are next to useless when painting a picture of the 1 per cent of wealthy households.
If the Government had looked to its own High-Wealth Individuals tax research, published a few weeks after it had killed the tax (ministers received it before), they would have seen that fortunes over $50m tended to be clustered in the finance, professional services and real estate sectors (54 per cent), rather than farming (15 per cent).
Quite apart from that, the wealth tax policy is said to have focus-grouped incredibly poorly. It may have delivered tax cuts - but that did not appease voters.
It’s not clear whether killing the tax solves many problems for Hipkins. Labour’s base is likely to be demoralised, and National will make sure that every voter knows the Greens are saying that Hipkins is in no position to rule any such tax in or out, given he will almost certainly need their help to form a government.
He inhabits the worst of all worlds. Voters know Labour wants a wealth tax and they also know Labour is in no position to tell the Greens they can’t have one on current polling. The rule-out may have meant something when Labour’s party vote polling had a four in front of it, but not when it’s perilously close to crashing into the 20s.
Hipkins should remember that Green Party delegates must consent to any governing deal between Labour and the Greens - and if he thinks they care a jot about whether he remains leader of the Labour Party, he should consult the advice of his ministerial colleague James Shaw, whom those delegates unceremoniously ousted from the Green co-leadership last year.
The documents also show that Labour sees (or saw) the need for changes to personal income tax rates, something National, Act, and even the Greens have called for.
Robertson’s comments around whether this would be included in Labour’s imminent election tax policy were elusive.
His problem is that absent a wealth tax, he has very little way of finding the $4-ish billion dollars a year needed to pay for the tax-free threshold. Labour will probably offer tax relief of a kind, but it will struggle to offer anything like this package. We’ll know when it is released - possibly as soon as next week (no date has been confirmed as yet).
The documents amply prove National’s point that Labour “can’t be trusted” not to implement new taxes, but as always, there is a sting in the tale.
The documents show from the perspective of Treasury and the IRD how rather large tax cuts for millions of people could be paid for by slapping a tax on a tiny minority of New Zealanders.
Those calculations will hang in the political ether for years, haunting parties of the left and right alike.
Jobs data published this week came in at 12% of what economists expected.