Thomas Coughlan: Taxes on wealthy coming? You betcha

Revenue Minister David Parker wants to start a debate on tax policy. Photo / Mark Mitchell

OPINION:

You might remember Chekhov's dictum about rifles and plays: don't have one onstage unless you plan to have it fired by the final curtain.

The rule is true for politics too. Rarely do MPs, Ministers or parties midwife an idea into the world without having some notion for what they want to do with it.

The gunpowdery whiff of Chekhov's rifle hung in the air on Tuesday when Revenue Minister David Parker lectured on the principles of tax, and his research on unfairness of the tax system: specifically the fact that ordinary income and wage earners pay a whole lot more tax than the very wealthy, who earn income from other sources.

While Parker very much wandered on to the stage bearing the tax equivalent of that expectant rifle, he's asked us to believe he might not ever fire it: "The Government is not secretly working on new taxes," he said.

That will be true on point of technicality. The Government is not planning to use whatever data Parker's expedition turns up to cook up new taxes.

He has been saying as much since the research was funded in last year's budget, but that does not mean the research will not be used to curry public opinion for a new tax at the next election.

Parker, an experienced MP of two decades' vintage, is not the poor type of player that struts and frets his hour upon the stage and then is heard no more. No sir. It's reasonable to believe this tax research will make its way into the tax code, it's precisely when and how Parker will pull the trigger that's the question.

The most obvious conclusion for this research is for Labour, as distinct from the Labour Government, rolling its findings into its revenue policy at the 2023 election.

French economist Thomas Piketty, for whom Parker nurses an almost boyish passion (and who he name-checked twice in the speech) proposed one possible tax in his book Capital in the 21st Century, the Ur-text on modern inequality.

Piketty's idea was a tax of 1 and 2 per cent on large fortunes, and it's reasonable to believe this would be a logical conclusion to Parker's tax research.

Parker's problem is that this relatively simple tax is precisely what he will not be able to take to the 2023 election. The Greens' 2020 manifesto included something similar and National's resulting conniptions prompted Jacinda Ardern to rule out ever implementing one while Prime Minister.

Indeed, Ardern has ruled out the other logical tax on the wealthy, a capital gains tax.

This doesn't take wealth taxes off the table completely, but it makes the job more difficult. The Government's interest-deductibility rules and bright line extension were a useful way of taxing property owners without violating the letter of Ardern's promise.

National Party leader Christopher Luxon has proposed a suite of tax cuts. Photo / Alex Burton

Ardern's rule-outs have created problems of a different kind. The bright-line test and interest deductibility changes have already fallen foul of two of the tax principles Parker outlined on Tuesday. They have created distortions, giving people incentives to hold or sell property at uneconomic times to avoid a tax liability, and they treat people in the same economic position differently, depending on when they purchased their home and how long they have lived in it.

Taking this further, Labour could find itself heading to the election with an overcooked and incoherent melange of rule-outs, carve-outs, and hand-outs as a revenue policy in order to appease Ardern's various rule-outs.

Labour must also grapple with the problem that caused the wealth tax to fall to the rule-out in 2020: its lack of coalition partners to the centre. With no credible coalition partners to the centre, Labour is vulnerable to the charge that Green and Te Pāti Māori policy will become part of whatever government Ardern leads.

A Labour-Green-Te Pāti Māori formation would be almost unprecedented in New Zealand. Not since 1999 has a party formed a government without any partners to its centre. Parties to the right will no-doubt be keen to sketch out what this Government looks like - and how much it might levy in tax.

The Government is already looking at multiple charges and levies which National and Act will brand "taxes", if they have not done so already: there's levy-funded social insurance, possible congestion charging, and whatever water charging mechanism the new Three Waters entities come up with. Yesterday, the Government announced consultation on what will probably become a levy-funded managed retreat mechanism.

This looks like electoral poison: a handful of levies and charges, plus a likely wealth tax.

But perhaps not.

Parker's Tuesday speech offered up unlikely praise for former finance minister Bill English's "master class in the politics of changing the tax mix" when he sold an increase in GST and cuts to income tax as a "tax switch" in 2010.

Parker also called this "switch" a misrepresentation, which is perhaps why Labour avoided similar tactics with its 2019 attempt at a Capital Gains Tax, despite the fact the Tax Working Group's terms of reference committed it to recommending no taxes that would raise substantially more revenue than was already being collected.

The argument Labour is making for its unemployment, managed retreat and water charges is that they'll save the tax and ratepayers over the long run.

Unemployment, climate, and water charges are already born by central and local Government. In the case of unemployment insurance, Finance Minister Grant Robertson has argued the scheme will simply pre-fund a more efficient and cost-effective form of economic support than what was cobbled together during the pandemic. Likewise Climate Change Minister James Shaw told media yesterday the Government was already picking up the tab for climate change adaptation - the policy out for consultation simply asks questions of whether it should defray those costs more fairly (on to property owners, for example).

Parker's tax research fits into this narrative because its findings will likely show that New Zealand's wealthiest aren't paying their share of the tax. This makes it easy to argue that not only are New Zealand's strained public services in need of dedicated funding, but the very people who should be paying proportionately more into those services, have been paying proportionately less than most people.

The findings would bolster National's argument that the "squeezed middle" are squeezed because they're paying too much tax - but only because, in Parker's terms, the top aren't being squeezed hard enough.

If Parker really is serious that English led a "master class" in tax politics in 2010, it's not difficult to imagine Labour heading to the 2023 election with a middle-class income tax cut, paid for by a switch and squeeze on the wealthy.

National could find itself in difficulty if Labour were able to propose income tax cuts that could at least hold a candle to their own. National will need more than $3b to pay for its tax cuts, half of which will go to people on middle incomes. It's not difficult to see Labour looking at ways of funding smaller, but similar middle-income tax cuts by rinsing the rich a bit more.

Such a policy would further emphasise the amount of money the party is planning to throw at cutting the 39 per cent threshold - something leader Christopher Luxon is struggling to make a case for, and is already softening his language around.

Labour has booby-trapped the 39 per cent rate by placing the threshold of the tax so high that only the top 3 per cent of income earners pay it. Last time National repealed the 39 per cent rate, fiscal drag meant the number of people ensnared by the 39 per cent rate was in the low double digits, roughly four times more than today. The tax rate may be the same, the threshold very much is not.

National should recall that this is still a very centrist Labour Party. It can try to shift the political focus to Labour's left, but it might find that Labour's focus remains fixed on the centre.