Stuff: What's really going on behind the scenes of the latest tax battles?
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When you file your income tax return, or see the PAYE deductions from your salary, do you experience a gross breach of privacy? Nineteenth-century commentators thought so. Confronted with the then-novel demand to itemise his income to the state, one British critic labelled it an intolerable intrusion by “the pimply minions of Bureaucracy”. In New Zealand, the MP John Bryce argued that men would be tempted to file false returns – and, thus hardened to criminality, would pretty soon be turning to drink, hitting their wives and robbing banks.
All this was nonsense, of course. But it served to defend the well-off against a new levy and to buttress the belief that the contemporary system was fair.
Income taxes, of course, eventually won the day, and are now totally normal. This tells us two things. First, what counts as “commonsense” can change out of all recognition. The radical becomes respectable. And second, progress is often delayed, for a time, by people raising spurious objections.
Why is all this relevant now? Because those with vested interests and entrenched beliefs fear that change is in the air, and are mobilising against it.
Stoking their anguish is the much-trailed publication next week of an Inland Revenue report on the assets, incomes and taxes of New Zealand’s 400 wealthiest individuals. The research continues the agency’s long-standing interest in whether the wealthy play by the same rules as the rest of us.
Very often, of course, they don’t. Inland Revenue has had to carry out this research because the wealthy often refuse to fill out the statistical surveys which would otherwise yield this information, and which the rest of us readily answer. Officials also have a not-unreasonable suspicion that the wealthy are quite good at minimising their taxes.
One key issue is capital gains. If someone has a salary of $100,000 and also makes a capital gain of $100,000 selling an investment property, they pay $24,000 tax on the salary, but (often) nothing on the property sale. That means their total tax rate is $24,000 on $200,000 of income – just 12%, less than someone on the minimum wage.
This is the kind of thing Inland Revenue is investigating. But not everyone welcomes such scrutiny. A 200-page report published this week claimed to show, in the words of RNZ, that the tax system is “reasonably fair and equitable”. Written by consultants Sapere, the report partly bases its claims on “illustrative” examples of wealthy families who – conveniently enough – take hardly any of their income as capital gains.
Indeed, to claim that the current system works, one has to ignore all kinds of data. The 2019 Tax Working Group showed that, once GST is included, poorer families pay about the same rate of tax as middle-class ones – despite being evidently less able to afford it.
And at the upper end, tax rates almost certainly fall. In 2020, Treasury estimated that many wealthy New Zealanders pay a rate of less than 10%, partly because much of their income may be untaxed capital gains. Next week’s report is a more detailed attempt to answer the same question, but as it stands, the best estimate is that many millionaires pay a lower rate of tax than supermarket cashiers.
Yet the irony here is that those mobilising against tax reform – which now includes the chartered accountants’ association and the National Party – may have little to fear. Though they seem convinced the Inland Revenue report presages a capital gains tax (CGT), this is far from obvious.
In technical terms, a CGT is relatively straightforward: for all the hand-waving one hears about unintended consequences, the truth is that Australia, the US, the UK and nearly every developed country has introduced one without major issues. The problem, rather, is that the politics of tax is difficult at the best of times, let alone during a recession, and the government remains badly burnt by its last failure to implement a CGT.
The Inland Revenue report will, nonetheless, hand Labour a large dilemma: if, as expected, it shows very low tax rates at the top end, the government will either have to do something about it and face a massive political fight, or explicitly say it will do nothing to right the injustice its own research has identified.
The establishment would, of course, prefer inaction. Sapere, conveniently, warn that the mere act of researching top-end tax rates could create “a more uncertain environment for investment” if the well-off fear it foreshadows a CGT.
Democratic debate, in other words, should be constrained lest it harm established interests. Which would be convenient for the wealthy – for if there is one thing we can take from the nineteenth-century defeat of income tax’s opponents, it’s that bad ideas don’t stand up to scrutiny. But, as a corollary, the good ones eventually win out.