Occasionally something in politics really surprises you. Like when I turned over to Campbell Live last night (I’d seen the Family Guy episode too often) and there was Gareth Morgan proposing a guaranteed minimum income funded by a comprehensive capital tax. Guaranteed minimum income/negative income tax is hardly a new idea (I’ve been meaning to write about it myself) but a commentator of Morgan’s calibre suggesting it opens up the possibility of a real national debate on it as an option.
Morgan suggests every taxpayer gets $10,000 from the government. Every additional dollar you earn gets taxed at 25%, and so does corporate and trust income. The guaranteed minimum income is paid for by a tax on capital (note, not just capital gains, all the value of capital). Morgan wouldn’t limit that to land, it would include buildings and plant (and, presumably, financial capital too).
Personally, I think it’s better not to tax at least commercial buildings and plant because they’re productive. You would probably want the capital tax to cover financial capital too, otherwise your dairy farmers get hammered and your Rob Fyfes just get an income tax cut. Maybe there’s problems with taxing financial capital I haven’t thought of.
There’s no reason the income tax couldn’t still be progressive too, although the case for it is weakened. And you would want to make Kiwisaver compulsory at a reasonably high rate (eg 9% like in Aussie) so that people on lower incomes don’t just spend their increased disposable incomes on Chinese imports and you increase the capital pool in the country.
Secondly, there are very high marginal tax rates for some people that discourage work. No, I’m not talking the 38% rate or the family with a parent earning over $70,000 who get Working for Families, meaning the parent has a marginal tax rate of 58%. I mean people coming off benefits. If you’re coming off a benefit you face a marginal tax rate of at least 82.5% – that makes getting a low-paid, part-time job not worth the effort. With guaranteed minimum income as suggested by Morgan (which largely replaces benefits and WFF) everyone faces a marginal tax rate of 25%. The welfare trap is eliminated.
Thirdly, because everyone gets $10,000 minimum, the worst poverty is eliminated. No-one falls through the cracks. A person working full time on the minimum wage would see their net income go from $20,500 a year to $28,400.
You don’t need an unemployment benefit under this scheme and the sickness, invalids, DPB, and superannuation benefits could be reduced by $10,000 because everyone gets $10,000 already. In fact, you get $10,000 whether or not you try to get work, which actually raises a far more real ‘moral hazard’ (ie. bludging) issue than the unemployment benefit does.
There’s a strong moral argument in favour of a payment to every adult funded principally by a levy on land ownership. There’s only so much land. Thomas Paine argued that those owning land had effectively expropriated it from everyone else and a universal payment was compensation for “loss of his or her natural inheritance, by the introduction of the system of landed property”. A similar argument is advanced by the Georgists. Henry George saw that landowners are rentiers, getting wealth gain merely for owning land when it is actually human labour that generates wealth not the land in itself. As the value of land is increased by other activities, human labour constructing and utilising capital, the owner of land does not have any right to that added wealth just because they own the land – it has not being earned by the act of landownership itself.
These arguments can be extended to any natural resource of which there is a set amount or a limited amount that can sustainably be used (eg greenhouse gas emissions).
Leftwingers like the fairness aspect, the elimination of poverty, and taxing wealth, not work (although Marx thought it was an attempt to save capitalism dressed as socialism). Righties (including Milton Friedman) like the efficiency, no deadweight loss, and low marginal tax rates. So politically palpable for all, except vested interests who hold the bulk of the country’s wealth.
Using the income data IRD has just made available, I estimate that Morgan’s guaranteed income and 25% tax would cost $5 billion more than the $25 billion raised now in income tax. The corporate and trust rate cuts would cost another billion. Most government welfare spending would be eliminated and would save about $10 billion. That would leave about $20 billion a year for a capital tax to cover. The non-government land in New Zealand is worth about $460 billion, the built capital another $550 billion, bank and non-bank deposits total $345 billion, and stockmarket capitalisation is $59 billion. A tax of less than 1.5% would be enough. (update: Morgan’s numbers are a 1.25% tax on $1,500 billion of capital to cover a $19 billion hole created by the guaranteed minimum wage and 25% income tax)
Of course, there’s no free lunch here. It’s about changing how we’re taxed as much as who is taxed. If you own a home, you would find your income tax goes way down but you’re paying out money on the value of your property.
But there would be a major redistribution of wealth from those few who own most of the country’s wealth to the majority who have next to nothing. And it would discourage people from owning land merely for the capital gain, encouraging investment in productive capital instead.
There are obviously devils in the detail that would have to be worked out but in general a guaranteed minimum income/wealth tax is an excellent idea. Now, which party will be courageous enough to promote it?