Bernard Hickey looks at the tax bludgers:
Tax avoidance, or tax minimisation in polite circles, has been the bane of our fiscal framework for the past decade.
What I find interesting is that we had a 66% tax rate until the late 1980s and tax avoidance doesn’t seem to have been a problem. What changed?
Labour’s introduction of the 39-cent tax rate was designed to shift some of the tax burden on to the wealthiest.
Instead, it helped create the biggest unintended consequence of the past decade. The boom in house prices from 2004 to 2008 was at least partially created by the imposition of this new tax rate.
An entire cohort of taxpayers spent years arranging their financial affairs to avoid the 39 cent rate. Often this involved creating family trusts or Loss Attributing Qualifying Companies to buy rental properties that made losses.
These losses were then claimed against regular incomes from salaries or wages.
I really wonder if LAQCs and trusts serve any legitimate purpose anymore or if they are nearly solely used for tax avoidance. I can’t be bothered finding out but I bet that back when the top rate was 66% LAQCs weren’t around and that’s one reason there wasn’t so much tax avoidance. If they aren’t being used for good reasons, should we get rid of them or replace them with something that does the job intended without being vehicles for bludgers?
In particular, the gap between the family trust rate of 33 cents and that 39-cent rate turned into a black hole for the Budget.
Many trusts were created simply to avoid the top rate.
That’s true. The 39% rate wasn’t a failure – it raised over $500 million a year but several hundred more was avoided and accountants and lawyers pocketed millions in the process, an artificial economy that saw money being expended on allowing rich people to be bludgers, rather than contributing anything to the national wealth.
National’s decision to remove the 39-cent tax rate was at least partly an admission that no matter how hard governments tried, the rich were able to structure their affairs to avoid that rate.
That might be the spin. But the truth is that National was just enriching the wealthy at everyone else’s expense, like it always does. Even if it is true that they wanted to eliminate the tax avoidance caused by the top rate, then they were just rewarding bludgers by legalising their bludging, and also giving a tax cut to all those who happily paid their fair share. An extremely inefficient case of throwing the baby out with the bathwater.
Legions of highly paid tax lawyers and accountants help the very rich avoid paying tax. There must be a solution. Transparency is the best form of disinfectant on this issue.
Norway has a long history of using such a disinfectant to keep its economy strong while being fair.
It publishes the net worth, income and tax paid of all taxpayers. It is controversial in Norway but it does mean there is nowhere to hide.
Property developers here who have never paid tax will be plain for all to see.
How would the tax avoiders feel if it was clear to their neighbours and relatives that they weren’t pulling their weight?
It would be one way to re-balance the debate and tackle an issue at the heart of New Zealand’s fiscal imbalances and social inequality.
Is there a politician brave enough to broach the subject?
The Greens? I don’t think public tax records would fly here but Hickey is right that there are solutions. We shouldn’t be stuck with simply saying either ‘tax avoidance is part of having a progressive tax rate’ or ‘lower the top tax rate to minimise tax bludging’. Other countries that are much wealthier than us, including Australia, have higher top tax rates and seem to get along just fine without a severe tax bludging problem. It’s loopholes in our system that allow it to occur. Reforming the two main vehicles for tax avoidance – LAQCs and trusts – must be the starting place.