We need to recognise our risk to the capital flight risk of the 1%, but also recognise the benefit to the 99% of us.
So let’s say on October 16th 2023 a government is formed that implements this level of tax, and it all starts (for arguments sake) on the same week government is formed.
What’s likely to happen next?
Let’s start with people with not much and earn under $30,000 a year. All the 1.5 million New Zealanders on NZSuper and other benefits get a big injection of cash per week. Some stress comes off their lives. All things being equal (though they never ever are).
New Zealanders who don’t own $4million in assets (net of debt), and don’t earn over $180,000 a year – which is 99% of us – are fine. So long as our houses are rented out and any land we have is developed.
Those who are aspirant to $4million or aspirant to earning $180,000+ – say another 5% of us, may start to make different plans.
But here’s where the policy effects get tough. New Zealand has 8,500 people approximately with wealth over US$10m. Of that, currently 12 people have wealth of more than $500m.
Why should the 4.99 million of us care about them through these big tax policy changes?
Well the quick answer is they matter because they own the companies that employ us. Where they go, go our jobs. Now of course that doesn’t matter if you are one of the 1.4 million retired or on a benefit: under Greens and Maori Party you are already much better off.
A further 19% are employed in the public sector. Temptable elsewhere, but that’s true now not just on October 15th.
For those not in the public sector, that 8,500 people’s ownership matters a lot.
It might matter to those companies who liked our previous tax level and for whom 5% extra tax makes a difference.
But are we really vulnerable to capital flight caused by tax changes?
Our large companies have been increasingly foreign owned for decades. The state-owned entities NZSuperfund and ACC have grown their share of assets in New Zealand. But our largest companies are now headquartered overseas or at least have share registers dominated by non-New Zealanders.
In land, 56% is privately owned but only 3.3% of that is foreign owned. But it is concentrated at the top, with 6 of the 10 largest private landowners are foreign.
So the risk of capital flight about land ownership appears low.
But our companies are in total about 50% owned by foreigners. Figures compiled by Bill Rosenberg of the Campaign Against Foreign Control of Aotearoa show foreigners owned 47% of shares in firms back in 2016, the highest level since 2002 when it was 60%.
It is certainly the case that cross-border Merger and Acquisition activity in New Zealand almost always takes our scarce capital away from us where it’s needed, than bringing it back.
Companies based elsewhere who don’t want to pay an extra 5% in tax may decide to leave. Some of them anyway. Doesn’t mean the assets we need to service go down the tube, since some are very fixed here such as all ports, airports, power generators, dairy companies, corporate farms, wineries and breweries, sports teams, timber companies, meat companies, road and engineering companies, supermarkets, real estate, airlines, fishing companies, iwi companies, land developers, and … actually that most of the private companies employing over 50 people and generating salaries over $100,000 …. Hmmm that’s almost all spatially fixed capital … maybe the fear of capital flights isn’t as high then. Indeed for the most part we are both so foreign owned and so spatially bound that capital flight is a lessened risk.
Tax changes of 5% at the corporate level aren’t going to change that.
So who might leave with these tax changes? What banner headlines are we going to get on ZB of the NZHerald that “X Richlister says ‘will the last person to leave turn out the lights?’” arf arf.
Well the answer to capital flight risk is not really corporations.
It’s the specialists. Let’s set out those who have $4million or well over $180k of income who might look elsewhere:
It’s those of the 1% who chose to stay. Not even the Mr Darcy’s of this world decided to shift their capital holdings overseas. Sure they had Caribbean or colonial interests, and adventure was adventure, but home was home.
The risk of capital flight is real. It happened when France introduced a wealth tax in 1989.
For those who are at risk of moving – the specialists listed above – they are indispensable to us and they take over 20 years to replace. And those who seek to replace them will expect the same wealth accumulation the previous generation had.
There have been reports going back to 1967 on the desirability of taxing realised capital. It wasn’t just the Cullen Tax report of 2019.
The Ross Report of 1967 Taxation in New Zealand: Report of the Taxation Review Committee (Ross Report) concluded “the introduction of a realised capital gains tax is desirable on the grounds of equity provided the rates of tax are moderate”.
99% of us under Green and Maori Party tax proposals will be fine. Except that the 1% have a group among them that employ us and feed us and entertain us and perform surgery on us and fire our aspirations – and take about 20 years to replace if they leave.
How much attention ought we pay to that part of the 1%?