Marty wrote on taxation expert Craig Elliffes opinion series in the Herald a few days ago. The third in the series wound up with statement at the end that exemplifies the major issue with the Tax Working Group and its process.
At the tax conference of the Tax Working Group, Susan St John of the University of Auckland questioned whether it was appropriate that the group had embraced the objective of aligning tax rates which aimed at improving efficiency while not making equity (the transfer of taxes to the needy and the poor) any worse.
She asked whether “is not making equity worse” an appropriate equity goal?
It was a poignant question. Maybe it would have been a good idea to have had a wider representation in this review group.
Perhaps someone other than a male earning over $100,000?
Craig, thank you for pointing out the basic flaw in the group makeup and focus. As well as the group ignored equity issues, many startup companies and talented people in the industries I’ve been associated with over the year would argue that many of the basic objectives and assumptions of the TWG are flawed.
As Craig points out the government is only interested in a basic fix.
It quickly emerged in the discussions at the Victoria University Tax Working Group that any recommended changes to the tax system would have to be revenue-neutral at least. The financial position of the government is such that any proposal that increases the budget deficit is unacceptable.
The main intent of the tax changes appears to be related to a precept from treasury. It looks like simply an article of faith at the treasury rather than anything supported by evidence at small changes in tax rates.
A reduction in personal rates will also assist in retaining and attracting highly mobile individuals and it is the view of Treasury that reducing business and personal taxation will increase productivity and the growth of the economy.
From my experience around innovative businesses and the people that work in them, that is utter bullshit. In NZ the major reason people leave is because of either a hankering for travel when they are younger. The best immediate way of getting productivity is to be able to invest money into productivity improving systems and technology. To get long term productivity gains you need
The reason that they don’t return, or older more experienced people leave is the same – lack of an appropriate opportunity to work further in their fields of expertise. The main reason that we don’t have the types of innovative businesses around that can employ them and which they can grow their skills in is the incredible constraints on getting working and development capital. Virtually all major capital in NZ gets sucked into the safer property market rather than into productive businesses.
The capital available for startup businesses, especially the ones working on export markets, comes at such a cost that it amounts to giving away your business to the capital provider and working as an employee to them.
Highly mobile people with talents move away from NZ because they cannot find opportunities to work in NZ. Personal tax rates seldom have much of an impact. Virtually everywhere else that our people go to, the effective tax rates are higher once you add in all of the taxes and account for the reductions in services and the prices to get them.
This is clearly the case for Australia, the UK, and for much of US, which are the major locations of the kiwi diaspora. What is different in these markets is that the market is larger, it is usually easier to get capital at a reasonable rate, and there are more interesting smaller startup companies to work for.
It is clear from the proposed likely changes that the impacts will effectively shift the burden of tax from the more affluent in society to the less affluent. This may be in the form of increased GST or increased rents. This is the essence of Susan St Johns argument.
It also does little or nothing to increase the amount and availability of startup capital in NZ. While we are currently getting an influx of returning kiwis due to the global recession. We will continue to bleed talent as soon as the global recession starts weakening because there aren’t the small startups here to soak up our talent.
The results of this look at tax, assuming that the government takes up the ideas will probably be an effective shift of taxation from the affluent to the less affluent, partially concealed in higher rents. But there will be no significant change in anything productive for the economy. Structurally we will probably just see some tinkering at the edges and a lot of people who cannot afford it getting more costs lumped onto them.