Written By: - Date published: 2:41 pm, March 25th, 2019 - 46 comments
Categories: Amy Adams, capital gains, equality, greens, labour, national, tax, uncategorized - Tags: inequality, tax tax working group capital gains inequality income tax, tax tax working group capital gains inequality income tax amy adams
Since publication last month of the Tax Working Group’s final report, there has rightly been considerable comment on the unfairness of a tax system that lacks even a capital gains tax (CGT).
However, to me, the most significant comment of the 130-page report is that the expert group considers the introduction of a CGT as “likely to have (only) a minor impact on income inequality”.
“A material reduction in income inequality through the personal tax system would require broader income tax changes, including an increase in the top marginal tax rate,” the report states, adding that this was outside the group’s Terms of Reference – though quite why remains a mystery.
This in no way suggests that the introduction of CGT should not proceed – all 11 members unanimously agreed that such a tax should be introduced in some shape or form (the three minority members accepting that CGT should be introduced, but had qualms about complexity issues).
The report made a cogent and virtually unarguable case that it is absurdly unfair that income from capital gains is untaxed while all salary and wage income is taxed.
A tax system without a CGT “reduces the fairness of the system” as well as making it regressive because it benefits the wealthy who own the vast proportion of capital assets. This has the effect of “reducing the proportion of tax paid by the wealthiest members of our society”.
The absence of a CGT increased perceptions of unfairness in the tax system as well as reducing its integrity by creating opportunities for “tax minimisation” and avoidance.
The report’s analysis of our tax system highlights two important facts, which are not new, but are unequivocally laid out – that Aotearoa has one of the least progressive tax systems in the OECD and, partly as a result of that, we have one of the least equal societies among that club of wealthy nations.
An OECD 2014/15 graph in the report (Fig 3.3, pg 32) shows Aotearoa ranked eighth lowest among the 35 members in terms of reducing inequality via both taxes and transfers.
The report also notes Aotearoa has one of the lowest top marginal tax rates in the OECD and that high income earners pay only 31% of their total income in tax (and that excludes their tax-free capital gains), while the lowest quartile pay 23% of their income. That means someone on $200,000 would get $138,000 in the hand while someone on $40,000 would get $30,800.
However, suggesting higher taxes rates has become anathema to modern democracies because Right Wing, neoliberal lobby groups have been hugely successful, through the use of clever, emotional catch-cries like “nanny state” and “tax relief”, in arguing tax cuts are good for society.
If going to the electorate on a platform of introducing a CGT is assessed as fraught with risk, suggesting that there should be a higher marginal income tax rate might be deemed a death wish, despite it being clearly in the best interest of the vast majority of voters who would get better education, healthcare and welfare.
Similarly, if higher marginal rates are anathema, imagine what would happen to a government that re-introduced gift or estate duties. Yet these were the tools that in the past allowed us to have a more equal society that gave all a better, if not equal, opportunity. That equalising of opportunity allowed more people to achieve their potential and that, in turn, helped underpin Aotearoa’s economic strength.
I can already hear Amy-I-have-only-got-six-properties-not-eight-Adams screaming she has worked hard for her wealth. Still the question has to be asked: why should some people be given a huge advantage by having a wealthy parent?
Even with the modest proposals of the TWG, National and the Right have painted the TWG’s recommendations as a “monster” and “an attack on the Kiwi way of life”. This despite the report clearly stating that whichever package is adopted, it should aim to be essentially tax-neural – ie tax collected will be offset by personal income tax cuts for all.
In terms of reducing inequality, the report says that the best way to improve the lot of very low-income households is via welfare transfers – ie increasing benefits or family tax credits. To improve incomes for selected low and middle income groups, then changing tax rates is the better option.
The best way to increase the progressivity of personal income tax is to lift the tax-free threshold. Even without raising the top marginal rate, progressivity could be increased by increasing the second marginal rate paired with increases in the tax-free threshold, the report said. That would mean no increase in average tax rates for higher income earners.
That would seem a political non-starter because it would sock it to lower-middle income earners, the group that both Labour and National profess to appeal to.
In Australia, people pay a similar rate of tax as here until they earn $90,000. From $90,001 to $180,000 they pay 37% and on anything above that they pay 45%.
In the UK you pay 40% marginal tax from £46,351 to £150,000 and 45% on anything above that.
At the 2017 election the only party advocating a lift in marginal tax rates was the Green Party (disclosure: I worked for the Green’s last year and in 2014). Their proposal was a 40% rate on income over $150,000 – quite modest compared with the UK and Australia.
The evidence from TWG report is clear – we have an unfair, regressive tax system that doesn’t address inequality or equal opportunity issues.
It would be great if Labour went to the electorate in 2020 with something akin to the Green’s 2017 proposal. But in light of the howls of outrage at even the proposed CGT, and Labour’s apparent reluctance to go hard on this, I’m not holding my breath.
(Simon Louisson reported for The Wall Street Journal, AP Dow Jones Newswires, New Zealand Press Association and Reuters and briefly was a political and media adviser to the Green Party.)