The tax plan to change capitalism

:  Finance Minister Grant Robertson with Revenue Minister Stuart Nash announcing Sir Michael Cullen's appointment to head the Tax Working Group
 

Grant Robertson's Tax Working Group, unveiled yesterday, may have a prosaic sounding name, but its ultimate goal will be to rewrite what Labour stands for.

And to achieve its aim to make the tax system, fairer it will be targeting the rich.

That it is to be chaired by Sir Michael Cullen is an indication of how important Labour regards it.

Cullen is one of Labour’s most beloved and admired figures.

Though his politics tend to the centre, he also believes that the 1999 – 2008 Clark Government left some unfinished business.

But couple his thorough grounding in Labour history and his experience as the longest serving Minister of Finance since Sir Robert Muldoon and he ranks as someone uniquely qualified to give Robertson’s Working Group a chance to be something more than a simple technical tax committee.

At a Fabian Society seminar to look back at the Clark Government last year, Cullen talked about capitalism.

“The question is whether we can change it in a way that is beneficial rather than hog tying it so it doesn’t work very effectively,” he said.

He believes that the tax system is fundamental to changing capitalism and that is fundamental to what Labour stands for.

“I think we  (the Clark Government) could have gone further on tax.

“We tied ourselves into a promise only to increase the top tax rate – nothing else.

"And in retrospect, that was a foolish promise to make because there are other things we should have done.”

At the same seminar, Labour's former finance spokesperson and these days Trade Minister and all-round policy advisor to Jacinda Ardern, David Parker addressed the same issues.

“The thing that we didn’t get right as a government and is still not right is that we don’t allocate capital to the right parts of the economy," he said.

“We put too much of it into speculative asset classes.”

He said the top 10 per cent of households owned 50% of the assets in the country and the top one per cent didn’t pay tax.”

A 2010 study supported by Treasury, Inland Revenue and then-Finance Minister Bill English and carried out by Victoria University found that the current tax structure provided opportunities for individuals to significantly alter their taxable income and the amount of tax that they paid.

“For example, out of an Inland Revenue sample of 100 of the highest wealth individuals in New Zealand, data indicates that only about half are paying the highest marginal tax rate on their income,” it found.

Parker was the author of Labour’s capital gains tax which the party took into the 2014 election and which Andrew Little said was one of the reasons they lost when he became leader after that election.

So now that Little is no longer leader it was not surprising yesterday that Robertson should define the overall goal of the Tax Working Group as being to design a fairer tax system and that he would emphasise its political nature. 

That approach opens up a wide range of possiblities -- most notably a capital gains tax.

“I think a lot of New Zealanders wanted us to look at the balance of the system,” he said.

“Those people who are wage and salary earners who do look across the driveway at somebody who is selling their third or fourth rental property and not paying tax on the capital gain from that.

“So I think New Zealanders want to see a better and fairer balance in the system."

Robertson said that one outcome of the review could be that it was revenue neutral.

“We are not setting out on this process to increase or grab revenue.

“We are setting out on this proves to get a fairer and more balanced system.”

In other words, the aim of the Tax Working Group is as much political as economic.

Robertson's announcement yesterday was welcomed by the Combined Trade Unions (CTU).

"Like many countries around the world, the increasing concentration of wealth in the hands of the super-rich has seen a groundswell of public support to re-examine whether the rules in New Zealand are fair," CTU President Richard Wagstaff said.

"The announcement of the Tax Working Group today is the first step towards opening the conversation around whether those who have benefited from the hard work of New Zealanders are doing their fair share. “

A somewhat more limited view came from the Public Service Association who said they were disappointed because Robertson had pre-empted the Working Group by ruling out any increase in income tax.

That rather missed the point. This Working Group is all about fairness.

And it  is summed up in the Working Group's Terms of reference setting out what it is required to report on:

 

  • Whether the tax system operates fairly in relation to taxpayers, income, assets and wealth
  • Whether the tax system promotes the right balance between supporting the productive economy and the speculative economy
  • Whether there are changes to the tax system which would make it more fair, balanced and efficient, and
  • Whether there are other changes which would support the integrity of the income tax system, having regard to the interaction of the systems for taxing companies, trusts, and individuals.

Robertson has asked the Group to report on some specific taxation areas:

  • Whether a system of taxing capital gains or land (not applying to the family home or the land under it), or other housing tax measures, would improve the tax system.
  • Whether a progressive company tax (with a lower rate for small companies) would improve the tax system and the business environment, and
  • What role the taxation system can play in delivering positive environmental and ecological outcomes, especially over the longer term.

The last point --- on positive environmental outcomes --- is the first indication that the Government might be open to a carbon tax at some point in the future. In July the Productivity Commission reported that the current Emissions Trading Scheme was seen by many as ineffective in transitioning New Zealand to a low emissions economy.

Robertson plans to have the final Working Group report delivered to him by February 2019 – in time for the Government to draft and pass legislation which it will take into the 2020 election to be implemented in 2021.

But the political rhetoric around the eventual conclusions will be just as important as the tax law proposals.

Clearly, this is Labour positioning itself to pitch as the “fair go” party.

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