PM Chris Hipkins' economic focus will not be on extracting more tax from wealthy ageing moguls, but increasing productivity from young workers
Analysis: No new capital gains tax. No new wealth tax. No new cyclone levy.
That's the key message Prime Minister Chris Hipkins delivered to Auckland business leaders today, in an unusually economically focused keynote speech to foreshadow next month’s Budget.
It's his take on the famous pledge, "read my lips – no new taxes".
READ MORE: * A taxing exercise for NZ’s wealthiest 0.01 percent * How to make NZ’s tax system fairer
That famous six-word pledge was delivered by presidential candidate George HW Bush to the 1988 Republican Convention; two years later, forced by law to cut the bulging US federal deficit, he broke his promise.
Hipkins told gathered Employers and Manufacturers Association members that yesterday's Inland Revenue report highlighted gaps in the tax treatment of the income generated off their assets. "But I want to be crystal clear with you today: the Government will not introduce any major tax changes like a wealth tax or capital gains tax in this Budget.
Similarly, the costs of the floods and cyclone recovery – which he said Treasury had estimated to be $9 to $14.5 billion – would be largely met within the Budget’s operating and capital allowances. “There will be no new tax everyone would have had to pay, like a cyclone levy, to fund the recovery,” he said.
Unlike Bush, and unlike Jacinda Ardern, Hipkins won’t make the mistake of constraining his entire premiership. There will be no new taxes in this year’s Budget – but going into the election campaign, Labour will lay out its tax plans for if it’s re-elected.
Those aren’t yet decided. They will be influenced by the inflation figures. They’ll be influenced by the extent to which the cyclone and floods rebuild stimulates or depresses the economy. They will be influenced by the realpolitik of the campaign to regain the Treasury benches in October.
It may well be that, like his predecessor, Hipkins will be forced to give a more enduring and categorical assurance to give Labour a chance at a third term. That would be a high price to pay for power.
What we learned from yesterday’s Inland Revenue report is that the effective tax rate paid by New Zealand’s 311 wealthiest households was less than half that paid by median income households, once working for families and other tax breaks were taken into account.
Perhaps, though, the economic and political climate will be sufficiently benign for Hipkins to deliver the tax policy he believes in, rather than the tax policy that’s forced on him.
If so, what might he consider?
Taxing wealth
There is quite a number of options.
The somewhat cruel imposition of death duties was abolished in New Zealand in 1992. (Actually, the legislation wasn't repealed; instead the rate of tax was simply moved from 40 percent to zero.)
Withers Tsang accounting partner Mark Withers tells Newsroom that death duties were a particularly cruel tax, given the tax was payable in cash but the wealth being taxed was often tied up in assts like property or the family farm.
He remembers, as a junior clerk, watching the panic as a client faced the reality of a terminal diagnosis and the family had to find the death duty money, in their grief. "The impacts of death duties were so significant much effort was spent protecting assets in trust and ensuring gifting of wealth to them was managed over time."
Despite yesterday's Inland Revenue report revealing 11 very large inheritances in the 311 wealthy families it interrogated, there's little appetite to reintroduce an inheritance tax.
A recurrent wealth tax, despite the arguments of the Greens, is a solution that is going out of favour around the world. It would be difficult for Inland Revenue to apply fairly.
But if neither a wealth tax nor a capital gains tax is a goer this election, what might be left? There is quiet talk of raising the tax on trust income as an uncomplicated change to New Zealand’s taxation regime
A capital gains tax on secondary properties and other investments would be practical and principled, but the very phrase has become tarred in repeated political campaigns.
Moreover, the return on the political investment looks increasingly dubious; already those who buy shares or property with the (subjective) intent of selling them can theoretically be taxed on their gains; so too, the 10-year bright-line property rule is in effect imposing a capital gains tax on an increasing proportion of rental property sales.
It's surprising, says Withers, that the bright-line rule focuses exclusively on taxing gains realised in the residential property sector. "There seems to be virtually no focus on taxing speculative gains on stocks and shares traded," he says. "Perhaps the Government's focus before introducing new wealth taxes should be on ensuring fairer enforcement of tax on speculative gains already being made across the asset classes."
A tax-free threshold has been championed by some experts, such as the tax consultant Terry Baucher. In Australia, income up to NZ$20,000 a year is not taxed. It’s similar in the UK and France.
In New Zealand, a $14,000 tax-free threshold would give workers an extra $1,470 a year – but would come at a cost to Crown revenues of $4.7 billion. It could only be achieved by a switcheroo, simultaneously imposing a new tax on the wealthy.
But if neither a wealth tax nor a capital gains tax is a goer this election, what might be left? There is quiet talk of raising the tax on trust income as an uncomplicated change to New Zealand’s taxation regime.
"Recent changes to trust laws have seen some Kiwis abandoning the protection their trust provided them," Withers says. "One thing that has remained consistent for many years is the trust income tax rate at 33 percent, but one wonders how long this will last with income taxes now at 39 percent for individuals earning over $180,000, given that wealthy individuals tend to hold income earning assets in trusts."
Baker Tilly Staples Rodway tax director Andrew Dickeson says the fact two thirds of the richest families use trusts indicates there is scope for action.
And at interest.co.nz, Baucher agrees the trust tax rate be increased from 33 percent to to 39 percent, in alignment with the top individual tax rate. Australia, the UK and the US align trust and individual rates, he says.
That does, of course, raise the question: why is the Government not moving those tax brackets in response to rising incomes and cost of living? At an added $10 billion, bracket creep is a more effective revenue collection tool than any new tax.
If the Government's concern about the tax regime is genuinely about treating middle-income wage-earners and wealthy property owners fairly, then adjusting the income tax brackets would help narrow the disparity.
For this Budget, the Prime Minister will tell his ministers and public service chiefs they must live within their means. That doesn’t mean an austerity Budget, but it is expected to be unusually tight for an election year. The focus will be on rebuilding.
Skills and infrastructure
Chris Hipkins' economic focus today was not on extracting more tax from the wealthy ageing moguls, but extracting greater productivity from energetic young workers.
Hipkins worked for industry training organisations before entering politics. He will argue that developing a skilled workforce should be the focus in enhancing New Zealand's productivity – not new taxes. Not yet, at least.
"As a former Education Minister it will be no surprise that skills is top of that list for me," he said.
This month the Government announced measures to support the teaching of maths and literacy, and boost teacher numbers. He indicated there would be more in the Budget.
"Education is the single biggest way that people can change their lives and outcomes. In New Zealand it has been the bedrock of our egalitarian society, the great equaliser providing the same opportunities to both rich and poor.
"I’m not sure that aspiration holds true these days to the same extent it once did, which is why investment in skills and trades training has been such a focus for the Government."
Infrastructure, too, would be a Budget priority.
The Government has boosted infrastructure investment to nearly $9b a year, and the Treasury estimated the investment from 2023 to 2027 would average more than $12.5 billion.
"Infrastructure will be a big focus in this year’s Budget not only due to the ongoing need to build hospitals and schools for a growing population, but also to rebuild and strengthen following Cyclone Gabrielle.
"While the primary focus will be on rebuilding the regions that have suffered the most, the cyclone has also made us more aware of risks in other parts of the country across our transport network – I bet that there will be more talk about culverts and Bailey Bridges over the next few months than this country has ever heard."
