Gareth Morgan

Gareth Morgan on the economy

Gareth Morgan and Susan Guthrie: Reviving values of an egalitarian society

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Speculative investment in high-value properties is a way of avoiding tax. Photo / Getty Images
Speculative investment in high-value properties is a way of avoiding tax. Photo / Getty Images

Rewriting tax policy would help ensure equal opportunity and choice for all, writes Gareth Morgan and Susan Guthrie, authors of The Big Kahuna - Turning Tax and Welfare in New Zealand on its Head, and economists at Gareth Morgan Investments.

Last week we looked at why our Welfare State has lost its way, sees fit to give families earning $100,000 per year a handout, stigmatises everyone (apart from the elderly) who receives a benefit as a loser, and regards those not in the paid workforce as non-existent.

Combine that reality with the ever-widening gap between the average wage and what those at the top of the paid workforce earn and you have a great recipe for alienating large tracts of the population - not just the poor but the majority who would never make it to the upper echelons of our white, middle class suburban nirvana.

Whether they be economic or social outcasts, outcasts they will remain - and that sows the seeds of widespread social unrest such as we have seen in Britain of late.

With close to 40 per cent of New Zealand adults receiving benefits now under our social assistance welfare model, it is obvious it doesn't live up to its promoters' billing of being a "hand up", in any way. It is an abject failure, an indictment of the tragedy of targeted welfare.

If egalitarian New Zealand is capable nowadays of reasserting the values upon which our society is founded, then priority needs to be given to providing all citizens with an equal opportunity to participate in wider society, to compete in the commercial world if that is their wont, or to contribute to society through the non-paid workforce that raises our children, cares for our elderly or is the foundation of our communities.

Taken together with the poor deployment of our capital (viz; overinvestment in property) we have produced an unattractive trio of low productivity, low growth in incomes, and increasing numbers becoming "eligible" for social assistance. With official policy now acknowledging that the minimum wage is no longer sufficient for many to live on you have to wonder how far from sustainable our policy settings have wandered.

A total rewrite of our taxation and transfer policies to correct the tax dodges available to owners of capital, to explicitly recognise the importance of non-paid work, and to foster equal opportunities for all citizens to participate in society and the wider economy, will go a long way to reasserting the values of egalitarian New Zealand.

In short, the following package addresses what is needed to get back on this path, while ensuring no blowout of government finances.

* An unconditional basic income (UBI) for every adult - $11,000 after tax, whether you're in the paid workforce or not. This enables more people to choose paid or unpaid work - or not to work at all. Most importantly more would be able to pursue what they want to do, rather than what financial penury forces them to do. We are a rich society so to compel people to opt for paid work or face the stigma of qualifying for a benefit has no logic.

* A single income tax rate of 30 per cent, which applies to every dollar earned whether by individuals, trusts or companies. Together with the $11,000 UBI this implies no tax is in effect paid until $36,667 is earned.

* Abolition of virtually all benefits including NZ Superannuation - they are no longer necessary. With the UBI people are being encouraged to make their own choices regarding their financial circumstances, there are no poverty traps from abatement rates on benefits conspiring with progressive income tax rates.

* A comprehensive capital tax (CCT) levied on an assumed return on real capital of 6 per cent per annum (government bond rate), this being the minimum return we should require on invested capital. Capital for these purposes includes all non-current assets on a balance sheet - so buildings, land, structures, plant and equipment, software, goodwill. It does not include financial claims (deposits or shares). Debt servicing is deductible and the CCT (rate = 30 per cent) is creditable against income tax. In other words businesses that earn more than 6 per cent on capital would not be affected by the CCT. What the CCT does is claw all low-performing capital into the tax net, hence encouraging owners to better deploy their capital.

* All property, including the family home is subject to the CCT. The family home is included partly because of the materiality of this asset class as a destination for speculators seeking capital gains. To the extent a house is purchased because of its potential return from speculation rather than merely for its ability to meet the housing requirements of inhabitants, it can be regarded as an inefficient allocation of capital and shouldn't receive tax favours (as it does now). Deploying excessive capital this way inhibits growth in GDP or incomes.

The policy package addresses the inefficient deployment of capital, it makes some recognition of the value of unpaid or voluntary work, and it gets rid of this awful concept of welfare benefits designed on the so-called "social assistance" principle. As our society has got richer, the numbers eligible for these benefits have grown inexorably, evidencing the total failure of this approach to transfers.

When you do the numbers of this package the cohorts that are hit are the asset rich-income poor, solo parents and superannuitants. Everyone else is better off. Let's deal with each.

* Asset rich-income poor folk are the most significant group of tax avoiders. If you have heaps of money it's quite easy to avoid tax in this country - you simply spread your wealth across a clutch of mansions or farms. You don't need to rent or farm them (the value is in the land not what you're doing on it). You just sit and wait for the speculative demand for property to raise their value. That speculation is fuelled by a central bank that instructs commercial banks to lend on property in preference to all other forms of lending, and by the tax break on capital gains. To bring this to an end is long overdue.

* Superannuitants receive the highest benefit of all, and form the benchmark advocates of other benefits aspire to. It is indecent that the rich "qualify" for NZ Superannuation given that the rest of the welfare system follows a "social assistance" framework . The UBI plus the CCT will restore equity to claims on the taxpayer and force superannuitants from their overpaid perch. Selling the $1 million house for an $800,000 one with $200,000 in the bank to pay the CCT is hardly a hardship. An ability for the elderly to defer the CCT (like a reverse mortgage) so the Government recovers it from their estate would cushion their adjustment.

* Solo parents. Here the fallacy of current policy is that it discourages solo parents adopting self-help strategies that could deliver a standard of living close to that enjoyed by two-parent families. The economies of scale from sharing housing in particular and the benefits of sharing caregiver responsibilities are obvious, but the DPB arguably discourages such rational adjustment. We note also that a $3000 per child UBI would be affordable if the single tax rate was 32 per cent rather than 30 per cent.

Overall then the package restores all the characteristics of an ideal tax and transfer regime - efficiency, equity, individual responsibility, and adequacy. But it does require the rich (rather than those on high declared incomes) to pay their fair share of tax, and it does compel two beneficiary cohorts (solo parents and superannuitants) to return to reality.

Labour has advocated a capital gains tax and exempted the family home - not a clever way to deal with the misallocation of capital and the biggest tax rort of them all. But at least it's trying. National's welfare policy was pathetic - a populist swipe at 1600 young people from dysfunctional homes, forced to live on the streets. The inequities and inefficiencies in our tax and transfer regime are not hard to address. But an educated public, knowledgeable of what the issues are and requiring of change, is a prerequisite for any political commitment emerging.

- NZ Herald

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