Big read: Tax dodging is hurting the poor and destroying capitalism

By Bruce Munro

Think tax is boring? It is the front line of the battle for the future of New Zealand, says political economist Brian Roper. He talks to Bruce Munro about research revealing the war he says big business is waging against ordinary Kiwis.
Companies and lobby groups in New Zealand have taken the United States lead in creating favourable tax conditions for high-earning companies. Photo / iStock
Companies and lobby groups in New Zealand have taken the United States lead in creating favourable tax conditions for high-earning companies. Photo / iStock

Robert Muldoon telephoned David Lange when it was clear he had lost the general election.

''Congratulations, Mr Lange. I've got some bad news for you tomorrow'', the defeated prime minister said, hanging up before Mr Lange could reply.

It was the evening of Saturday, July 14, 1984. New Zealand was standing on the edge of a precipice.

The economic boom years of the 1950s and 1960s were long gone.

A tightly regulated economy was failing to thrive.

Militant trade unionists were at loggerheads with intractable employers.

A wage and price freeze had been in place for two years in an attempt to tackle high rates of inflation and unemployment.

The country was on the verge of defaulting on its overseas debts.

Into this storm walked 41-year-old prime minister-elect Mr Lange.

''I believed in our capacity to do good,'' he said of that heady time.

Mr Lange devalued the dollar by 20%. He convened an economic summit attended by all the big players and many interest groups.

And he worked with his cabinet to develop what, at the time of the election, was only a half-formed economic policy.

That blueprint for the economy was not made public until Finance Minister Roger Douglas delivered the Budget, in November.

Observing the process was Margaret Pope, Mr Lange's speechwriter, lover and later his second wife.

Ms Pope noted the influence of Treasury on the Labour finance minister's increasingly right-leaning economic views.

But Treasury advisers and Mr Douglas were not the only voices, she said in her 2011 biography.

''Any number of factors coloured its [Cabinet's] decision-making - the ability and interests of its members, official advice, the advocacy of the finance ministers, the leanings of senior ministers, the prime minister's chairmanship, the mood of the moment or the last poll result - but no outsider could accurately gauge their influence,'' Ms Pope wrote.

One influential voice she did not cite was that of big business.

In July, within days of the election, a grouping of the country's leading business sectors had written to the incoming prime minister with their vision for a new economic model.

The Top Tier Group

Assoc Prof Brian Roper knows it happened.

In 1989, while conducting research for his PhD thesis, the University of Otago political economist was given a copy of the letter.

It was addressed to Mr Lange and signed by the presidents of Federated Farmers, the Chambers of Commerce, the Employers Federation, the Manufacturers Federation and the Retailers Federation.

Collectively calling themselves the ''Top Tier Group'', they advocated for a radical restructuring of New Zealand's economy.

Their prescription included a focus on reducing inflation and keeping it low, increased labour market flexibility, increasing competition throughout the economy, removing regulation that was not business-friendly and big cuts to company tax and to income tax paid by high earners.

The revenue the Government lost through its tax cuts could be made up by reducing government spending and introducing more indirect taxation.

The November budget, and the economic plan that underpinned it, was a show-stopper.

It would change New Zealand almost beyond recognition.

''It was more than a step into the future. It was a leap, a bound - a plunge,'' Ms Pope recalled.

The Government's economic plan read like a page from the Top Tier Group's playbook, Prof Roper says.

''What is so fascinating,'' Prof Roper says, ''Is here we have a letter from the heads of five of what at the time were New Zealand's largest and most significant business groups all advocating a particular policy framework, which the Fourth Labour Government then proceeded to implement.''

The only bits they did not fully embrace were a thorough overhaul of employment relations and redesigning the welfare state.

''Both of which the following National Government got stuck into with the Employment Contracts Act and the Mother of All Budgets.''

The significance of that event three decades ago, is that it was not a one-off case of business getting its own way, Prof Roper says. Instead, he argues, it is part of a long-term strategy to bend economic policy to the advantage of business; a strategy which has hurt many ordinary people and which continues unchecked today.

Prof Roper is a researcher, a Marxist and a keen outdoors man. He is also a prolific collector.

His medium-sized office on the fourth floor of the University of Otago's 1960s Arts Building on the edge of campus seems smaller than it really is.

That is because three walls and a chunk of the floor space is crammed with archival material continuously collected during the decades of his academic career.

He is probably New Zealand's foremost authority on government lobbying by business from the late 1960s to the present day.

Brian Roper says big business is waging a war on ordinary Kiwis. Photo / Peter McIntosh / ODT
Brian Roper says big business is waging a war on ordinary Kiwis. Photo / Peter McIntosh / ODT

And his collection of industry magazines, press releases by business groups, submissions to parliamentary select committees, industry policy statements and the like is undoubtedly the largest such personally held archive in the country.

During the past three decades, many business organisations have lobbied government for the introduction, and then the extension, of roughly the same economic policies.

From the mid-1980s to the new millennium, the leading force was the Business Roundtable, which, according to its publicity material assiduously collected by Prof Roper, had been formed during the 1970s to ''represent most of the large business interests in New Zealand''.

It more effectively gained the Government's ear when the former assistant secretary to the Treasury, Roger Kerr, became its executive director in 1986.

The Business Roundtable consistently argued for reducing the size of the State, market and trade liberalisation, massive reductions in social spending, weakening trade unions, privatising education and health and hands-off environmental policy.

In 2012, the Business Roundtable and the New Zealand Institute merged to form the New Zealand Initiative.

''To put it simply, from the early 1980s onwards, business lobby groups started lobbying really hard for a shift towards a neoliberal policy regime and towards taking the progressiveness out of the taxation system,'' Prof Roper says.

''They've lobbied really hard for a reduction in the top marginal rate of income tax, a reduction in the rate of company tax, the introduction of GST and its increase. They've lobbied really hard against capital gains tax.

''The upshot is that business absolutely has got the taxation regime it wanted.''

What it has gifted New Zealand, is a sharp increase in the gap between rich and poor.

How the other 99% live

During the six years after the new regime was introduced, the amount of money people had left over after they had paid their taxes and paid for necessities such as housing, food and power steadily declined for all New Zealanders except those on the highest incomes.

For those in the top 10%, whose income tax rate was halved by the Government (with the lost revenue made up by taxing everyone, including the poorest, for all goods and services, including fresh food and power) their share of the country's total disposable income grew by 28%.

''Over the years there has been a lot of angst about welfare reform. But in actual fact, the major driver of the increase in socio-economic inequality in New Zealand has been the changes to the taxation regime,'' Prof Roper says.

Kirk Hope does not agree. He is chief executive of Business New Zealand, the country's biggest and most influential business lobby group, representing 76,000 employers and businesses, including 80 of the country's biggest companies.

The Business NZ website says its Major Companies Group ''helps ensure that New Zealand's largest companies are heard in policy, business and economic debate.''

Mr Hope believes the type of economic system we have, and the tax policy it demands, is not the problem. Far from it.

''What we are looking for ... The perspective that Business New Zealand has, goes back to the first comment I made,'' he says.

''If business is done well - and it needs to be done well - that helps New Zealanders' prosperity and it helps New Zealanders reach their potential.''

No system is perfect, but it is indisputable that the system we have is ''doing the job it was set up to do'', Mr Hope says.

He points to the latest survey examining quality of life in 38 Organisation for Economic Co-operation and Development (OECD) countries, including New Zealand.

''New Zealand is in the top 10 of the OECD. So, I suspect that the things we are doing, we're doing pretty well,'' he adds.

He also mentions the wealth redistribution that takes place. For example, 40% of New Zealanders get more in benefits and top-ups from the State than they pay in tax.

Among that number will be the poorest New Zealanders, either out of work or trying to cobble together an income from multiple minimum-wage jobs.

The growth in their numbers has the same OECD report ranking New Zealand 20th in terms of social equality and 28th for work-life balance.

And figures released last week by Statistics New Zealand show inequality is increasing.

The top 10% now owns 60% of New Zealand's wealth - five percentage points more than in 2010 - while that bottom 40% of households have just 3% of total wealth.

Rounding out the picture, figures obtained from Statistics New Zealand by the Otago Daily Times show it is still only the richest who are seeing increases in disposable income.

Between 2007 and 2015, the percentage of personal disposable income fell for all but the bottom and top income groups.

The top 10% of earners now get more than 33% of the total ''spending money'' (up 4.2%), while those who earn the least remain on zero.

In fact, during 2011, the poorest 10% lost more money overall than they received, dropping into negative figures before rebounding to zero disposable income last year.

A growing number of establishment voices, including some among the ultra-wealthy, are warning that this level of inequality is economically as well as socially dangerous.

In January, at the World Economic Forum, a gathering of the world's wealthy, in Davos, Switzerland, a panel of experts told the audience that inequality was one of the key threats facing the global economy.

The OECD and International Monetary Fund have also warned that concentrating money in fewer pockets, which has reduced consumer demand and fuelled household debt, has been a key cause of slow economic growth during the past two decades.

''Essentially, we have a taxation system that gives ample opportunities for high income-earners and corporations to work the system in a way that isn't possible for the overwhelming majority of wage and salary earners,'' Mr Roper says.

''They are advocating tax changes that benefit a very small percentage of the population, very high income earners and corporations, while at the same time (compared to a more progressive taxation regime) disadvantage low and middle income earners.''

He says it is no surprise that New Zealand has been shown in a bad light by the Panama Papers revelations about international tax havens.

Last week, an official report by former PwC chairman John Shewan on New Zealand's foreign trust regime said this country was not a tax haven but that existing disclosure rules around foreign trusts were ''inadequate'' and ''light-handed''.

Mr Roper says New Zealand's wealthiest individuals and largest corporations have been aggressively pursuing tax avoidance for the past 30 years.

''This is not the exception, or unusual. This is the norm,'' Mr Roper says, ''And what is most annoying is that some of these individuals ... have been outspoken critics of the welfare state, arguing welfare support for the poor and disadvantaged should be cut, or benefit fraud should be a major focus of government. It's outrageous.''

Recently published research by Victoria University shows welfare fraudsters are 10 times more likely to be prosecuted than tax evaders; and that despite the fact that tax evasion is estimated to cost the country $1billion a year, compared to $30million for welfare fraud.

Big business lobbying for the economic framework most advantageous to itself is not just a New Zealand phenomenon, Prof Roper says.

''Globally there was a shift in thinking by business leaders and their associations. They were also funding right-wing think-tanks which, among other things, were highly critical of progressive taxation and started to advocate a shift in tax policy.''

The solution to New Zealand's growing divide between rich and poor, Mr Roper says, is major changes to the taxation system.

''We have a situation where beneficiaries are having to pay 15% tax on food for their children, while at the same time New Zealand's richest individuals are not paying any tax at all on their capital gains. It is appalling.''

He advocates a more progressive taxation regime, i.e. paying more tax the more you earn; reducing GST and removing it from household necessities such as fresh food and electricity; and taxes on land, capital gains and financial transactions.

''That would lead to a very substantial reduction in inequality in New Zealand.''

But could it happen? Not in the present environment, he says.

''I don't think people understand clearly enough the extent to which business has got the taxation regime it wants, nor the extent to which it wants to take things further.''

Business lobbyists want further substantial reductions in the top marginal rate of income tax and in the rate of tax paid on company profits.

In the long term, they want these to be funded through substantial cuts in social spending, he says.

''If you look at the New Zealand Initiative, which is the successor to the Business Roundtable, they want government expenditure reduced to 20% of GDP or lower, which would be the lowest level percentage in the OECD. That could only be achieved through the decimation of New Zealand's welfare state.

''There is no end-point to their demands.''

His comments are reminiscent of Mr Lange's in his memoir My Life, published shortly before he died in 2005.

Mr Lange said he had thought the economic reforms promoted by Treasury and Mr Douglas were an emergency response to the dire economic circumstances.

''It was only towards the latter part of 1986 that I formed the opinion,'' Mr Lange wrote ''confirmed beyond all doubt the following year, that there was an unbending element in the views of Treasury and its minister which was more like religious belief than professional practice.''

Mr Roper sees a growing tension between the path business and government continue to tread and the increasing hardship low and middle income earners are experiencing.

In the wake of the Global Financial Crisis, governments in many countries are telling their citizens they face generation-long ''fiscal austerity'' - that is, more of the same - to reduce debt.

''When I'm talking to my students I say, 'You are 18 now. This programme of fiscal austerity might be over when you are in your 30s.' Their eyes widen,'' he says.

He thinks it is going to reach breaking point before then.

''The political sustainability of maintaining a policy regime that has benefited a small minority of wealthy individuals while the majority of people on low to middle incomes have seen their real incomes either not go up or decline during the past 30 years; I mean, how sustainable is that? My personal view is that it isn't. But we'll just have to wait and see.''

Billionaires exemplify power of money

Nowhere is government lobbying by business more rife than in the United States.

No example of its power is more compelling than that of the Koch brothers.

Charles and David Koch, now in their 70s, are multi-billionaire businessmen and the leaders of Koch Industries.

Investigative journalist Jane Mayer, of The New Yorker, has researched the enormous influence the brothers have had on American politics and legislation.

Her book on the subject, Dark Money, was published in January.

Speaking on Radio New Zealand National this week, Ms Mayer said the Koch brothers had been "unearthed for having laid a 40-year plan to really change the direction of American politics''.

They have brought together a group of 400 extremely wealthy people who, during the current US elections alone, will spend $US889 million to promote their aims.

"They are complete free-market zealots who are anti-tax, anti-regulation, and pretty much anti-government,'' Ms Mayer said of the brothers.

"They aren't just spending money on candidates. They have put hundreds of millions of dollars into free-market programmes in universities. They have think-tanks in every state that they help fund ... They have a huge amount of influence over Congress on how they vote, particularly on environmental issues.''

They are both problem and symptom, Ms Mayer said.

Differing views on solutions

Christine Lagarde fears Marx is right.

The head of the International Monetary Fund has expressed the fear that capitalism may, as the father of communism put it, carry "seeds of its own destruction''.

During the past two years, speaking to gatherings of the super-rich, including the World Economic Forum, in Switzerland, in January, Ms Lagarde has been warning about the potentially harmful consequences of economic policies that perpetuate the widening gap between rich and poor.

The growing tension that creates is illustrated by two young New Zealanders who share a common interest in our economic system but have irreconcilable views on what needs to be done.

Morgan Godfery (24) is a Wellington-based writer and trade union strategist with First Union.

He grew up in the industrial heartland of Kawerau, in the central North Island, and graduated with a law degree from Victoria University at the end of last year.

New Zealand needs something more than business as usual or the tweaking of a couple of policies, Mr Godfery says.

His vision is for a New Zealand "that returns to the values of fairness and egalitarianism''.

"To be honest, that goal drives nearly everything I do in the public sphere,'' he says.

"And I think that's true for an increasing number of New Zealanders of my generation.''

Jenesa Jeram is a year older than Mr Godfery. She grew up in Auckland but studied politics and economics at the University of Otago, even taking one of Assoc Prof Brian Roper's papers, before getting work in Wellington as a policy analyst with business think-tank the New Zealand Initiative.

Most of Miss Jeram's work is in the area of social policy.

The concept of economic freedom is important to her.

Economic freedom involves clearly defined property rights, a strong legal system, freedom to trade internationally, and little government obstruction, she explains.

A change she favours is the introduction of social impact bonds, allowing private investors, rather than government, to fund social programmes and be paid a return if the social outcomes are met.

"I'm one of the lucky ones who works in an area I'm personally interested in,'' she says.

"We have the opportunity to get our ideas out there and influence public debate and hopefully even bring about policy change.''

The Government has given the green light to piloting social bonds in New Zealand.

- Otago Daily Times

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