Bernard Hickey: Asking the rich to Goff up on tax

Phil Goff. Photo / Sarah Ivey

Labour leader Phil Goff's idea of a new higher tax rate on very high income earners has scratched at a scab in New Zealand's economic and political life.

Tax avoidance, or tax minimisation in polite circles, has been the bane of our fiscal framework for the past decade.

Labour's introduction of the 39-cent tax rate was designed to shift some of the tax burden on to the wealthiest.

Instead, it helped create the biggest unintended consequence of the past decade. The boom in house prices from 2004 to 2008 was at least partially created by the imposition of this new tax rate.

An entire cohort of taxpayers spent years arranging their financial affairs to avoid the 39 cent rate. Often this involved creating family trusts or Loss Attributing Qualifying Companies to buy rental properties that made losses.

These losses were then claimed against regular incomes from salaries or wages.

In particular, the gap between the family trust rate of 33 cents and that 39-cent rate turned into a black hole for the Budget. Many trusts were created simply to avoid the top rate.

National's decision to remove the 39-cent tax rate was at least partly an admission that no matter how hard governments tried, the rich were able to structure their affairs to avoid that rate.

Labour's plan to bring in a higher tax rate revived the debate again. Goff was cautious to avoid saying how much such a tax would raise and offered no solution to the problem of avoidance.

John Key was just as vocal in ridiculing Goff's call for a return to the future. He said such tax rates rarely collect much because high-income earners arrange their affairs quickly.

Key is right. Legions of highly paid tax lawyers and accountants help the very rich avoid paying tax. There must be a solution. Transparency is the best form of disinfectant on this issue.

Norway has a long history of using such a disinfectant to keep its economy strong while being fair.

It publishes the net worth, income and tax paid of all taxpayers. It is controversial in Norway but it does mean there is nowhere to hide.

Property developers here who have never paid tax will be plain for all to see.

How would the tax avoiders feel if it was clear to their neighbours and relatives that they weren't pulling their weight?

It would be one way to re-balance the debate and tackle an issue at the heart of New Zealand's fiscal imbalances and social inequality.

Is there a politician brave enough to broach the subject?