Damien Grant: Pressure to raise taxes misplaced

Opinion

One of the advantages of globalisation is the free movement of skilled labour and capital. This places pressure on nations to become competitive in their tax structures.

In the past 30 years, this competition has led to a move away from high company and personal taxation towards consumption taxes.

In The Big Kahuna, Gareth Morgan advocates a comprehensive capital tax, or CCT. This is effectively a minimum tax of 1.8 per cent on the net equity on most assets, including the family home and business assets.

An asset worth $150,000 that had a $50,000 debt attached to it would attract a CCT of $1800, 1.8 per cent of the net equity. If the asset produced no income the tax obligation could be rolled over.

Morgan's rationale is three-fold. We currently tax capital randomly. Taxing wealth rather than income is fairer and a CCT would incentivise the efficient use of capital. He is right, but taxing capital is problematic.

Morgan says "no one really knows how important taxing capital is for investment and economic growth". He is wrong. The OECD does.

Morgan dismisses a 2008 OECD study that found taxes on capital and income were "most harmful to growth" but he does not provide an alternative narrative. In his view, the OECD is a euro-centric organisation whose advice need not apply in New Zealand.

This is nonsense. We face the same competitive pressure for capital and labour. A tax on capital will result in less capital creation, lower investment and a flight of capital from New Zealand. This will mean Kiwi workers have less capital to work with so will produce less and earn lower wages.

It is a basic premise of economics that people respond to incentives. It is why tobacco attracts such a hefty surcharge.

Morgan frets the current system is unfair, and he is right, but imposing taxes on people who can avoid them is not an answer. The real problem facing New Zealand is not how to raise more tax but how to address the burden of compounding welfare programmes.