Why tax crackdown must leave savings alone

By Brian Fallow

Between the lines


It is encouraging that Michael Cullen looks like resisting the temptation to plug a potential tax leak by raising the tax rate on employers' contributions to superannuation schemes.

To do so might have closed off an avenue of avoidance for those who will be faced with a higher income tax bill from April 1.

But it would also have sent a terrible signal about how committed the Government is to tackling one of the New Zealand economy's most basic weaknesses - inadequate household savings.

The Opposition is, of course, right to point out that the dilemma arises only because of the decision to raise the top tax rate. It has been suggested that one of ways high income earners might get around the new rate is to have a portion of their salary replaced by employer contributions to superannuation schemes of a type which could be drawn on at any time, like a bank account.

So far Dr Cullen has said only that his preferred option for countering that would be to retain the 33c for contributions, provided they are locked into a long-term retirement savings plan.

Otherwise the 39c rate should apply.

Another option under consideration is to tax at the 39c rate only employer contributions above a certain level.

The difficulty is to set the level - in effect to decide what percentage of income people would have saved anyway.

Either option will add further complexity and potential anomalies to the taxation of savings - which already has plenty of both.

The current tax treatment of retirement savings, in which they are taxed (and taxed hard) while in the fund manager's hands but exempt when eventually paid out, requires faith on the saver's part that the final exempt bit will survive for anything up to 40 years - or 14 elections.

Dr Cullen noted this yesterday.

It is a Gordian knot crying out for a machete.

The Government's promised "first principles" review of the tax system should, however, provide an opportunity to address a more fundamental question: should we be taxing savings at all?

If saving is merely deferring consumption, why not wait until that consumption occurs, when it will, of course, be taxed anyway?

The resulting hole in the Government's revenue would be substantial - amounting to billions of dollars - but there are other things which can be taxed, like energy. It seems perverse to continue taxing something we do much too little of, like saving, instead of something we do too much of, like consuming energy.

There can be little dispute that we save too little. This year alone New Zealand will probably import about $8 billion of other people's savings to help fund probably inadequate levels of investment.

At the same time, at least some climate scientists are warning that global warming will spell oblivion before the century is out to entire island nations, to say nothing of the scores of millions of people living near sea level in places such as Bangladesh or the Nile delta.