Taxing the rich seems a defining policy of the Labour Party. It plays especially well to its left wing, a point underlined by the Council of Trade Unions' hearty welcome to the announcement that Labour proposes lifting the top personal tax rate from 33c to 36c for those earning more than $150,000 a year. On other grounds, however, the policy doesn't make a lot of sense. Not only is it unnecessary but it will surely raise far less additional revenue than anticipated.
Labour says the new top rate would raise almost $200 million in the 2015-16 year, increasing to $350 million a year by 2020-21. Aligning the tax rate for trusts with it to minimise tax avoidance would add a further $200 million a year, rising to $336 million, and a similar initial sum would come from tackling tax avoidance by multinational companies. This, with a capital gains tax, would, said David Cunliffe, see a Labour government run surpluses and pay off "National's record debt" by the end of its second term in government.
In fact, the main impact of Labour's policy is likely to be an increase in tax avoidance. That is virtually guaranteed when tax rates fall even further out of alignment. Labour may believe it has sealed one avenue by stopping the impulse to use trusts as tax avoidance vehicles. But that disregards the potential for using a company tax rate of 28 per cent to shelter income. It will never be fair that one taxpayer can funnel costs through a company and another on the same income cannot.
Labour says its top personal rate would apply to just 2 per cent of New Zealanders. That hardly makes it right. Even the previous Labour Government, which began by lifting the top rate to 39 per cent, came to see this was not the way to go. It lowered that rate to 38 per cent and endorsed the principle of giving people's tax money back to them to spend as they chose when it extended tax relief through its Working for Families programme. If Labour's reversion to type now is less extreme than at the last election, when it proposed charging top earners 39c in the dollar, that is no recommendation.
Nor is much of value likely to come from its plan to clamp down on tax avoidance by internet-based multinational corporations such as Google and Facebook. As welcome as this instinct may be, and as unwelcome as the practice of avoidance is, there is little hope that its approach will yield anything like $200 million a year. The issue of tax minimisation raised by these companies will eventually require a global solution. But its complexity has bedevilled an international effort led by the OECD group of developed economies. This country, acting alone, faces an uphill battle to gain traction.
