Revenue Minister David Parker was quick to pour cold water on the idea he was buttering up the electorate for a capital gains tax, after the release of two reports that showed the ultra-wealthy were paying tax at half the effective rate of ordinary Kiwis.
National and Act were quick to say the reports - which showed 311 of New Zealand’s wealthiest paid 9.4 per cent of their total incomes in tax, versus an average tax rate of 20.2 per cent paid by middle-income Kiwis - showed Labour was readying the electorate for more taxes and, perhaps, a capital gains tax.
Parker spent two, and arguably three, elections campaigning with Labour on a capital gains tax of some form, and hinted at the fact he still held this view.
“I’ve long believed, as a lot of other people do, that there are unfairnesses in the tax system. I remain of that view and I think this report proves that case,” Parker said.
He said he believed the Government could make the tax system fairer, but said he would not be announcing tax policy just yet.
Parker said he would not be announcing new taxes and said if there were any tax changes to announce, they would occur in Labour’s revenue policy for the 2023 election.
He confirmed discussions with colleagues on Labour’s election tax policy had begun, but refused to elaborate further.
National’s finance spokeswoman Nicola Willis argued any unfairness was actually Labour’s fault for driving up untaxed asset values while doing little about the inflation that had pushed workers into higher tax brackets.
The 311 ultra-wealthy people surveyed by IRD made more than $14 billion between them in 2021, largely thanks to capital gains which are mostly untaxed.
“There’s been no change in tax policy that has driven that [unfairness],” Willis said.
“What has actually driven that is monetary and fiscal policy decision-making, which is to say a massive programme of money printing by the Reserve Bank approved by Grant Robertson and a Government that’s now spending a billion dollars more every week compared to when it came to office - and that has directly pumped up inflation, as Treasury analysis has concluded,” Willis said.
She noted that an accompanying Treasury report showed that the wealth share of the top 10 per cent and even the top 1 per cent of New Zealanders actually declined between 2010 and 2018, a period capturing most of the last National government.
The Treasury data, however, uses Stats NZ’s Household Economic Survey (HES), which the IRD report shows does a poor job of measuring the super-wealthy.
The wealthiest household measured in the HES is worth less than $40m - not quite a fifth of the average wealth of people captured in Wednesday’s IRD survey, which was $256m. In fact, the wealthiest person in the HES might not even qualify for inclusion in the IRD’s 311-person sample, which was generally restricted to people worth more than $50m.
The Green Party’s revenue spokesperson Chlöe Swarbrick said the report confirmed her party’s suspicions about the unfairness of the tax system.
“The only barrier to a fair tax system, well-funded public services and ensuring everyone has what they need to survive is political willpower,” Swarbrick said.
“Let’s be clear: to allow millionaires to continue to not pay their fair share after this explosive evidence is a political choice. Poverty is a political choice,” she said.
Swarbrick pointed towards the report’s findings on wealth inequality, saying when the “top 10 per cent own 60-70 per cent of the wealth and the bottom half - two and a half million New Zealanders - hold just 2 per cent, we have a foundational problem”.
“The problem only gets worse when our tax system supercharges inequality,” she said.
When asked what he might do with the billions of dollars in additional revenue he would earn if the wealthy paid more tax, Parker hinted that a “tax switch”, cutting taxes for workers by hiking them on the wealthy, would be his preferred option.
The Opportunities Party leader Raf Manji said this was exactly what the Government should do and proposed income tax cuts paid for a 0.75 per cent tax on the value of urban residential land.
Parker was delivered another challenge by the report, which raised the question of realised versus unrealised capital gains. Large portions of the gains were paper gains from rising asset values, rather than realised gains.
Capital gains are only realised when an asset is sold. That makes realised gains relatively easy to tax. Capital gains taxes in other countries simply tax a portion of that gain.
Unrealised gains are far more difficult because the taxpayer does not necessarily have the cash flow to pay the tax they owe. In some circumstances, it is not always clear what the unrealised gains actually are because they are based on the increasing value of things like privately held companies - values which are subjective and contestable.
Despite these challenges, Parker hinted that unrealised gains were still a topic of interest.
“Once you’ve got an average [wealth] of $256 million, you actually don’t have to realise assets - you can take your profits and build an even bigger portfolio,” Parker said.
Act leader David Seymour said these unrealised gains should not be classed as income.
“Unrealised capital gains are profits that exist on paper in the theoretical possibility the assets are sold, but not in reality. The report can’t be taken seriously if hung off such a concept,” Seymour said.
“As Act predicted, David Parker’s study was a politically driven fishing expedition to find people with money and take it from them,” he said.
Willis said the fact that these gains were largely unrealised was a cause for caution.
“I think it’s important that we look at what the report’s actually measuring, because when it talks about effective average tax rates, it is looking at unrealised capital gains, which is to say we’re not talking about money that’s poured into bank accounts available to be spent here,” she said.
Willis said a problem with bringing these into the tax regime could be the “Trump phenomenon”, in which people use their declining worth to minimise their tax burden. Former US president Donald Trump was famously effective at minimising his tax burden by using losses to offset any tax he might owe.
“I don’t know the ins and outs of his tax affairs, but I do know that in the US system, the ability to write off capital losses means that some wealthy people are able to arrange their affairs as to avoid paying tax. I think my point is that this, this data, isn’t conclusive in any way of a specific course of action,” she said.
Willis did not rule out making changes to improve tax fairness including at the top end, but gave the impression this would be unlikely.
“I don’t want to rule out that there’s some technical issue or other issue that could be addressed in due course,” Willis said.
She added IRD was spending less on tax investigations and investigating the black economy than before.
Deloitte tax partner Robyn Walker warned it might be too early to draw firm conclusions from the report.
“I think this stuff needs to be digested,” Walker said.
“That report probably gives more problems rather than, necessarily, solutions. It’s still interesting data that we need to process, but I don’t think there’s any ‘silver bullet’ answer [as to] what’s going to suddenly make the tax system fair,” Walker said.
Infometrics chief executive Brad Olsen said the question was now what politicians would do, but he did think the difference between the tax rates levied on ordinary income earners versus the super-wealthy was an issue.
“I still don’t know how and where we best have that tax policy discussion that doesn’t immediately become embroiled in short-term politicking that creates better change,” Olsen said.
Olsen said that bringing in a tax regime that looked at taxing things like capital gains would have the effect of dampening some of the massive asset price inflation that had fuelled New Zealand’s inequality problem.
“If you brought in a change in the tax regime for capital, then you would lower the valuations implicitly on those capital values,” Olsen said.
The Prime Minister meets President Xi Jinping at an inflection point.