Thomas Coughlan: Greens’ wealth tax very clever - but income, corporate tax changes are risky

Green co-leaders James Shaw and Marama Davidson announce tax policy. Photo / Alex Burton

OPINION

The Greens have taken a leaf out of Labour’s book for their 2023 tax policy, making small but significant tweaks to their 2020 wealth tax plan, which make the policy far more palatable to voters the party wants to win over.

The Greens’ wealth tax has always worked by taxing only net wealth, rather than simply whacking the value of assets with no regard to debt. Under the 2020 plan, only individual wealth over $1 million would have been taxed, which stoked fears many ordinary Auckland homeowners would be in the firing line.

But most of those homes were owned with a large mortgage or a partner - or both.

Because most of those $1m homes also have a mortgage, very few would be caught by the tax, which only applied to net wealth over the $1m threshold. A $1m home with a $500,000 mortgage would still be $500,000 short of being taxed. Only net wealth over $1m would have been taxed too, meaning the few people who were caught by the tax would pay relatively little unless they were really rather wealthy.

And because the tax was worked out on an individual basis, couples would have needed $2m in net assets ($1m each) to be taxed.

That set an incredibly high threshold: the Greens reckoned just the top 6 per cent of Kiwis would end up being hit by that tax.

But the Greens appear to have decided that even this applied to enough people to be politically risky, or that explaining the carveouts was not getting through in an attention-competitive election campaign.

So the party has dramatically hiked the criteria for the tax in their 2023 plan - doubling the threshold to $2m (so $4m for couples), which they think means just the top 0.7 per cent of people will pay the tax.

While you might have been able to find a relatively ordinary couple lucky enough to have a $2m mortgage-free home, it will be very difficult to do the same for a $4m home (although other assets contribute to the threshold).

This is an Occupy Wall Street Tax - designed for the not-even-1 per cent. It cleverly excludes the upwardly mobile and temporarily embarrassed millionaires that comprise a non-negligible chunk of voter identities and who might have felt themselves targeted by the previous policy.

To compensate, the party has hiked the rate of the tax. In 2020, it was 1 per cent on net wealth over $1m and 2 per cent on net wealth over $2m. It is now a flat rate of 2.5 per cent.

Analysis from the Green Party showing people earning less than $125,000 would pay less tax, and people earning more than $125,000 would pay more.

The changes copy a very effective Labour tactic from 2020. Labour’s new income tax rate of 39 per cent on income over $180,000 was less politically toxic because very few people, and certainly very few marginal voters, could see themselves ever paying it (the Greens abstained on voting for that change, judging, correctly, it would simply see money funnelled into trusts).

It’s naive to assume attacks on the tax won’t involve playing on the fear that ordinary hardworking Kiwis et cetera, et cetra will pay it. This is, after all, the most effective way of attacking any tax.

But with a threshold set so high, it’s hard to see that attack being especially effective this time around.

The Greens are right to focus hard on a palatable wealth tax this election. With Labour probably needing them and fellow wealth tax supporters Te Pāti Māori in order to govern, the party has a conceivable chance of getting at least something over the line.

The Greens have threaded the needle well. The 2020 wealth tax was one of the most contentious policies of the 2020 election and managed to spook a then-historically popular Jacinda Ardern into ruling it out (something she later rolled back slightly). The wealth tax was one of the few things that went right for National that year.

This policy changes that. The tax is as politically non-threatening as a wealth tax is ever likely to be (which is to say it is still relatively politically threatening, just not half as much as last time).

But that isn’t to say the Green Party tax policy doesn’t include some gifts for the right to campaign on - it wouldn’t be a very good Green tax policy if it didn’t.

The real political threats for the left (threats which will probably hurt Labour more than the Greens) come from the policy’s practicality, and the changes to income tax thresholds, which hit some ordinary-adjacent income earners.

On the practicality issue: taxing wealth is incredibly difficult, and while other countries have taxes that could reasonably be called wealth taxes, no one relies on them as a major source of revenue. In fact, it’s hard to find international examples of wealth taxes that work quite as planned.

The Green plan reckons the wealth and trust taxes will earn about $12 billion a year, about a quarter of what the Government currently earns from income taxes on individuals.

New Zealand’s cashed-up plutocrats will have every incentive to structure their affairs to avoid this tax, potentially even shifting some wealth offshore. For this tax to work, the Greens need to find some way of ensuring people actually pay it, which is very hard. An easier way of taxing wealth would perhaps be to look at taxing the value of residential land ( a Top policy), but that runs headfirst into the political problem this wealth tax avoids - it hits a vast number of voting Kiwis.

The other part of the tax plan, which is new this election, is a flat 1.5 per cent tax on trust assets. Trusts are certainly popular with the wealthy, but they are used by people across the wealth spectrum. A flat tax on assets, particularly for people with poor cashflow, is likely to be politically contentious.

The Greens, and Labour should prepare for an attack on that front.

The most difficult part of the Green plan relates to income and corporate tax.

It is easy to make a philosophical income for taxing wealth, as so much wealth in this country is essentially unearned. Income is, by definition, earned, and many people who earn high incomes have to work a lot to get them.

The corporate tax rate change from 28 per cent to 33 per cent would mean our already quite high corporate tax rate would go even higher. Most importantly, it would be higher than the Australian rate of 30 per cent. It’s probably worth questioning whether such a hike is worth risking our tax competitiveness with Australia over, particularly when that country already offers so many other incentives to shift there.

The Greens’ income tax changes introduce a tax-free threshold and lift the bottom tax brackets, meaning tax cuts for people earning less than $125,000 - the vast bulk of income tax payers.

But for people earning $125,000 and above, taxes will increase. A 39 per cent rate on income over $120,000 will hit a lot of the white-collar professional class who switched from Helen Clark to John Key in 2008, deciding that they really weren’t “rich” enough to be paying such a high rate of income tax.

In 2020, about 10 per cent of income tax payers earned $100,000 or more - a figure that will be far higher thanks to the three years of inflation since then. This means a small but non-negligible part of the electorate will be hit by those tax changes, or are a couple of pay rises away from being hit by them.

About a quarter of income tax payers will find their income taxed at higher marginal rates under the Green scheme, which is also something of a political risk, despite the fact that most of these people will see their overall tax paid fall.

The income support policies all this extra revenue pays for are worth looking at. It is not difficult to see Labour adopting them in a less ambitious form.

The Greens once again make an aggressive play for the student vote by introducing a universal allowance.

The Working for Families changes (including scrapping the name) would deliver thousands of dollars of income support to families. The current abatement threshold for the payments of $42,500 was set in 2017-18 and has been rendered punitive by high inflation. If it were adjusted for inflation, the threshold would be $55,000. Instead the Greens promise to lift it to $60,000.

Labour has naughtily hiked the abatement rates while in office, meaning that while people get to keep their payments as they earn more, once they hit the abatement thresholds, the payments evaporate quickly. This creates an income cliff edge between support and work.

The Greens would drop the abatement rate from 27 per cent to 18 per cent.

It’s hard to see other parties adopting the scheme wholeheartedly (they’re costed at more than $2b a year), but it would be very difficult for Labour (and even National at a stretch) not to adopt a pared-back version of this, and perhaps phase it in over a longer time period.

Child poverty remains a problem in New Zealand and Working for Families remains an effective (and, frankly, cost-effective - it’s about 3 per cent of core Crown spending) way of grappling with it.