OPINION:
If there’s one thing Labour doesn’t want the public talking about, it’s ambiguity in the party’s tax policy.
In 2017, new leader Jacinda Ardern’s hitherto unstoppable polling rise hit a ceiling at the same time the National Party started raising questions about whether she would implement a capital gains tax (CGT) in her first term without putting it to a vote at the 2020 election. Ardern was forced to U-turn and clarify that any Tax Working Group taxes would be put to voters before being implemented.
Labour governments tend to put taxes up, National governments tend to cut them down - and it’s probably for that reason that any policy ambiguity left by Labour tends to cause more anxiety than a similar level of ambiguity on the part of National.
So it’s not for nothing that commentators have begun speculating on what sort of new taxes Labour might be cooking up for the Budget or the election.
Instead of moving quickly to quash speculation, Prime Minister Chris Hipkins and Finance Minister Grant Robertson have publicly floated the idea of looking at additional revenue to pay for the cyclone rebuild.
Ardern was an enthusiastic ruler-outer when it came to politically inconvenient tax policy: first killing the CGT in 2019, then a wealth tax the year after.
National is having plenty of fun stirring up rumours of a “cyclone tax” - and Hipkins, surprisingly, isn’t going out of his way to dispel those rumours, suggesting some sort of cyclone-related revenue tool is actually under consideration.
National is right to point out there’s no fiscal need for an additional tax.
Hipkins says the cyclone is likely to cost between $4b-$8b, spread over several years and while there are questions about whether permanently higher revenue is needed to cover ongoing public sector costs (rising pensions, wages, and the costs of climate change), the Government can easily borrow $8b without touching the current debt ceiling of 30 per cent of GDP.
Net debt is forecast to be about 14 per cent of GDP in 2027, giving Robertson about $70b worth of headroom (enough money to build about 300 Disneylands or 100 Disneyworlds, if you were looking for a comparator). Borrowing without taxation or reprioritisation would, however, be inflationary.
If Labour were to introduce a tax increase, the Budget - as Hipkins and Robertson are signalling - would be the time to do it.
It’s far enough away from the election to hope the public will have tired of the inevitable blowback. Instead, ministers can spend every day between May and October trumpeting what the additional revenue will be spent on, rather than where it’s coming from.
The other advantage is that any new tax designed for the Budget can be cooked up by public servants at Treasury and IRD because it would fall under the scope of Government policy, as opposed to party political election policy.
Party political tax policy would need to be written by party political staff.
This asymmetrical resourcing is unfair and anti-democratic, but everyone does it. National’s 2017 families income package was clearly a policy for the election, but drawn up by public servants for the Budget that year.
Any tax introduced at the Budget is effectively election policy, as it would almost certainly (depending on the tax) not come into force until the beginning of the tax year on April 1 - well after the election.
So while Labour might hope that the public forgets any tax hike announced in May by the time they go to the polls in October, there’s a risk that it spends every day of those months defending tax hikes, rather than fighting the election on more comfortable ground.
The two obvious questions around any new tax are who gets taxed and how much?
Rising wealth inequality and runaway house prices have focused attention on the “who” part of that question. It’s been 12 years since Labour first took a CGT to the polls (one of the spokespeople for that policy, then associate finance spokesman, is now the Revenue Minister David Parker).
These questions will probably resurface at the Budget, thanks to the publication of a report that could provide welcome mood music to any move on the part of Labour to rinse more tax out of the wealthy.
Parker confirmed in the House on Tuesday that IRD’s long-awaited research into how much tax high-wealth individuals do (or don’t) pay, will be returned before the Budget. Given IRD’s working estimate is that the super wealthy pay just 12 per cent of their total income in tax, less than 16-18 per cent effective tax rate paid by ordinary wage earners, that report is likely to reignite the debate over whether the current tax system treats everyone fairly.
While that report will no doubt blow a helpful tailwind for a Labour Government keen to wring a bit of extra tax out of the super wealthy. It does not make fixing the problem any easier.
The problem with the “who” is that it begs a more fundamental rethink of how tax works in New Zealand - so fundamental that it’s probably not something any third-term government would want to attempt.
There’s a ruthless simplicity to the New Zealand tax system: It’s somewhat progressive. If you earn an income you pay a smaller portion of tax on that than people who earn more income. But that’s about where any social agenda ends.
The primary goal of New Zealand’s tax system is to earn as much money as possible with the least interference upon people’s lives and the economy.
While other countries agonise over whether to tax fresh fruit and vegetables at a higher or lower rate, or to exempt tampons, and other life essentials - New Zealand’s tax system turns a blind eye.
That’s not because the Government doesn’t care. It’s just that the job of the tax system is to raise money, not to advance other policy. Any social agenda should be progressed by using the money raised thanks to taxation.
The problem with this is that it’s becoming difficult to sustain. If the primary goal of your tax system is raising revenue, then you end up, as we have done now, with ordinary people paying income tax and GST carrying the burden of sustaining the state while the ultra-rich get a fairly easy ride.
They’ve got reason not to be worried.
In a system designed to raise the maximum amount of revenue with the minimum amount of fuss, it makes sense to lean hard on taxing workers through income tax rather than passing complicated legislation to go after the super-rich.
Does Labour want to spend the rest of the year looking at whether art, wine, boats and goodness knows what else falls in or outside of the scope of a capital gains or wealth tax? Probably not. Even if it did, there almost certainly isn’t sufficient time to get such a complicated tax over the line by the Budget.
If Labour somehow managed to survive picking a fight with New Zealand’s wealthiest in an election year. It would then have to invest serious money in enforcing such a tax.
As for rolling out a proper CGT, that also seems unlikely.
The big hole in the current bright line test is that it doesn’t touch the family home - a loophole Labour is quite happy with (not even the Greens’ 2017 tax plan touched the family home). While the bright line test could be broadened to become something closer to a CGT, you’d have to wonder whether it’s worth the fight.
That leaves adjustments to GST or income tax. GST is a non-starter. No one is putting taxes up on goods in the middle of a cost of living crisis.
Personal income tax is the obvious place to move. Last year, it raked in over $50b in revenue. Income tax rates are far easier to change than rolling out a new tax.
The most obvious change is at the top end of the income tax scale, either by lowering the threshold at which the 39 per cent bracket kicks in from $180,000 to something lower - or by introducing a new ultra-high income tax rate of something like 45 per cent kicking in at $200,000, say.
There’s been too much commentary on Labour’s purported tax increases and not enough attention on the potential for tax cuts.
National’s finance spokeswoman Nicola Willis picked up on this in a speech on the Government’s current tax bill on Tuesday, accusing Parker of hinting that “a tax swap is the way to deliver tax reduction”.
It’s not totally clear whether Parker’s speeches on this bill did hint that - but a speech last year on tax principles certainly did.
In that speech, Parker praised former finance minister Bill English for his ability to sell the 2010 GST increase as a “tax switch”, in which a hike to GST paid for a cut to income taxes.
“While I did not agree with the proportion of that ‘tax switch’ that went to higher income earners, the way he carried that debate was a master class in the politics of changing the tax mix,” Parker said.
Labour knows that the current income tax thresholds, untouched for more than a decade, need to change at some point, and cutting them would deliver delicious election-year tax cuts.
A similar idea was considered by the Government four years ago when the Tax Working Group report of 2019 recommended a revenue from a new CGT be used to fund adjustments to an increase to the bottom or bottom two tax thresholds, cutting taxes for all income tax earners, but particularly those on low incomes.
Interestingly both proposals delivered far greater tax cuts to people on lower incomes in 2019 than National’s 2022 indexation proposal, largely because they leave the third tax bracket untouched.
The problem is paying for them whilst also increasing spending on public services.
The answer to that could be hiking taxes at the top of the income tax scale, while cutting taxes on the bottom - a policy that would give voters the public spending they enjoy from Labour, whilst also neutering the tax cuts promised by National.
It’s not a perfect switch. There’s almost no way Labour has the stomach to hike the top tax rates in a way that pays for meaningful tax bracket adjustments at the bottom of the tax scale (National’s rather miserly bracket adjustments cost about $1.7b in 2021. Labour’s new 39 per cent top rate only raised about $700m that year.)
And, as Parker suggested on Tuesday, Labour is unlikely to hike taxes at the bottom end of the high-income scale either - shifting the top brackets downwards.
Lowering the $180,000 threshold begins to hit that treasured class of voters, the “aspirational” - and it was the tax burden faced by these voters that was one of the reasons why National found it so easy to repeal the relatively onerous 39 per cent rate introduced by the previous Labour government, which kicked in at $70,000 when it was repealed (about $98,000 in today’s money).
An equivalent tax rolled out today would hit about 10 per cent of taxpayers, a relatively sizeable portion of the electorate that probably includes many of the working professionals who vote Labour.
Cutting taxes for the millions of New Zealanders on low incomes costs a lot, simply because there are so many people paying tax at those low rates.
Nevertheless, an extra few hundred million dollars isn’t something to be sniffed at and if Labour is to announce a tax hike in the next year, I’d keep an eye on adjustments at the top end of the scale, but if any new tax does get rolled out, I’d keep an eye out for tax cuts too.
