We all want better health, infrastructure and other public services but the Government can’t meet our expectations with the amount of tax it currently collects. Graeme MacCormick details how a simplified net wealth tax could benefit all New Zealanders.
"Indeed, for Martin Daunton, Emeritus Professor of Economic History, taxation goes to the heart of fundamental questions. 'Fairness, for example. The definition of equality. The difference between passive wealth, such as inherited wealth, and active wealth,’ he says. Daunton cites the huge difference between countries such as Sweden (where high taxation sits alongside a well-funded state) and the zero income tax regimes of many of the Gulf states, where petrol is subsidised and the rallying cry of 'no taxation without representation' would appear to be inverted (free from the need to tax their populace, rulers are free from the need to give them representation too). Daunton points out that these issues are now also international: national revenues are threatened by tax havens and the ability of large companies to book profits in low-tax regimes."
Here in Aotearoa, should the Government's rejection of the Tax Working Group's majority recommendation of a capital gains tax be the end of the matter? The Government's decision no doubt emanated from a perceived lack of electoral support. A capital gains tax has always had the connotation of inhibiting growth and enterprise. Lack of public support may have also been partly due to the complexity of the majority proposals of the Tax Working Group, chaired by Sir Michael Cullen.
Yet there remain constant demands on Government for additional funding for health, housing, education, environmental protection, infrastructure and many other urgent needs. These needs cannot be met without either further borrowing or increased revenue. The Government simply needs more money if it is to meet expectations of it, fast enough.
Income tax and GST are at their perceived limits. But has a low-level net wealth tax, with a single level of exemption been adequately considered as an additional source of revenue?
New Zealand is one of the few developed countries that does not have any estate duty, stamp duty, capital gains tax (except in limited specific circumstances) or any other form of tax on assets. One of the side-effects of such a tax can be to reduce the gap between rich and poor. The perceived benefits are a more harmonious and ultimately more productive society.
That a more equal society is almost universally more harmonious is the thesis of The Spirit Level by Richard Wilkinson and Kate Pickett, Allen Lane (Penguin Group, 2009). It clearly demonstrates that more equal societies do better in most respects.
The Opportunities Party, then headed by economist Gareth Morgan, campaigned for a capital tax (net wealth tax) in the 2017 elections, in conjunction with a reduction in income tax or other redistribution of the yield. The Party estimated that with a capital tax of either one or two percent, under their proposals 80 percent of the population would be better off. That was a tax neutral proposal.
The Tax Working Group dismissed a net wealth tax on the basis that such taxes were perceived by the authors of an OECD report as being too complicated. The Working Group also referred to New Zealand's perceived historical difficulties with the administration of estate duty.
The problems with estate duty were that it applied at too low a level and valuations of assets were checked in minute detail, with an accompanying level of frustration as probate could not be released until estate duty was finalised. Moreover because of the way it was administered the costs of administration outweighed the return, or so nearly did that it was not worth collecting.
As to complications with a net wealth tax, it’s surely not beyond our capability to devise a comparatively simple form of it.
The Tax Working Group was no doubt also influenced by a report from its secretariat. This report was prepared at a time when a capital gains tax appeared to be the preferred option. It did conclude, however, with the observation: "The preliminary conclusions of the OECD work is that an annual wealth tax is not needed as a mechanism for addressing inequality (as it has the disadvantages of adding a novel tax base to most tax regimes and it is more difficult to apply than an income tax) if [italics added] there is a comprehensive capital income tax including a capital gains tax and an inheritance tax. The OECD also says a net wealth tax may be desirable if a country does not have an inheritance tax ...."
Incidentally, a net wealth tax should also encourage the productive use of assets and discourage such practices as land banking. Those with wealth exceeding a designated exemption level should be able to use that wealth to produce a much greater annual return than the amount of any low level net wealth tax.
Another advantage of a net wealth tax is that the revenue from it is not dependent on the sale of assets and the realisation of a capital gain. Revenue will accrue from the first year after implementation and will thereafter provide revenue at an almost constant annual rate, facilitating national budget estimates. The government of the day would need to decide which percentage of the population should be liable: the top 1 percent, 2 percent, 10 percent or 20 percent depending on projected yield, needs and the perceived overall benefits of greater social and economic equality. This can be achieved by the level at which an exemption is set.
Data released by Oxfam NZ, in association with its 2018 report Reward Work, Not Wealth, reported that one percent of the population received 28 percent of the country's wealth in a single year while 1.4 million people (30 percent of the population) got barely one percent of all the wealth created in 2017. If just that one percent of the population was liable it would still make a significant difference.
As also reported by The New Zealand Herald last year, "The research also showed a mere 10 percent of New Zealanders own more than half the nation's wealth and the inequality gap has widened significantly in the past year."
Colin James in Unquiet Times (Fraser Books, 2017) refers to an OECD finding that too great income inequality has a negative and statistically significant impact on subsequent growth. One of the things that a capital tax could do is fund greater income equality, as proposed by the Opportunities Party.
James also notes that on a single day in September 2016 the president of the European Central Bank, the president of the European Council and the head of the International Monetary Fund all warned of a backlash that could undermine market-capitalism. The recent mass demonstrations in France could be just the beginning.
Additionally, James noted that an International Monetary Fund report in 2014 found that "the combined direct and indirect effects of redistribution are on average pro-growth". James wryly observes: "Neither the OECD nor the IMF are wistful socialists of a bygone age. They have been one of the strongest advocates for a market economy."
According to the New Zealand Child Poverty Monitor report in 2017, 290,000 New Zealand children were living in income poverty, using the latest statistics then available. That is 27 percent of our children. The results reflect our wealth gap. None of these children chose to whom they would be born or the circumstances into which they would be born; but they are children of our society as well as of their birth parents: our future adults. One can blame the parents – if one must – but not the children. Those raised without adequate means to support them are much less likely to thrive, develop their potential and become positive, productive citizens. Indeed they are far more likely to become anti-social, drug – including alcohol – dependent, suffer other costly health problems and end up committing crime. It is as simple as that – with a huge societal cost factor.
While parenting difficulties and deficits arise from a multiplicity of causes, income poverty (basically insufficient income with which to provide for and bring up a child well) is the major delimiting factor in preventing a child from thriving and developing his or her full potential. Sufficient financial support to enable all parents to feed, clothe, house and properly care for their children is needed. While some may abuse an increased benefit level it is evident that most parents would use additional assistance for essentials. Pennies from Heaven by Jess Berentson-Shaw and Gareth Morgan (The Public Interest Publishing Company Ltd., 2017) is required reading for those inclined to query this.
In summary, the 'trickle-down effect' has not worked adequately on its own to reduce such socially divisive, economically costly and potentially dangerous inequality. Wealth is linked to power; and power protects wealth. The balance needs to be redressed as a simple matter of social justice. Everybody needs a 'fair go', children in particular.
Some broad outline suggestions are:
- An annual net wealth tax of 1 percent on each New Zealand citizen's net assets (excess of assets over liabilities) exceeding say $10 million. This level of exemption should cover the value of most family homes and would be much simpler than a family home exemption as such. It would amount to $20 million for a couple whose assets were held equally or substantially so. Such an exemption level would also obviate the necessity for the majority of New Zealand citizens to file a return. It would also discourage the building of large luxury homes as a means of minimising the value of other assets. Alternately if there is absolute political commitment to a specific family home exemption perhaps it could be the previous year's average price of a residential property in the provincial district in which the taxpayer resides, with a supplementary exemption of a specific amount sufficient not to erode reasonable savings for retirement.
- Those with net assets over say $1 million less than the exemption would be required to file a return. Included in net assets would be all chattels having an individual value in excess of say $100,000 including boats, vehicles, jewellery and works of art. All chattels of minor value would be exempt.
- Companies (apart from overseas-based companies as proposed below) would not be liable for the tax but the value of each individual's shareholdings would need to be included in their own return of net assets, assuming they have a liability to file a return.
- Duly registered charitable trusts and entities would be exempt, allowing philanthropic individuals to donate to charities of their own choice without any prospect of diminution of their donations. Māori land trusts or corporations would also be exempt, if not already having charitable status, on the basis that they do not subsist for individual gain.
- The net assets of private trusts would not have the benefit of any exemption. Private trust assets usually represent assets surplus to the donor's own needs. Most private trusts have been created to minimise tax, protect assets against creditors or other persons who might otherwise have a legitimate legal claim to them, gain some form of benefit to which the donor might otherwise not be entitled; or have been created simply because for a time it was fashionable to do so. Most trusts contain the facility to be wound up ahead of their ultimate distribution date – for those who might wish to revert to a more direct form of ownership. Trusts would not be precluded by this. They simply would not have the benefit of a personal exemption. Trustees could be liable to file returns, with the principal donor to the trust liable for ensuring payment.
- Included in a New Zealand citizen's assets would be their overseas assets. This would discourage the remittance of funds overseas to avoid or minimise the tax. For the purpose of this provision only, a New Zealand citizen would be one who has lived a specific percentage of his life in New Zealand – say 70percent. If they have lived more than 30percent of their life overseas and are still living overseas they would not be liable for any tax on their overseas assets, as opposed to their New Zealand assets. If a liable New Zealand citizen should choose to renounce his or her citizenship to avoid a relatively low level tax on their overseas assets then that would be their choice.
- Non-citizens and overseas entities, including overseas-based companies, and in the case of trusts whether having charitable status in their own country or not, could be liable on their net New Zealand real estate (land and buildings) at the same rate of 1percent per annum but without any exemption. The lack of exemption would offset the fact that they would not be liable on other assets. The tax could be a charge on the land. This would favour New Zealand citizens owning New Zealand real estate and may possibly result in New Zealand real estate becoming slightly more affordable. A charitable trust created by a non-citizen entirely for the benefit of New Zealanders or a New Zealand charitable organisation would, however, be exempt.
- Losses would not be carried forward. Less tax would simply be paid on the reduced value of the net assets in the following and subsequent years.
- The value of real estate could be its capital value for rating purposes at 31 March in each year and for public company shares their market value at that date. The only items requiring valuation would be private company shares, life insurance policies (at their surrender value), pension entitlements and chattels exceeding say $100,000 in individual value. For private company shares and chattels the valuation basis would be the generally accepted one: the figure at which a willing but not anxious vendor would sell and at which a willing but not anxious purchaser would buy. Both the valuation of private shares and of high value chattels would need to be declared to be a true and fair value by a person qualified to value them. Pension entitlements would need to be actuarially valued, but KiwiSaver funds, universal superannuation and war and disability pensions could be exempt.
- These valuations would be the only onerous requirement, particularly in the first year, with mere revisions for subsequent years; but overall there should be little problem in the preparation of returns, with not too great a hardship attached to the requirement that people with significant assets should assess their worth. To mitigate against a constant undervaluation the taxpayer should be required to report any sale of a liable asset at more than say 10 percent above prior year's valuation, with penalty for any consistent undervaluation that might become apparent. In general the annual certified valuations should simply be accepted, albeit with such penalties for any gross, negligent or dishonest under-valuation as will deter that.
It is appreciated that the foregoing proposals would require the wealthiest segment of our society to contribute even more than the significant amount most of them already contribute as a percentage of total income tax. Some, however, will have so ordered their affairs as to pay less than their fair share of income tax. Wealth does not necessarily correlate with income levels. While most in this group will have earned their wealth through a combination of skill, prudence, enterprise, risk-taking and hard work, few will have acquired it by their own efforts alone, without the support of a range of others, including their workforce. Others will have benefitted from a substantial inheritance, a better than average start in life or the guidance and support of a special parent or mentor. It is to be hoped that most of those affected by these or similar proposals, if implemented, will be sufficiently far-sighted to appreciate the long-term social and economic benefits for both present and future generations.
Societal inequality and desirable levels of social and infrastructure investment at government level must remain high on the list of issues for further consideration and discussion. There are clearly a number of perceived social and economic advantages in a net wealth tax. What are the disadvantages and do they outweigh the potential gains? If a net wealth tax has merit how might the above suggestions be modified and improved?
Graeme MacCormick is a Former Human Rights Commissioner and Family Court Judge.