Analysis by Dr Bryce Edwards.
Yesterday the IRD released its landmark report on the ultra-rich in New Zealand and the tax they pay. It starkly illustrates the extent to which the wealth of the ultra-rich has skyrocketed in recent years. The richest 311 families have a combined wealth of $85 billion, and own a quarter of the country’s assets.
Their income in the last year of the study, 2020-21, was $14.6 billion. But the rate of tax they paid on this income was, according to IRD, only half of what the average taxpayer pays. According to business journalist Bernard Hickey, if those ultra-rich families paid the same rate of tax as middle-income New Zealanders, the government would’ve raised an extra $3.4 billion in tax in that one year.
How our tax system became so unfair
The IRD report raises the age-old question of how we divide up our society’s resources, and who should pay for the costs of running the country.
New Zealand’s economy is set up in a way that enables the creation of great wealth, but not in a way that sees it evenly distributed. Those who own businesses and other major assets and resources become wealthy through the profits, capital gains and high salaries they extract from the economy, while ordinary people who work for a living get what is left over – which often isn’t very much.
Because of this vast economic inequality, in theory taxation systems are set up in a way that takes this into account. The concept of progressive taxation means citizens with the most ability to pay tax are expected to pay a greater proportion than those with less capacity.
Yesterday’s report shows that New Zealand’s tax system isn’t so progressive – in fact, it’s particularly regressive. And it turns out that it’s designed this way. Reforming Rogernomics politicians of the 1980s established a tax system in which poor and middle-income earners pay too much, and the wealthy pay relatively little. They introduced a regressive GST and significantly reduced progressive income and company taxes. Various reforms over the years by National and Labour governments have only embedded and accentuated this unfairness.
The Need for a debate about wealth and taxation
The IRD report’s findings are a huge wakeup call about the politics of tax and wealth. It shows, as Revenue Minister David Parker says, that New Zealand’s tax system is fundamentally unfair.
New Zealanders care very much about fairness – it’s a central part of our political culture. And so, the IRD’s exposure of this unfairness should kickstart a big debate on reforming NZ’s tax system. In particular, we need a proper debate on wealth, land, and capital gains taxes.
However, New Zealand has historically been very poor at debating taxation. Partly this is because the issue of taxation can appear to be very dry – all accounting and maths. Yet it’s a vitally important issue – the dynamics and levels of taxation determines so much about how a country works. Taxation determines levels of resourcing for fundamental services like our healthcare system, roads, and whether we can afford to pay for superannuation.
Debates on taxation are also let down by the politicians and political parties. Part of the problem is that the politicians simply don’t prioritise taxation issues. Not only are there much more exciting issues to debate and campaign on, more crucially, our politicians lack the courage required to provide leadership on taxation reform.
This is especially the case for politicians and parties of the left. They’re very afraid of being bold on taxation, which would require persuading the public of the benefits of reform. Contemporary Labour and Green politicians generally do their best to stay out of debates on capital gains taxes or wealth taxes, or even progressive taxation in general.
The best example of this was the 2018-19 capital gains tax debate sparked by the Labour Government’s consideration of implementing a new scheme. The debate back then was remarkably superficial, partly because the Labour Government deliberately stayed out of it. And then, of course, Jacinda Ardern simply announced that a CGT was off the agenda while she was Prime Minister. This was one of Ardern’s biggest failings as a leader – she claimed to believe strongly in a CGT, but wasn’t willing to make the case for it and convince the public.
Ardern epitomised the political left’s orientation to taxation reform. Whereas in the past, parties of the left would run major campaigns to convince the public and create a consensus in favour of reform, now when it comes to taxation, the contemporary left capitulate, and instead rely on focus groups and polls to tell them what they should do.
Vested interests and the wealthy dominate the debate on taxation
When politicians are unwilling to lead the debate on taxation and wealth they hand over the debate to vested interests who dominate the public discourse. In what is effectively a tax debate void, the wealthy and those who represent them can win the debate by default, blocking any reform of taxation.
This month we saw lobbyists and vested interests blatantly enter the debate, seeking to stymie any demands for a change to the status quo. The most obvious example was a report that tax consultants OliverShaw commissioned from Sapere Research Group, which claimed to show that the wealthy pay their fair share of tax.
This was designed to pre-empt yesterday’s IRD report release. And OliverShaw’s directors, Robin Oliver and Mike Shaw went public with their concerns about what they thought would show up in the IRD research, as it could produce a “misleading and confusing picture of our tax system”.
Similarly, the Herald’s Jenée Tibshraeny reported that Chartered Accountants Australia New Zealand (CAANZ) tax lead John Cuthbertson was also worried that the IRD report would be “beat up” to encourage people to think the rich aren’t paying enough tax. He expressed his concern that this might pressure the politicians into a “knee-jerk reaction” of taxing the rich.
Other lobbying to prevent taxation is now underway. Today, Baker Tilly Staples Rodway tax director Andrew Dickeson told NBR that the IRD’s report is “a self-serving study for the Labour Government. It’s really giving the Government ammunition to start a conversation around, they would say, improving fairness.”
Economist Shamubeel Eaqub wrote yesterday that the onslaught from vested interests will help ensure that the latest tax reports don’t have any impact on changing tax policy: “The very wealthy will inevitably mount a strong and co-ordinated opposition, using a wide array of organisations and people. They can afford to do it, and it would be a small cost relative to taxes they may have to pay.”
And we can see this happening. Groups and politicians representing the interests of the wealthy are mobilising and casting doubt on the IRD’s research and what it could lead to in terms of taxing high incomes and wealth.
A Failure of political leadership
In contrast, it looks like Prime Minister Chris Hipkins will say virtually nothing meaningful about the stark unfairness uncovered in the report. His cautiousness and conservatism, mean that he’s unlikely to reverse Ardern’s prohibition on even discussing wealth taxes.
By conceding the taxation debate to vested interests, this will ensure that New Zealand continues to have a largely regressive taxation system – one in which the poor subsidise the rich, much like the days of the Sheriff of Nottingham. Sadly, we don’t appear to have any Robin Hoods to intervene in what is essentially a class war.
We should be thankful for the IRD and David Parker for making this latest research happen. But we now need a proper debate about wealth and taxation. And it’s time for the politicians to be bolder on what they really think is needed. If that’s a wealth tax, a land tax, or a capital gains tax, then let’s hear the arguments in favour. We can’t afford to continue with the status quo.
