The ultra-rich can breathe easy and progressive voters can scream into the void, because Prime Minister Chris Hipkins has ruled out any meaningful reform to our broken and unfair tax system. The Labour leader says it won’t happen on his watch.

Official documents were released yesterday showing the Government asked officials to draw up ideas for how a wealth tax might work. They focused-grouped the idea and this exercise showed it wouldn’t be an easy win for Labour so, regardless of its merits, it was thrown on the bonfire.

Hipkins was then asked yesterday whether Labour might implement wealth taxes during its next term in government, and he categorically ruled out any such progressive reforms under his leadership.

The Progressive tax reforms that Labour rejected

We now know that Treasury put together a number of different models for how a major taxation reset could be progressed by the Government. The main model Labour considered involved two central planks, and was designed to be fiscally neutral, much like Bill English’s “tax switch” in which some taxes went up and some down.

Under Treasury’s proposal, a tax of 1.5 per cent would be levied on the assets of those owning more than $5m. About 25,000 ultra-rich would be affected, and it was forecast to bring in about $3.8bn a year.

The flip side of the tax increase would have been a new tax-free $10,000 threshold for every individual, which would amount to a tax cut for most of about $20 per week.

The Herald’s Thomas Coughlan reports today: “The documents show from the perspective of Treasury and the IRD how rather large tax cuts for millions of people could be paid for by slapping a tax on a tiny minority of New Zealanders.” And Treasury calculated that those paying more tax as a result had gained their wealth mainly in sectors of the economy involving finance, professional services and real estate.

Hipkins has dismissed this wealth tax idea as being an unwanted “experiment” at a time when his brand is about being focused on the basics. Furthermore, reports say Hipkins was “spooked” by the tax switch idea, taking fright at the potential for his government to be criticised by farmers and the rich for negatively impacting them.

In demoralising progressives Hipkins might be shooting himself in the foot

In ruling out progressive tax reform such as a wealth tax, Hipkins is keeping alive the possibility of winning over wealthier voters who might be considering voting for National. He’s made an electoral calculation based on the potential votes that could be lost, and whether he and his party have the capacity to successfully sell the concept of a wealth tax to the electorate. There are reports today that Labour’s focus groups made it clear that the wealth tax was a risk for the Government’s re-election. In that sense it’s an understandable decision.

But it’s a terrible move for Labour’s progressive reputation and standing. Voters who want to see progress made on inequality, poverty, and a genuinely transformational leftwing government after 14 October will be severely disillusioned. The question of significant tax reform has become a symbol amongst progressive voters of the need for radical change.

When Jacinda Ardern ruled out a capital gains tax in 2018 it was a major turning point for her reputation with leftwing activists and opinion leaders. There had been hope that Hipkins wouldn’t go down the same route. So there will be anger with Labour amongst some on the left, and it’s hard to rally the troops for the election campaign when the troops have lost faith in the leadership, or ponder what the point of a re-elected Labour Government is.

So the unintended impact of Hipkins’ captain’s call could actually be to reduce Labour’s chances of re-election. The demoralisation factor could hit the political left at a crucial time, when there are already concerns about whether the Labour-led government of the last six years has really achieved much at all.

Even on the question of Hipkins’ electoral calculation, progressives might well doubt whether ruling out a wealth tax was necessary. Is Labour really that reliant on the votes of those concerned about the fiscal wellbeing of the ultra-rich? After all, Treasury’s wealth tax proposal would’ve only impacted negatively on about 25,000 voters (something like 0.5 per cent of the population), while improving the lot of four million.

Labour is angering progressive voters

Political journalist Richard Harman writes today that Labour’s decision “infuriates its left-wing base”. Similarly, BusinessDesk’s Pattrick Smellie says “it’s likely that a goodly chunk of Labour supporters will be wild, seeing what Hipkins ditched.” He points out that those wanting substantial and progressive tax reform have essentially just been told that they will have to wait until 2026 at the earliest.

Leftwing blogger No Right Turn typified the angry leftwing response yesterday, writing: “Labour, ‘the party of the workers’, has sided with the ultra-rich to f*** over normal people, as usual. But then, should we really expect anything different from a man paid $471,049 a year, who owns three houses? Bluntly, he’s not one of us – he’s one of them. Of course he stands for their interests rather than ours”, and now it’s clear that Hipkins is “not going to offer us anything – just the awful, unequal, rusting status quo.”

And others will now wonder if Labour really believes in anything. Labour already admits that the current tax system is broken and highly regressive. And the public recognise this – two months ago a Newshub poll showed that 53 per cent of voters want a wealth tax implemented. Yet Labour has effectively shut down the debate.

Newshub political editor Jenna Lynch put this best yesterday: “It begs the question what is the point of Labour if even with this massive mandate it would not risk electoral punishment and stick to its morals of fairness”. And she asks: “What is the point of Labour? What do they stand for? Power is pointless if you do nothing with it.”

Business journalist Bernard Hickey has written a scathing analysis today. He sees Hipkins’ decision as a complete capitulation to vested interests over the common good: “That’s it. It will now be almost impossible for a wealth or capital gains tax to be implemented within the next decade or two. The future of Aotearoa’s political economy will now remain frozen in its stagnant, unequal, unjust, unproductive and unhealthy state for the foreseeable future. That’s what our leaders, and ultimately the only voters that matter, have decided…. The announcement yesterday of the freeze on the full wealth tax debate probably added another 10-20% overnight to land values, thanks to the removal of any uncertainty about a threat to the existing model of our ‘churn and burn’ economy of a housing market with bits tacked on.”

What happens next?

Labour is about to unveil its tax policy for the election campaign, and the signs are it will be very unambitious. Hipkins has already signalled that people should expect “restraint”.

Labour might still propose some sort of tax-free threshold on the first component of everyone’s income. But if this is announced it will be very limited because Labour don’t seem to have any way to raise the money to pay for it.

Likewise, they could imitate some of National’s tax threshold changes, effectively providing a tax cut. But this too would be minimal, because Labour hasn’t found a way to pay for such changes.

A wildcard would be the revival of Labour’s 2011 policy of removing GST from fresh fruit and vegetables. Pattrick Smellie raises this possibility today, saying “This policy has had political appeal for decades. And while it would make a mess of one of the world’s most effective indirect tax regimes, tax purity never won anyone an election. Making food cheaper during a cost of living crisis might.”

If Labour doesn’t find a way to reassure leftwing voters that they still have a progressive plan, then the risk is these voters will turn to other progressive options. Commentators are saying that Labour’s conservatism on tax will be good for the Greens. For example, today’s Herald editorial says: “The decision seems set to send Labour supporters keen on tax reform into the arms of the Green Party.”

But are the Greens really that well-positioned to mop up these votes? The party is also looking tired and ineffectual. Even on this issue, 1News’ Felix Desmarais says party co-leader James Shaw has been pretty pathetic in his “feeble stab at Hipkins’ political principles”. Shaw suggested that Hipkins’ ruling out of a wealth tax won’t stop the Greens campaigning to implement one and trying to negotiate for one after the election. But Desmarais asks: “if James Shaw can’t tear shreds off Chris Hipkins in a press conference, how strong can he argue around a coalition negotiation table?”

There’s another party that is perfectly placed to be the receptacle for voters who want to see more significant tax reform and progress on transforming New Zealand – Te Pāti Māori. The party is on a roll at the moment. Its last three poll results have put it on 7, 4 and 5 per cent. They are nipping at the Greens’ heels, threatening to push that party into fifth place in the election.

Right now, Te Pāti Māori are overshadowing both the Greens and Labour in terms of radicalism, freshness and being bold. The wealth tax debate, together with three big polls, may well have handed Te Pāti Māori the mantle of being the Real Party of Progressives in 2023.

Auckland Council ended its meeting yesterday without a decision on the annual budget.

The long-debated budget will attempt to close a $325 million deficit, exacerbated by a further $40 million in storm-related costs.

Councillors arrived in good cheer, cracking jokes about the lengthy session ahead of them, which included a debate over the council’s sale of its 18 percent stake in Auckland International Airport Ltd.

The mayor said the meeting would take as long as it needed to.

“This is a difficult process. It may take more time than expected, that’s fine,” Mayor Wayne Brown said. “We may have to come back next week, we’re not rushing this process.”

Three councillors declared a stake in the airport ahead of the meeting.

Airport shares declared
Just a few hours before, Albany Ward councillor Wayne Walker admitted to owning $3 million in shares through a trust. His neighbour at the table, Maurice Williamson, poked fun at Walker on his way into the chamber.

Chris Darby and Julie Fairey also declared airport shares in the days leading up to the meeting, prompting questions of whether they could vote on the sale.

All three said they had received advice from the auditor-general.

“In their view, my situation does not represent a conflict of interest,” Fairey said.

“Their advice was that I do not have a financial interest in the share sale,” Darby said.

“Same advice, and so I can participate in today’s decisions,” Walker said.

Backdown from the mayor
The mayor’s original budget proposal called for a full sale of the council’s 18 percent share in Auckland Airport. But during the meeting, he compromised.

Just three councillors — Andy Baker, Maurice Williamson and Desley Simpson — unambiguously declared their support for a full sale.

After hearing the positions of his fellow councillors, Brown offered a partial sale of 8 percent, meaning the council would hold onto a 10 percent stake.

“I’m now proposing that we sell 8.09 percent of our 18.09 percent shareholding,” Brown said as councillors returned from their lunch breaks.

“This means that we have to find another $32 million in operating savings or rates to balance the budget. I’m proposing we fill this gap with a general rates increase of 7.7 percent.”

The issue of selling the shares was contentious, leaving councillors divided. Manukau Ward’s Lotu Fuli opposed the sale, declaring the shares had value.

“This is a high-performing asset, it is an asset that we ought to keep,” she said. “And yes, we should consider our underperforming assets, but that’s a discussion to have at the long-term plan.”

Council would regret sale
Fuli said the council would regret letting go of the shares.

“Let’s not be rash, let’s not sell off these shares, $2.3 billion worth of shares, in order to plug a $325 million hole,” she said. “Let’s not make the mistake that past councils have made.”

Waitematā and Gulf Ward councillor Mike Lee agreed the shares had value.

“This is a real asset, folks,” he said. “This is an earning asset, just like the Ports of Auckland. Not only does it earn us money, but it earns us capital gains on our balance sheet. Any decent accountant will tell you that.”

North Shore Councillor Richard Hills said the months of debate around the budget had soured its culture.

“This has been the hardest six months of my career, it hasn’t been nice,” he said.

“It hasn’t just been about things you’ve said, mayor, there’s been a lot of other discussions around this table that I’ve been appalled at around staff, each other. It isn’t a nice place at the moment and I think the city knows that.”

He said the council needed to be careful about repeating the same mistakes next year.

“I want to work with the majority here, because we will break our staff and our city if we make them do this again next year,” he said. “I think we need to be really clear about that — we’ll do that again if we don’t make a hard decision today.”

Few in support
Albany Ward councillor Wayne Walker said the council needed to adjust its spending habits if it wanted to fix the issue.

“We’re not addressing the underlying financial issues, and that is that we are spending beyond our means. We’ve been doing it for successive years, and that has to stop,” he said.

“Fortunately, we have a mayor that’s committed to turning that around.”

He said there was time enough to make large decisions like selling the shares.

“We have a very, very good situation to go forward and not have to make decisions immediately in this long term plan that may be counter-productive.”

Some councillors, like Maurice Williamson, strongly favoured a full sale. He said the assets were not making enough money.

“I’m very much in favour of selling any asset that’s costing us more to keep than it’s returning to us. There’s a good old Tremeloes song, ‘Even The Bad Times Are Good’ — well, even the good times are bad.”

Williamson warned other councillors against accepting more debt.

“There’s so much more coming down the pipe at us,” he said. “The CRL, god knows what’s coming, I’ve been told the final figure is going to be $7.25 [billion], we’re going to have to borrow debt to fund that, and that debt ratio is already near the ceiling.

“So please, please look at trying to bring that back down.”

Auckland Mayor’s revised proposals:

• Mayor Wayne Brown is now pushing for the sale of 8 percent of the council’s shareholding in Auckland Airport, instead of the full 18 percent of shares
• Brown has also proposed $4 million of reductions to local board funding, and $5 million of unallocated to chief executive, Jim Stabback
• An average general rates increase of 11 percent has been proposed, with adjustments that will result in an overall rates increase of 7.7 percent for average households
• Plans to establish a political working group on the council’s investments has been set out, which aims to oversee assets like the remaining council shares in Auckland airport, and make recommendations to the governing body on long-term investment in other funds

Even Brown’s deputy, Desley Simpson, cautioned members. She said the final form of the budget needed to be balanced.

“We’ve talked this through so much, and it’s going to be a hard task to balance a budget that is fair for Aucklanders and meets the needs and desires of all those around the table.”

Brown’s new proposal included the establishment of a working group to oversee council investments, as well as a $4 million reduction to local board funding.

Questions about the updated proposal brought the meeting to a close at 5pm, with no time left to debate or cast votes.

Mayor Brown said the council would reconvene at 10am today.

Article by AsiaPacificReport.nz

The day after New Zealand’s first lockdown was announced, I expressed to a senior colleague my concern for those around the country whose livelihoods would suffer as a result.

She agreed, but was confident that the spirit of “we’re all in it together” accompanying these drastic public health interventions would allow the government to lead the country towards a kinder, more equitable society.

“I think we might see a universal basic income,” she said hopefully.

As it turns out, the government had little appetite for progressive welfare or tax reform.

Instead, working with the Reserve Bank, they have propped up the economy through a combination of measures that have drastically inflated the price of houses.

This has most likely protected some jobs, but it has also made work increasingly irrelevant as capital gains completely outstrip wages. The wealthy have been made even wealthier, while many can no longer afford a roof over their heads.

In the past year, the average New Zealander effectively lost $54.59 for every hour they turned up to work if they did not own a home.

According to Stats NZ, the median worker earned $26.44 per hour before tax in 2020. That comes to $21.49 per hour after tax if working a 40 hour week.

Median house prices
Meanwhile, in the year to end of February 2021, the median nationwide house price increased from $640,000 to $780,000: a difference of $140,000. If houses took weekends, public holidays and four weeks’ leave off each year – which of course they do not but it makes the calculation simpler – that makes an hourly rate equivalent to $76.08 per hour. Tax-free.

This is a direct result of the decision to support the economy through a combination of quantitative easing, a reduced Official Cash Rate and wage subsidies, instead of meaningfully increasing spending on things we need such as infrastructure and welfare.

The government handed out money to the banks, effectively at no cost, allowing them to lend more at increasingly attractive rates.

The government also bought bonds at the same time, devaluing deposits and making it pointless to keep money in the bank. This combination of easy credit and disincentivised saving caused a large amount of money to start sloshing around looking for somewhere to go.

The traditional concern with this approach to stimulus is that it will inflate the price of goods and services, increasing the cost of living.

In New Zealand, though, we like to buy houses. A tax system that drastically favours property ownership, combined with a cultural sensibility that houses are a safe bet, has seen much of this newly available money pumped straight into the housing market.

A feature
This is a feature, not a bug.

It represents a new, more interventionist version of trickle-down economics for the 2020s. Decried in 2011 by Labour MP Damien O’Connor as “the rich pissing on the poor”, politicians from the right have long argued that if the wealthy feel wealthier, their increased spending will benefit those less well off.

Generally used to advocate for reduced taxes on the rich, these ‘trickle down’ arguments refuse to die, no matter how comprehensively and repeatedly they are discredited.

This revival of trickle-down economics is a little different, as it is based on direct stimulus rather than a reduction in tax, but the effective mechanism is the same.

House price inflation is desirable, we are told, because homeowners feeling the resulting “wealth effect” will spend more on the goods and services provided by other New Zealanders. The win-win logic of this argument hides the fact that, fundamentally, someone is paying a heavy price.

Another way to think about it is that the government has effectively paid for covid-19 by levying a special tax on anyone who wants to live in New Zealand, but did not happen to own property during the summer of 2020/21, and handing that money to homeowners.

Paying the price
Many will pay this price throughout their lives. Some will be consigned to renting forever, handing over ever-increasing portions of their incomes to landlords seeking increased yield from their value-inflated properties.

Too many won’t even be able to do that, and sleeping on the street or in emergency accommodation. The relatively lucky few who do manage to buy a home will have mortgages hundreds of thousands of dollars larger than they otherwise would, spreading the cost of covid across their entire lifetimes.

Even as the beneficiaries of this covid levy, most homeowners are unable to simply stop working and enjoy this newfound wealth.

They may feel that they cannot realise their capital gain because it is tied up in their family home. What this windfall does provide, however, is choice: the option to release some of their newfound capital by downsizing into somewhere cheaper, or to stay put, taking advantage of the extra equity to fund lifestyle improvements like a new boat, a bach or a remodelled kitchen.

Unprecedented demand for watercraft this summer suggests that many are doing exactly this.

It can be tempting to view this growing inequity as just another “baby boomers vs millennials” issue. Certainly, it does represent a massive transfer of wealth from generally younger New Zealanders who do not currently own homes, to the largely older folk who were able to buy homes cheaply in the past.

This disparity is reflected in Westpac’s latest consumer confidence figures, which show that younger New Zealanders are far more likely to be worried about their financial situation compared with older cohorts.

Patronising advice about avoiding avocados and food delivery services to save for a home entirely misses this point. Nonetheless, it is important to note that many older New Zealanders also live in poverty while subject to similarly individualising narratives of self-control.

Social divide
Perhaps the more important question is how this rapidly accumulating wealth will be deployed to further entrench a growing social divide.

Parents with equity to spare are increasingly using it to help their children “get on the property ladder”. On an individual basis this is an entirely reasonable thing to do.

At a larger scale, though, the competitive advantage conferred by having generous, wealthy parents makes it even harder for those who do not have such privilege to obtain a home. Many are being left behind as a new landed gentry takes shape.

These political-economic arrangements favouring existing wealth over hard work have been a long time in the making, beginning well before most of the current crop of politicians arrived in parliament.

It is notable, though, that a government that promised to address the “housing crisis” has actively and knowingly pursued policies that have produced an unprecedented upward step-change in the market.

Perhaps most concerning is that the Prime Minister has expressed her intent that house price inflation should continue, just at a more “moderate” rate, because that’s what “people expect”.

It is exactly these expectations that are the problem: these issues will not be resolved while houses remain a speculative investment vehicle, rather than a home.

‘Tipping the balance’
Tuesday’s announcement of measures to “tip the balance” towards home buyers, rather than investors, might begin to signal a growing recognition that housing is more than an investment.

A substantial class of investors have certainly been made exceptionally wealthy by the covid-19 response, even as those who work for a living have seen their incomes stagnate.

But while this separation of ‘investors’ or ‘speculators’ from ‘homeowners’ might be politically convenient, it makes something of a false distinction.

Whether a house is owned as a home, or purely a source of income, any non-improvement appreciation in value comes at someone else’s expense.

Until New Zealand acknowledges this, little will change: whoever is in charge, and no matter how many new homes get built.

Covid-19 has shown that when politicians want to act, they certainly can. As many others have pointed out, this government promised “transformational change”. I’m not sure that taking money from those with the least, handing it to those with the most, is quite the kindness my colleague had in mind.

Dr Brendon Blue is a geographer in Te Kura Tātai Aro Whenua, the School of Geography, Environment and Earth Sciences at Te Herenga Waka, Victoria University of Wellington. He mostly studies and teaches the politics of environmental science and restoration, but would have been better off owning a house instead. This article was first published on The Democracy Project and is republished here under a Creative Commons licence.

Article by AsiaPacificReport.nz