I’ve just been sent the following paper by Labour Party member Perce Harpham. Perce is exploring the ideas around a fixed weekly or fortnightly payments, or “Citizens Dividend”. As well as an asset tax.
I don’t necessarily endorse all these ideas, but it’s good to see some healthy debate and new thinking. Keen to hear what you think.
The Citizens Dividend & Asset Tax
Its all about reducing inequality
firstname.lastname@example.org April 2012
A new approach is needed to replace the complex benefit and tax systems.
The virtues of fixed weekly or fortnightly payments for all people who are NZ citizens are explored. These payments are referred to here as the “Citizens Dividend” (CD) and would be dependant only on age. The payments are seen as replacing our complex benefit system – with “top up” allowances in case of hardship. The same tax rate is suggested as applying to all income of all people and other entities – reducing the possibilities of tax avoidance.
This is a new approach for reducing inequality and thereby improving our society for everyone.
The effect of some different levels of CD and tax on individuals are set out and a spreadsheet for more extensive exploration of the possibilities is offered if requested by email.
As one means of meeting the costs, at least partially, the concept of an asset tax is explored.
An indication is given of the detailed work that is required before legislation could be enacted once the principles are agreed.
Time for a change
The development of our welfare system has progressed over many years to a level of complexity that requires huge infrastructure for administration, and for advocacy groups to assist potential beneficiaries to secure what is due to them. In many cases there is currently a stigma attached to the benefit.
The taxation system has similarly evolved to such a level of complexity that every few years in New Zealand we have another review to make minor changes.
Many people now believe that the time has come for a new way of dealing with the tax and benefit issues – a new paradigm. Any major shift of this sort needs careful consideration of the details and ramifications that will occur but the first essential is to achieve a clear picture of the strategy to be applied. This paper outlines such a strategy and puts some flesh on a concept whose time has, I believe, now arrived. The concept is of a CD being paid to everyone and with the same tax rate then applying to all income of everyone to replace the widespread benefit and complex tax systems.
In the United Kingdom the Mirrlees Review has just reported after a major study. Dramatically, in a break with tradition, this review considers both tax and benefit systems at the same time. The working papers are in a 1300 page book (available on the Web) and the final document will be of similar size. Draft chapters of the latter are also available on the Web. The most interesting chapter for present purposes is chapter 5. It is available at http://www.ifs.org.uk/mirrleesreview/design/ch5.pdf.
This chapter says at section 5.3 “ The holy grail of integrated design, however, has always been the integration of taxes with benefits. Integration finds its purest expression in proposals for a ‘negative income tax’ or for a ‘social dividend’……The attractions of integrating taxes with benefits …… removes the need to separate out means-tested benefits as a special mechanism “.
There is considerable potential for reductions of cost and stress in achieving both the collection and distribution of government funds. Many of the well-off who may be more highly taxed under the new system will have the wisdom to see the Citizens Dividend concept as a matter of “enlightened self interest” to preserve our society. A timely book in this respect ” The Spirit Level – Why More Equal Societies Almost Always Do Better” by Richard Wilkinson and Kate Pickett provides compelling arguments for some such system. The book uses international statistics and US statistics to show that stress levels, sickness, crime, teenage births, mental health, drug use and other social concerns are magnified by greater inequality in income.
The Citizens Dividend
This type of payment system has been referred to as Guaranteed Minimum Income, Basic Wage, Universal Income, National Dividend, etc, etc. Our version should, in my view, be called a “Citizens Dividend”. Googling any of the prior terms yields a huge literature and many advocates.
The name “Citizens Dividend” more correctly labels it as a payment made to all citizens as of right rather than as an act of charity. ( Possibly of the order of $10,000 per year but this needs to be decided). Citizens not only have a right to live in this country but a right to live at some basic level of dignity. This can be seen as a natural progression in the rights which have taken people from being chattels of others through to a notion of freedom, having the right to choose their leaders, for landowners to vote, for all men to vote, for women to vote also, for a “safety net” and so on.
Universal superannuation can be seen as a kind of Citizens Dividend restricted to the elderly.
The North American movement
In the 1970s the American government almost adopted a Guaranteed Annual Income as part of President Johnson’s “war on poverty”. A number of studies were done and the idea was pursued by President’s Nixon and Ford but finally lost after President Carter with the election of President Reagan.
The idea was taken up in Canada and an extensive trial called MINCOME ( Minimum income) was funded from 1974 to 1978. The politics then changed and funding was cut. Data was collected but not analysed. A draft paper by Professor Forget is at:
“THE TOWN WITH NO POVERTY: A history of the North American Guaranteed Annual Income Social Experiments”.
This not only details the history noted above but in its latter half analyses the results of the “Dauphin” experiment. This was part of the MINCOME study. Her analysis is in terms of the effects as measured by other records such as the census and health and education records for Dauphin, an isolated village of about 10,000 people. She made comparisons to a matched control group which did not have the payments. The payments were, essentially, a type of Citizens Dividend from 1974 to 1978.
The results showed that children stayed at school longer than the control group and, later, that their descendants also did better than the control. Hospital admissions dropped and then reverted after the payments ceased.
To quote from the paper:
“the GAI is conceived as an insurance policy. In the same way that people who buy fire insurance on their houses perceive the policy to be beneficial even if they never collect, the GAI benefited everyone in the saturation site, including families that never collected payments under the scheme. The benefit to those who did collect payments is obvious, but those whose incomes exceeded the threshold and therefore did not qualify still benefited from the reduction of risk. Because this is an agricultural community and even those working in other sectors had incomes dependent on harvests and agricultural prices, few people knew in advance whether they would qualify or not. The health benefits, including the willingness to allow potentially useful adolescent children to stay in school rather than encouraging them to work, is dependent on perceived risk and not directly on whether the family qualified for support after the fact.”
“Income security, the guarantee that all participants can expect a basic annual income whether or not they work, gives people a longer planning horizon, allowing them to get beyond just making ends meet. Moreover, a universal program avoids targeting individuals because they are “unemployed” or “single parents”. Universality promotes social cohesion; a universal guaranteed annual income becomes a shared social experience rather than simply an individual benefit.”
The New Zealand Scene
The Citizens Dividend is a concept whose time seems to have come here if we consider that people as diverse as Gareth Morgan and the National Council of Women of New Zealand have become local advocates. In the April 2010 Circular from the NCWNZ, it is stated that
“NCWNZ policy calls on the Government to ‘investigate the feasibility of introducing a universal basic income for all New Zealanders’. This policy was adopted in 1996, and is as relevant today as it was last century. ”
Many others in New Zealand have also advocated the same approach. The report of the Alternative Welfare Working Group in November 2010 said “ While the UBI, and variations on it are considered radical and untested, there is a strong case for substantial work to be done on assessing its practical application in this country”.
Gareth Morgan and Susan Guthrie published ” TheBig Kahuna” in 2011. It gives an excellent account of the history of our Welfare System and its current dysfunction. Our Tax System is similarly well described as a mess. They advocate logically for a Citizens Dividend by another name. They also propose a form of Asset Tax. They have set up a web site http://www.bigkahuna.org.nz/ which has descriptive material and many comments.
The differences in The Big Kahuna and what I will describe highlight the amount of work that needs to be done to deal with the levels of CD and tax with all the details which need to be decided. But these matters should not be allowed to obscure the need , as noted above, “for substantial work to be done on assessing its practical application in this country”.
The Welfare Working Group has had Treasury write a paper on the economics of paying everyone over the age of sixteen $300 per week and financing it from income tax. Treasury show this to be disasterous. That is not surprising. I have never seen anyone else contemplate payments at this level and am astonished that such a question should have been put. The practical levels of CD and the manner of paying for the cost of the CD will be explored further below.
The Auckland economist Keith Rankine has contributed many papers and ideas over a long period. He has captured the ethical basis at http://keithrankin.co.nz/krnknubi1new.html saying:
“The right to enjoy one’s social inheritance is no less sacrosanct than the rights of private inheritance. The introduction of a universal basic income is a way of recognising the public property rights of a resident population. … A universal basic income is an effective means to the creation of a self-reliant economy which can be set to any level of fiscal constraint. As a part of a social wage, it complements other forms of public expenditure. And, by acting as a safety net but not as a poverty trap, a universal basic income can be used by a rich society to ensure that it is not populated by poor people.”
He has also advanced a persuasive “fairness” argument along the following lines:
The tax rates in the 2010 budget are as follows:
From 0 to $14000 per year 10.5% From 14001 to $48,000 per year 17.5%
From $48,001 to $70,000 30.0% From $70,001 upwards 33.0%
So we can calculate that a person earning $14,000 per year will pay $1470 in tax.
A person on $48,000 will pay $7420 in tax and someone on $70,000 will pay $14,020.
So on $14,000 per year income tax is $1470.
On $48,000 per year income tax is $1470 + $5950 = $7420.
On $70,000 per year income tax is $1470 + $5950 + $6600 = $14020.
Above 70,000 per year the tax rate becomes 33%. If this applied to the earnings below $70,000 they would pay $23,100 tax on a 70,000 income instead of $14,020. Which is $9080 greater than they currently pay.
In other words at present Rankine points out that that we effectively tax those at or over $70,000 at 33 cents on every dollar of their income but we give back to them $9080. Why do we not do the same for everyone? That is, tax at 33cents on every dollar earned but give back $9080 per annum. If everyone did earn over $70,000 that would be exactly what we would be doing. So why do we not give the same benefit to all those who earn less than $70,000? Clearly those earning less than $70,000 per year would be better off than at present so it would cost the Government more than at present.
The loss of tax revenue might be unsustainable so we will work out the cost below and also see how it might be recovered but first let us look at the general idea more closely.
Social Benefits for NZ
The CD would be a major shift from “benefit” to “right”. There will still be a need for special hardship grants but benefits as they are currently known would disappear. There would be huge savings in bureaucracy and in the stress for those wanting to get a benefit. For most of the population there would no longer be a bureacracy intruding into their lives and deciding whether they were sick, students, unemployed, living alone, married, cheating on the system, deserving or otherwise. Many of the voluntary services, advocacy and emergency and the like, would be freed to do other good works.
The CD must be set sufficiently close to what is currently paid for many benefits to achieve these results or it will not be acceptable to the electorate. It cannot, for this reason, be introduced timidly and transition to it needs careful thought. There will be a need for top-up in some cases but these already exist and would be administered in a similar way. The means of paying for such a CD will be explored below.
There are many minor benefits that can be reasonably anticipated:
- Payments from spouses who currently default on child maintenance could be deducted from the CD very easily.
- Unpaid fines and court awards could be more readily collected.
- The iniquitous disincentives of the “claw-back” provisions of the current system of benefit abatement would disappear – no poverty trap.
- The inequity of people being taxed on their income but companies being taxed on their profits would be reduced if only people were paid the CD. This would partly compensate for their costs of being available to work and their other income might more fairly be considered to be “profit”. (It is a peculiarity of our tax laws that people are taxed on income but other legal entities are taxed on profit – disposable income).
- Part time and low paid jobs would become more attractive for those who currently cannot afford the costs of going to work because of the abatement of their benefit. This would improve our national productivity and social cohesion. It would also make it easier for people to take courses to improve their skills.
- It may become possible for a discharged prisoner to avoid going back to their old method of “earning a living ” when they are discharged with $300, no job and very likely no means of support.
- The CD would not be paid while an offender was in prison. It would either go towards the cost of keeping them in prison or to payment for victims.
- There are also implications for the payment, non-payment or waiting for payment from ACC.
- If it becomes necessary to increase the age of entitlement to Superannuation then the effects of this change would be mitigated. ( This assumes that superannuation will remain higher than the CD just as it is currently higher than other basic benefits.)
10. Students would require less in the way of loans and it may be possible to simplify the procedures for them.
At least some of the problems of the existing benefit system will remain. There may be some “layabouts”. . There will almost certainly be persons making false claims but greater concentration and detection should be possible because less overall surveillance to detect wrong classifications will be required.
Before attempting to cost the CD or to work out how to pay for it some basic principles are required. The following are suggested:
- The CD will be tax free.
There is not much point in the complexity of paying the CD then taking it back.
- The level of the CD will not depend on anything except age.
In 2010, the state should not intrude on living arrangements. So the CD should not vary by race, religion, political choice or the personal choice that people make as to whether they live alone, in a commune, on a marae or in marriage or other partnership arrangement. The CD should be determined only by age.
- The CD will be paid to all people who are citizens of NZ.
This is another way of saying that it will not be paid to companies, trusts or other such entities.
- The level of the CD will be different for children, youths and adults.
The needs of these groups are different. There is a special case to be made for the replacement of “working for families” with a more uniform payment so that the children of the unemployed are not left in poverty. There is also a special case for superannuitants which will be explored further below.
- The tax rate will be the same for all people and other tax payers.
There is a huge and wasteful tax avoidance industry deciding whether income is diverted into trusts or companies because they attract different rates of tax. If there is no difference in the tax rate then these devices have no effect and the, currently legal, tax avoidance will be greatly reduced.
The effect on individual incomes
Many people will judge the change by how it affects them financially. Let us examine this with some hypothetical figures. (I am happy to email on request a copy of my spreadsheet which, with lots of qualifications, allows anyone with the Excel program or open source equivalent to easily enter tax rates and CDs for different ages and to see the effect for different income groups. The total cost of those choices is also calculated and the level of one possible new tax is approximated if it is to recover the costs. The data available and other things prevent absolute accuracy but the comparative effects are useful.)
If all income was taxed at 25% ( as has been advocated by some ) regardless of the level of income then at $14,000 per year people would pay $3500, at $48,000 per year it would be $12,000 and at $70,000per year the tax would be $17,500 (compared to the present $14,020).
But if the adults income was boosted with a tax free CD of, say, $8500 ( about the level of the single unemployed rate for those under 24 years of age) and all their other income was taxed at 25% they would save the tax they already pay but pay at the new, higher, rate. In other words the net effect on an individual is $8500 + current tax – new tax.
On zero income people would be $8500 per year better off.
On $14,000 per year they would be $6470 better off (8500 + 1470 – 3500)- since 25% of 14,000 is 3500 ;
on $48,000 per year (8500 + 7420 – 12000) this becomes $3920
and on $70,000 it is $5020 (8500 + 14020 – 17500).
Beyond $70,000 the saving from the tax cut escalates further and the 33%-25% (8%) reduction applies to every dollar. On $100,000 per year the saving is $7420 and so on.
So, a 25% tax rate is a greater advantage to the better off compared to the current one which peaks at 33%. The same is true for a 30% tax rate – on $70,000 the saving is $1520 but escalates beyond that as 30% is below the current top rate of 33%.
However if, with the same CD of $8500, the uniform rate is 33% the advantages are:
on zero income $8500, on 14,000 it is $5350, on 48,000 it is $80 and on $70,000 it is minus $580. Above $70,000 the figure would remain at minus $580. The break even point would be at $68,260. The CD could be raised to $8500 plus $580 (getting to $9080 as calculated earlier) so that no one was worse off. (Above 70,000 the tax rate is 33% anyway so there is no more difference for those earning over $70,000 per year.) But the affordability of the CD changes accordingly and the income gap does not narrow.
For superannuitants the position is more complicated. They already receive some $14,500 each (married rate). This is included in their income and they are charged tax of 1557 even if they have no other income. And it pushes their other income into a higher tax bracket. If the tax rate is simply raised to 33% on all income (including super) then they would be $3228 (1557 – 4785) per year worse off if they had no other income. If (including their super) they have 48,000 of income they would be $8420 worse off and on $70,000 it becomes $9080 worse off but with no further change above $70,000. It would appear therefore, in broad terms, that in order to bring superannuitants on less than 48,000 (including their superannuation) into the uniform tax rate without making any of them worse off it would be necessary to pay them the same tax free CD of 8500 as other adults. Those on 70,000 (including superannuation) would be $580 (9080 – 8500) worse off. While this is a neat solution it may compromise the affordability of the system and does not accord with the principle of closing the wealth gap.
A smaller CD (perhaps the same as for teenagers – say $5000) could be contemplated for superannuitants, while keeping the uniform tax rate, such that those with higher incomes suffer more loss of benefit – remembering that they still get the superannuation. The breakeven point could move to whereever may be decided by choosing a suitable tax-free CD to be paid in addition
to the taxable superannuation in order to compensate, wholly or in part, for the higher tax on all income including the superannuation.
The Cost of the CD
Bill Rosenberg has contributed many ideas to this thinking and has provided such data as is available to him to enable the calculations required. This has highlighted the need for better and more reliable data. But the rough level of costs can be determined.
First we need to find what is currently collected. Applying the 2010 budget tax rates to the distribution of taxable incomes in 2008 (the latest for which we have figures to hand) shows that those on the 10.5% tax rates would contribute $4194 million, on 17.5% would contribute $8397 million, on 30% would contribute $3238 and those on 33% would contribute $5009 million. Giving a total of $20,838 million for the current total personal tax take.
On a comparable basis if the tax was a uniform 33% then the lowest bracket would pay 4194×33/10.5 or 13,181 million and so on to give a total of 37,586 million. So on a uniform 33% tax the personal tax collected would be $16,748 million greater.
But what would the CD cost? Since one would like to set the CD such that most people are going to be better off, or only marginally worse off, the net cost must be higher than at present. This depends on the levels chosen for the CD and the uniform tax.
Some arbitrary decisions are inevitable but there are several natural break points for changing the level of the CD. Thus puberty starts at about 12 years of age and children then get into more expensive education – and eat a great deal more. Also, at age 18 many laws assume adulthood. And at 65 people currently become superanuitants.
So if the CD was set at $2000 per year for the 0 to 12 (inclusive) age group there are some 750,000 of them and the CD payment would be $1,500 million. Similarly it would be 340,000×5000 (1,700 million) for the 13 to 17 group if they had a CD of $5,000 per year. The 18 to 64 group total some 2,850,000 persons and at $8,500 for the CD would need 24,225 million and 65years upwards, also on $5000 for the CD, would add a further 2,830 million giving a total of 30,255million dollars to pay out.
This apparent precision needs all sorts of qualifications about the data, various assumptions, population growth, inflation and so on. As set out above the CD would cost $30,255 million and the 33% uniform tax would collect $37,586 million. So far so good but we also have to pay Superannuation and other things. We can expect to eliminate some benefits entirely but others will need to be partially retained with “top-ups” for disability, sickness and so on.This may be partially balanced by savings which should eventually occur within the departments concerned. There would also be savings from “Working for Families”.
From the October 2010 Treasury Report to the Welfare Working Group on “A Guaranteed Income for New Zealand” we find at page twelve that the “… personal tax rates currently raise approximately $6.5 billion in excess of current social assistance costs”.
We can also infer from the same Treasury Report a cost of $4.5bn for Working for Families. So this must be taken into account as an offset to the cost of the CD. Similarly Superannuation at $8.306 billion must be added and possibly, say, $5bn for topups. But if the CD rate is higher than, or close to, a present benefit then that benefit should disappear. In other cases it can be moderated.
Let us add it all up.
We then have with the CD rates set out above and a uniform tax of 33%:
Cost of CD $30.25 bn Return from 33% tax $37.58bn
Plus superannuation $8.3bn Saving from Working for Families $4.5bn
Plus top-ups, say, $5bn $42.08bn
Plus excess as above $6.5bn
So, at worst, we need to think in terms of an extra cost of, say, around 10 billion.
Would it be much different if we went to a 38% tax rate?
Consider a CD of $10,000 for the 18 to 64 group and a 38% uniform tax.
Just putting up the tax rate to 38% with no other change would result in the following distribution
Income Pays now @38% Difference
14000 1470 5320 3850
48000 7420 18240 10820
70000 14020 26600 12580
100000 23920 38000 14080
So, going to a uniform 38% rate does not look too good. The funding problem would be reduced but almost everyone would be worse off. However, suppose the CD was $10,000 per year and consider that for a couple with two children they would have 2×10000 plus 2×2000 paid under the CD. So even where the household income was $100,000 they would be better off.
From my earlier calculations, those on a tax rate of 10.5 % currently contribute some 4194 million.
They would then pay 4194×38/10.5 = 15178 million. Working through the other groups I then get to a tax take of 43,280 million which is 5,694 million more than with a 33% uniform tax rate.
However, the extra 1500 to get the CD from 8500 to 10000 for this age group will cost 2.850million times 1500 or 4,275 million extra.
Hence putting the CD for the adult age group up to 10,000 and having a uniform tax rate of 38% cuts the extra tax to be recovered elsewhere by 1419 million. Compared to the earlier total of 10 billion the saving is useful but not fundamental. So, for thinking about the funding problems, let us retain a cost estimate of 10 billion.
How should this be financed?
There are limited possibilities but it should be remembered that one of the objects ought to be to reduce inequality in our society. Our national tax policy has, in the past, focused solely on income and expenditure ( PAYE &GST). This contrasts strangely with the fact that local body tax policy (rates) has been focused largely on accumulated wealth in the way of property.
It is time for a better balance between taxing the flow of wealth and its accumulation. Not only should people work if they can but wealth should work too.
In order to stress that it is only one of the ways in which the CD can be paid for I will relegate discussion of an asset tax to an appendix.
It is my hope that these ideas will be taken up by Government which, after carrying out the necessary modelling and detailed work, will establish a new paradigm superceding the “welfare state”. Maybe it would become known as “The Fair Society”.
Appendix An Asset Tax
Few people seem to be aware that France and India, to name only two, have “Wealth taxes”. There is much to be learned from the experiences around the world including why some European countries have abandoned these taxes.
People have, at different times, advocated land taxes but it is hard to see why this class of asset should be given special treatment. Why should a farming business be treated differently from any other business? Gareth Morgan, and others, have suggested a Comprehensive Capital Tax or similar tax. We will here refer to a related idea as an “Asset tax” to apply to all people and businesses etc.
The intent is to levy a small tax on all assets so far as this is possible, equitable and practical.
Some of the virtues of such a tax are:
- It is paid by those who can afford to pay – even if they have to borrow in some way against their assets.
- It will catch overseas owners who have no income in NZ.
- It will encourage the use of capital in productive enterprises rather than ostentatious expenditure on boats, houses, cars and the like.
- the tax base will be greatly broadened.
- more productive use of existing resources will be encouraged – e.g. working shifts in a factory rather than incurring additional expense to increase plant and buildings.
- An asset tax is in line with the overall objective to reduce the disparity in wealth.
There are obvious problems also
- There would be a great temptation to under-declare value. This might be countered by charging 10% on the amount undeclared when a sale takes place or when a valuation is carried out after a warning.
- There would also be a great temptation to not declare ownership at all – particularly of overseas assets. A counter would be that, if discovered, they might be forfeited to the crown.
So far as possible all assets should be included. Cars, houses and planes are registered and are either valued at intervals already or can be taken at original market value and indexed. Similarly with boats. Other things like jewelery may have to be taken at their insured value.
The Effect on the Economy
Gareth Morgan (http://www.garethmorgan.com/Pages/News/Default.aspx) has put this rather well:
“By facing an annual charge on capital, an owner is more likely to use that capital to generate income, as there is an increased cost in leaving it idle. This would see more capital brought into the production process. An offset would be that the cost of capital versus labour would rise and so producers would prefer labour over capital. A risk of full employment might ensue! Which is the greater effect – greater use of capital because of the higher cost of leaving it idle, or the switch from capital-intensive to labour intensive production? The first effect is unambiguously positive in terms of lifting economic performance, the second effect could be positive or negative. There is no magic capital/labour ratio, indeed increasingly the value-add in businesses comes from intellectual property so my “guess” would be that efficiency gains (the income effect) would substantially outweigh relative price (substitution) effects.”
A major question
A major point of departure is the question of whether an asset should be valued at its gross value or its net value – meaning the equity of the owner in the asset. In the case of a house should its value for the owners tax purposes be the notional sale value or the sale value less the mortgage? In other words is the tax levied in the same way that local body rates are levied or is there a system like GST where every component of the asset is taxed separately.
In the latter case the net equity in the house would be counted as wealth of the owner but the mortgages provided by the bank less their borrowings would be counted as an asset of the bank and the lenders of money to the bank would have it taxed as their asset. It could become very complicated.
Again, if a company has shareholders equity and some borrowings should the company be liable for asset tax on its shareholders equity or on its total use of assets? And should the equity of individual shareholders be counted as their share of the calculated equity in the company’s books or on the market value of their shares?
The most practical solution would appear to be to have the owner of the assets accountable for the entire wealth that the assets represent. They are, after all, the ones who are using and managing the resource. We need the scarce capital resources of the country to be used to the best effect and this would be encouraged by making them more expensive.
An interesting corollary is that money, as such, would not be counted for the asset tax. Very much in the same way as with GST where the finance sector was exempted from GST for the same reasons. And the end result for the owner of the assets would be much the same since, if an asset tax is levied on providers of finance along the way then this cost will be passed on in any case.
Definition of the Asset Tax
One ends up with a fairly straightforward system where money invested or deposited by someone in a finance company, bank or company is not counted for purposes of the asset tax but everything else that they own is so counted (or at least as far as practical means can be found for doing so).
It may seem a little strange not to count money as an asset but money does not use the resources of the planet and to the extent that it is loaned to someone who does have physical assets then this final owner will pay the asset tax but there will be no double taxation or great ccomplication in dealing with tax accounting all along the chain.
Companies, trusts and other legal entities will have no exemption and, similarly, do not count their bank deposits for asset tax purposes. Banks and finance houses have only their shareholders equity counted for asset tax purposes and have no exemption. Local bodies are not subject to the tax – otherwise there would be double taxation of property holders. Note that the improved value of properties should be the basis for the asset tax so as to properly measure the assets of the owner.
When I started thinking about this I believed that there was a clear need to provide a level of exemption which meant that most householders would not have to pay the asset tax or arrange charges against their property. For example, if the exemption level was such that 80% of people do not have to pay the asset tax then, on the 80/20 rule ( whereby 20% of people have 80% of the wealth) which often applies in social things, the tax would have to increase. So far as I can discover there is no data available on the distribution of assets in New Zealand.
On reflection, in trying to assess the difficulties of collection and avoidance problems I have concluded that there should be no exemptions – better to increase the CD slightly and avoid many problems as with communally owned land etc. Also to avoid “rorts”with alleged distributed ownership.
There is also an issue of “fairness’ and “equity”. If family homes are exempted then those who do not have a home of their own will be in rented accomodation which will have to bear the tax. Therefore the rent will be higher for the renter making it harder than ever for them to aspire to a home of their own.
A side benefit of having no exemptions is that the whole collection process becomes very straightforward. An addition to local body rates for the CD would be collected in the current fashion. Company taxes would be levied on the balance sheet total assets (not net shareholders funds but total assets) and less the local body collection. A CD could be added to car registrations and a levy collected on insurances for personal property and house contents insurance etc.
The Modelling Requirement
As noted earlier I am happy to email my spreadsheet to anyone who wants to get a feel for the comparative effect of different settings of the tax level etc. It is a first crude step in this direction.
The real imperative is to accept and commit to applying the new paradigm. The second is to work out the details and to balance the level of the CD with the manner of paying for it.
There are many other things that would have to be settled before enacting legislation but what we are initially concerned with is to have a model which allows the exploration of the broad parameters of these ideas – of a CD, one rate of tax on all incomes and an asset tax as set out above. Amongst the issues to be ignored in the first modelling are flow on effects such as possible migration, capital flight, increased rents, interest rates, prices, the labour market and capital market effects.
A large part of the task will be unearthing appropriate data or being able to plausibly estimate it.
The independent variables need to be:
The level of the CD in each age range.
The level of the asset tax.
The level of income tax (33% occupies its peculiar position of choice outlined earlier because that is the top rate now established. It may later be desirable to consider higher rates on very high incomes but at the risk of “rorts” – although if few people are in a position to benefit from them these people could be subject to higher scrutiny.)
The output for each of these settings should be:
The net cost of the CD after the offset of the uniform income tax.
The yield from the Asset tax.
There is a further requirement to show how people at different ages and income levels would be affected compared to the latest tax regime.
Later we also need to model the
- Effect on households/families of different CD structures, taking into account asset holdings, in particular estimating the effect on disposable income inequality of the changes and comparison with current tax structure including Working for Families.
- Interaction with the current welfare system
- Ways to deal with New Zealand Superannuation.
This whole matter is of a level of complexity which is worthy of the best attention of our Public Service. It is not something that can be done overnight but needs to be staged and well thought through before implementation. And it will have to be implemented step by step. But the efffect on our social and economic well being will make the difficulties worth the effort.
I do not underestimate the work that has to be done. Consider two extreme examples where decisions will be required if an Asset Tax is to be the chosen means of paying for the CD.
The first is with forestry companies. They have to finance establishing a forest which will not produce a return for close to thirty years. If they have to pay an Asset Tax every year the attraction of forestry will be reduced. Should forestry be exempted until harvest begins? On environmental grounds I believe that it is important that we continue to develop forestry so I would answer yes.
One attraction of an Asset Tax is that it should increase the pressure for the capital in the country to be put to productive use. Amongst other things it should be a disincentive to spend huge sums on elaborate houses and the like. And it should encourage companies to make profits or to reassess what they are doing. But how do we deal with start-ups. Many will be a smaller version of the forestry company. Some will take years to carry through their development and get it to market. They may raise capital and use it, raise more and do the same for a number of years. This is the typical “burn” of IT companies. They then have accumulated tax losses but almost no physical assets. But they have used some of the country’s resources. Should the tax loss (capital that has been used up) be subject to the Asset Tax?. Do we also exempt them until they start to make profits? Again, on the grounds that the IT industry has great merits for NZ I would answer yes to both questions.
So now we are into choosing what industries to favour. I think we should do this for many reasons. But what about farming, fishing etc ?
These are all problems to be thought through.
It may be easier to use another tax to finance the CD but it should be one which reduces inequality.