Red Alert

Archive for the ‘Tax Working Group’ Category

Philosophy & principles behind Labour’s tax policy announcements

Posted by on January 25th, 2011

As we know, today Phil Goff announced a tax free threshold policy. Trevor outlined the bones of this revenue policy in a previous post.  Phil also announced other measures to improve the fairness of the tax system.  These mainly centred on closing down tax loopholes that are currently used by some to avoid paying their fair share and that inhibit investment in the productive economy.  I would like to briefly explain the philosophy and three guiding principles behind today’s announcement. 

Philosophy: Labour is a social democratic party that (by and large) adheres to the principles of Keynesian economic theory (as do most Western democracies).  Keynes believed that in times of recession the government should provide tax relief to the lower and middle socio-economic classes, as this group will spend any increase in disposable income, thereby stimulating demand in the economy.  He stated that giving tax relief to the wealthy is counterproductive, as they either save or retire debt; which is exactly what has happened in NZ.  Alan Bollard, Bill English and the Treasury have admitted that the latest tax cuts have had no stimulatory effect on the economy at all.  So in a time of the greatest recession since the 1930s depression, why spend $14billion on tax cuts that aren’t going to help economic recovery?  You don’t – or shouldn’t.  National’s tax switch was fiscally irresponsible, based on out-dated economic theory and poorly targeted.

Integrity: for any tax system to work efficiently it must have integrity; i.e. minimise the ability of taxpayers to engage in avoidance.  When the government-instigated Tax Working Group discovered that half of New Zealand’s wealthiest 100 citizens don’t pay the top tax rate, there were gasps of disbelief.  How could this be?  It could be because there are too many loopholes that allow a high level of legal tax avoidance.  The Tax Working Group noted that the $200billion invested in rental properties brings in no tax revenue; in fact it generates tax losses.  Hardly the type of investment that will drive sustainable economic growth or create export-driven industry, and yet the law currently allows it.  Labour will change this.  It is important for the integrity of the tax system that these loopholes are closed down and people pay their fair share. 

Equity: basically this deals with tax equity across investment classes.  Phil talked about using the tax system to drive investment towards the productive economy by closing down the tax advantages afforded to those who invest in property.  Under current law, investors have the ability to write off tax losses associated with investment property against personal income.  Often people negatively gear investment properties simply to maximise tax losses, and therefore avoid paying their fair share of income tax.  Labour will change the law around this and ensure that losses associated with investment properties are ring-fenced (as currently happens under company law). 

Equality: is it really fair that in last year’s October tax cuts, someone earning $1,000,000 pa received an extra $1,000 per week, whereas someone on the median income received pretty much nothing?  No it’s not.  I totally agree with rewarding those who do well, who are successful, take on responsibility and who put in the hours, the study and the time – but not at the expense of the great many.  The level of inequality in NZ is alarming and it needs to be addressed.  We pride ourselves on living in a country where all have the opportunity to achieve to our potential.  However, this ideal is sadly no longer reality.  The tax system is but one tool we can use to create a fairer, more equitable society.


Systemic Market Failure?

Posted by on September 22nd, 2010

When this country is in recession and Kiwi families are doing it bloody tough, I cannot bear to stand by and see rich and powerful private interests – whom I will not name at this point and this post is not about SCF – rorting the rules and using their clubs and networks to finesse processes.

It makes Godzone look like “the coldest banana republic in the world”.

For goodness sake interests associated with the Natural Dairy Crafar farms bid (potentially with Nat links) reportedly gave $200,000 to the National Party while the Natural Dairy application was still before the OIO and while National has a ministerial policy review underway. 

National should IMMEDIATELY reject that bid – otherwise what is left to separate this from complete corruption?  Brown envelopes?  Is David Garrett really the only sick or crooked puppy on the Govt benches? 

Was it OK for the OIO-overseeing Minister of Finance to lease his (trust’s) house to the govt for a staggering ministerial rent, or accept hours of free TV for his “Plain English” ads?  Isn’t it time we Kiwis stood up and demanded that the tories do sweat the small stuff like the rest of us?  Isn’t it time John key held SOMEONE to account for SOMETHING rather than smile, wave and make excuses?

The Fendalton and Queen St methods are different from the Crafar one but they are even more dangerous and subversive: very polite circles of influence in the clubs and boardrooms - with massive flows of funds through anonymous trusts that violate the intent of the Electoral Finance Act.  Prestigious law firms and lobbyists.  This is up with the worst sort of influence peddling  I saw in Washington D.C. -  One dollar one vote:  permanent plutocracy unless we fight back.

Beyond political donations, look at the ability of the rich and powerful to get their way while the poor and middle struggle: $2 billion a year of tax avoidance through LAQCs and trusts that National in government has refused to touch.  Half the top 100 welathiest NZers are still not on the top tax rate!

This post is not about SCF, but researching that issue has opened my eyes to the complexity of the company and accounting structures in daily use around the markets.   One prominent international investment broker told me he tells his clients never to invest in NZ other than through an ASIC-regulated (Australian) vehicle, because our market is a wild west.

Well what is the point of getting our savings rate up (and asking hard working families to go without consumtion) if the investment vehicles we need to get the money to our struggling firms are being milked and siphoned by fees and sweet deals to the cronies in the markets?  Why would any sane Kiwi sweat 80 hours a week to build a real business here?  Where will our kids choose to live?

We are talking the need for a full scale root and branch reform.  For example, is the Trustee model not a fiction?  Issuers want tame trustees; trustees want clients.  How do you prevent a race to the bottom?  I will wager now the FMA Bill will not do the job.  We have BIG problems here folks. 

It might have been cool to point the finger at Labour when the champers was flowing during the bubble hype days; but corporate influence peddling is about as attractive as a bucket of sick in the middle of a recession.

There is a real risk of systemic market failure in the NZ financial markets.     They remind me of telecommunications markets in the 1990s – time for a big cleanup.

It is not right and not fair on the silent majority who play by the rules and who are getting absolutely screwed. 

It will only get worse until we have a Govt with the guts to stand up to it.   The smiling millionaire from Bankers Trust is hardly likely to do that!


BUDGET 2010: Will they fix the rorts?

Posted by on May 19th, 2010

Interesting piece in the Dom front page today about the tax avoidance around trusts – but mostly interesting for what it does not say. 

The National government has spent much of the last year cutting “low quality” services like home help for frail elderly because of the supposed fiscal crunch.

Tomorrow they will announce billion dollar plus tax cuts, overwhelmingly benefitting the wealthy few, while the many just tread water in the face of rising GST, rent, power and food costs. 

They lamely justify the top end tax cut as either a growth stimulant (which is nonsense – much more stimulus results from good investments or tax cuts at lower income bands)…

…or a way or retaining talent (branding Kiwis as “envious” is rubbish, as not all talented people are wealthy and NZ already has the third lowest taxes in the OECD!  Our real need is to lift wages and sustainably grow the economy)….

….or a way of stopping the $300 m tax fiddle arising from the abuse of Trusts.  Ironically the way they plan to do that is by giving all top rate earners the same rate as if they too werre fiddling.  (Of course, without sin there would be no sinners)….

But here’s the real rub: even that trust tax avoidance is puny compared with the writeoffs around loss attributing companies (LAQCs) – $2.3 billion in 2008 alone.   Plus a $500m writeoff around rental property losses.  Plus more around the abuse of savings vehicle (portfolio investment entities – PIEs). 

Not to mention the wider issue of the income/capital boundary and the incentives created to hock off small companies too soon, taking the tax free proceeds to buy the bach and the BMW rather than to grow the business.

Does this government have the nerve to address these issues, which have spiralled out of control since the election?   Or will it just continue to take home help off oldies and special ed services off crippled kids?  Will it penny pinch on night classes while boosting private schools? 

Will it stop the rorts?  Is it capable of governing for the many not the few? 

Increasingly, Kiwis are coming around to the view that it cannot, but Labour can and will.


GST increase not good for vast majority of Kiwis

Posted by on April 23rd, 2010

Finance Minister English has confirmed the worst kept secret of the 2010 budget – GST is going to increase to 15%.  Now I accept the Tax Working Group’s argument that the tax base needs to be broadened, but what I find so offensive about this particular tax increase, is that the money gathered from every single New Zealander is going to be used to pay for the tax cuts given to the 8% of kiwis who are fortunate to earn enough to pay the top marginal tax rate. 

We have been here before - I know – but let me illustrate an example of why this isn’t going to be as simple as the government has outlined:

Businesses price items strategically.  For example, an item is priced at $49.95 to psychologically convince the buyer that it costs less than $50.  Add 2.5% onto this and you get $51.20c.  No retailer is going to sell an item at this price point – the next psychological point is $54.95, which is around 10% higher – not 2.5% – or they will leave the price the same.  Either way there is a loser – the purchaser, who has had to pay 10% more for an item, or the retailer who has had to forgo margin.  If, however, the retailer leaves the item at $49.95, then, as sure as eggs, they will double the increase in price on other items to make up for this margin erosion. 

My point is that the government is kidding itself if it thinks that the increase in GST is going to be smooth, seamless and painless.  Those who will really feel the pinch are the 75% of people earning under the average wage, as costs increase above any level of compensation that the government may provide. 

It would have been harder to argue against a GST increase in order to broaden the tax base IF AND ONLY IF the resulting personal tax cuts had been equitable to all in our society.  Why is someone earning the median wage of around $33k/ann worth less than someone on $100k/ann.?  Why shouldn’t everyone who works hard and pays tax be compensated equally?  Of course the answer is they should.  

The message this government is sending, however, is that not all New Zealand workers are equal.  I wonder how Mr Key and Mr English will be able to look the guys in the eye who come in to clean their offices at midnight or who make sure they are kept safe during the day, when all parties know that Messers Key and English will be now be getting around $300/wk in the hand extra, when the cleaners and security personal will have got next-to-nothing.  Is that fair?  Not in my book.!


Tax and the Budget Policy Statement

Posted by on March 4th, 2010

Parliament’s Finance and Expenditure Select Committee has just released its report on the half-yearly Budget Policy Statement.  This  politely worded document contains some useful nuggets of information that arose from Bill English’s testimony to the committee, and summarises FEC members’ views of what they heard.  Some of it was reported at the time, but it is worth reiterating in the context of the broader tax reform debate.

  1. English reiterated that the tax pacakge will be fiscally neutral.
  2. Raising GST to 15% is the government’s intention.
  3. This was not presented as a “revenue raiser on its own” but was needed to help pay for cuts to tax rates.
  4. The main rate change would be at the top end, with likely alignment with the Trust rate at 33%.
  5. Although there was talk that middle and lower income earners would be “no worse off”, committee members pointed out the huge inequity of top rate reductions for the few, versus standstill at best for the many.  There is no disguising the relative shift of the tax burden.

FEC members pushed on how the government would achieve fiscal neutrality given its stated intentions to compensate for GST – the numbers did not appear to add up.    Mr English first disputed the Tax Working Group’s estimates (funny how when he agrees he quotes them) that show full compensation costs almost all the extra revenue increased GST raises; then said rate cuts woul be largely funded from taxes on property.

Having excluded a comprehensive CGT, Land Tax and RFRM, the amount able to be raised from changing building depreciation rules is insufficient (only $0.3 to $1 bn compared to a revenue requirement of $1.2-$1.5bn ).  So if the government cuts the top rate as much as they’d like, it doesn’t leave a lot left over for the great majority of taxpayers.

Mr English then wriggled around on what a partial CGT might look like – discussing a bright line test to change the “intent” rules around property speculation.  English has also proposed “ring fencing”, a measure that he has ridiculed in the past as a ‘disastrous’ proposal.(http://www.hansard.parliament.govt.nz/Documents/20070621.htm )

It is very debateable whether that would fix the tax inequity between investment classes.  It is even more dubious to suggest that the additional property taxes would all be borne by top tax rate individuals – what about retirees and middle income earners with one or two investment proprties who may need to sell up? It looks like the intervention into the property market will really be a revenue gathering exercise to pay for tax cuts to the top rate, rather than a principled approach to addressing distortions as English claims.

And nowhere in the MOF’s presentation was there any talk about closing down the other tax planning rorts.  Funny that.

More broadly, the government cannot escape the contradiction that:

  1. It says it has enough revenue to deliver big top rate tax reductions for the few (but not the many).
  2. But it will drastically reduce new spending to $1.1 bn in Budget 2010 and onwards - inevitably resulting in real front line service cuts to Health and Education.
  3. There was no discussion of restoring superannuation pre-funding, Kiwisaver incentives,  restoring contributions to the SuperFund, or R and D tax credits, even though Treasury has previously advised all are prudent and necessary.

My impression of Bill English’s presentation was that no matter how it is dressed up, the government’s intentions are stark and predictable: raise taxes for the many and cut them for the few, and cut services for the many to pay for it.


AXING THE TAX PACK

Posted by on March 1st, 2010

Labour is taking the fight to the government on its unfair tax plan.  The “Axe the Tax” bus tour is covering the country.

We are campaigning against is whole tax package, which includes all of:

  • GST going up from 12.5% to 15%, even though National said before the election they would NOT;
  • The unfairness of the massive cut to the top tax rate, dressed up as “alignment”, which delivers windfall gains to the top few percent.

The government’s GST tax switch is really just cover for the massive shift towards top end tax reduction.

Politics is, at least partly, about who gets what – and guess who stands to benefit most from National’s plans?

Not the vast bulk of Kiwis, who are on middle and lower incomes and who have toughed out the recession.

Labour will release its tax policy before the next election.  Labour’s tax plan will be fair to all Kiwis, not one aimed at delivering big cuts only to a few.


Exploding tax myths – Part 5

Posted by on February 18th, 2010

Myth: Alignment between corporate and personal tax rates is required for a coherent tax system

Reality: only two countries in the world (Mexico and Slovenia) have an aligned company and top marginal tax rate.

Rate alignment is the major recommendation of the Tax Working Group’s report.  They believe that this is vital in the battle against tax minimisation, and non-alignment is one of the reasons why the system is ‘broken’..  As an aside, an interesting fact is that a person has to be earning $130k/ann or more at the flat 30% company rate to be better off than paying tax using the graduated personal tax regime.

If there is one structure that needs a comprehensive review it is the Trust vehicle.  Unlike company profits for individuals, which are taxed at marginal rates, the Trust rate of 33% is the final rate.   Many people have companies owned by Trusts, which will allow for tax minimisation.

Back to aligning the top marginal and the company rate: this is highly unusual internationally.   In the OECD, only Mexico and the Slovak Republic have top marginal and company rate alignment  In fact, some countries have gaps far wider than New Zealand.  Australia, for example, if you include the 1.5% Medicare levy, has a top tax rate of 46.5%, making a gap between the two rates of 16.5%.  If Australia does decide to further reduce their corporate rate, this gap will widen further.  I suspect that rate alignment between the top marginal and the company rate isn’t essential to fix a “broken” system.

1

Ireland

28.5

2

Netherlands

26.5

3

Austria

25

4

Poland

21

5

Belgium

16.01

6

Hungary

16

7

Italy

15.5

8

Portugal

15.5

9

Australia

15

10

Greece

15

11

Turkey

15

12

Germany

14.82

13

United Kingdom

12

14

Korea

10.8

15

Luxembourg

9.41

16

New Zealand

8

17

Iceland

7.75

18

France

5.57

19

Finland

5.5

20

Denmark

1.48

21

Japan

0.46

22

Mexico

0

23

Slovak Republic

0

24

Sweden

-1.3

25

Canada

-2.32

26

Norway

-2.7

27

Spain

-2.87

28

United States

-4.1

29

Czech Republic

-5

30

Switzerland

-7.97


Key flip flop on GST astounding

Posted by on February 12th, 2010

Key has now said that he will not introduce an increase in GST if the data proves that some kiwis will be worse off, or if he can’t get support from the Maori party.  What..??? Astounding.!

The government’s Tax Working Group presented its discussion paper on GST at the end of July last year, so the govt has had all this time to do the figures around this important piece of tax reform.  What have English and Dunne been doing for the past 6 months?  Both Key and English have previously said in the House and the press that no New Zealander will be worse off when GST is increased to 15%, but now we have this amazing admission that perhaps they were wrong.  We always knew they were – and told them so – perhaps they should have listened to the party that represents the many not the few: NZ Labour. 

As for the Maori party – again, Key, English and co have had 6 months to consult and build concensus with their coalition partner on this important issue, but obviously didn’t even tell them their plans before the PM’s state to parliament.  Some coalition, some partnership - where’s the trust.? 

So Key’s flip flop appears to be an admission that he is wrong re the numbers and a case of out-and-out incompetence (wouldn’t want to be Bill English at this moment in time).  As for the Tax Working Group – they must be wondering why they bothered.!


Why do we favour foreign ownership in our tax system?

Posted by on January 28th, 2010

Before reading this, read the box to the top right of this blog. And then note that I accept that Labour made it worse. And I was Associate Minister of Finance. Then take a deep breath and read on.

For most Kiwis, the imputation system means that the tax their companies (or the companies they own shares in) pay is part and advance payment of their personal tax.  It is a matter of timing but unless they are involved in avoidance or rorts they end up paying a bit more at some stage.

Most countries don’t have imputation systems. Companies pay tax and then individuals pay tax on the dividends from the companies. They don’t get a credit for what the company has paid.

However, for overseas owners of NZ companies, the company tax rate is their final tax. And even then there is real doubt in some cases, for example banks, as to whether they properly declare their profits.

So my fairly simple proposition is; that because their final tax on NZ assets is less than a NZ owner of the same assets, and their net return is higher, they can afford to pay more than Kiwi-owned companies for a specific asset piece of land or whatever and get the same return.

What is the answer? Eliminate the margin between company and top personal rates. You can do this one of three ways:

First, reduce top tax rates down to meet company rates. Second, increase company tax to the top personal rate. Or third (my preference) be fiscally neutral about it and get them to meet at about 36c and while you are at it put the trust rate at that level too.

That means Kiwis can foot it on equal terms buying our assets – it also means we have a tax effect neutral system for choosing the form a business takes – and that is a good thing.


Tax Working Group’s Report

Posted by on January 20th, 2010

The Tax Working Group released its long-awaited report today on recommended changes to the tax system.

Main features are:

  1. Alignment of company, trust and top marginal tax rates – financed by:
  2. increases in GST (to either 15% or 17.5%)
  3. possible land tax (though not all members of the group agreed with this recommendation)
  4. removing tax depreciation on buildings,
  5. removing the 20% depreciation loading on new plant and equipment,
  6. a risk free rate of return method for rental property and changes to thin capitalisation rules.

      At this point, Labour’s stance is to carefully consider the report’s recommendations and their implications for ordinary New Zealanders, develop scenario analyses around the recommendations, and wait and see what recommendations the government adopts before commenting on specifics.

      We are, however, concerned that at this stage the recommendations seem to deliver big tax cuts for those earning substantial incomes (for example, if the top marginal rate was reduced to 30% without any adjustment to other rates, someone on $100k would get over $500/month tax cut and someone on the average wage nothing).  The potential increase in GST would also have a much larger relative impact on those on lower incomes, superannuation, benefits etc than those in the top income brackets.

      Labour’s bottom line is that any tax changes have to address structural issues in the context of broader economic and social goals.

      The allocation of scarce resource (in this case government revenue) is always about choice – how and where to direct money and who will benefit and who will miss out.  In a fair and equitable society, those in the positions of greatest privilege should not receive more government gain and benefit than those less fortunate.

      Very interested in peoples’ thoughts on the tax working group’s recommendations and how they may impact on all New Zealanders.


      Where’s the plan?

      Posted by on November 1st, 2009

      One of the most telling moments in this morning’s Q&A interview with Bill English was when Guyon Espiner asked the Minister: “Cutting spending isn’t really an idea is it? What other ideas have you got to make us more prosperous?”

      English then reeled off infrastructure, cutting red tape, public sector productivity and the tax working group. None of which amount to a strategy to address the structural weaknesses of the New Zealand economy surely.  Finally Espiner tried again: “What is the key policy you want to implement?”  The Minister’s response: a thriving business environment. Which it needs to be said is a goal, not a strategy.

      So let’s look at English’s four ideas and how the Government has performed in its first year:

      Infrastructure – Delayed the roll out of broadband for a year causing uncertainty, shifted priority from  public transport to roads, not much else. Sorry I forgot the bike track.

      Cutting red tape – RMA reforms scaled right back in the face of community and expert opposition, Hide’s core services agenda for local government reduced to a PREFU and plain English financial statements. Not much here to make the boat go faster.

      Public sector productivity – Job cuts and a wage freeze. It is a kind of productivity increase.

      Tax working group – Yet to report but the big idea seems to be a transfer of wealth from ordinary Kiwis to high earners by way of reducing the top rate and bumping up GST.

      The Government could claim that it has been focused on riding out the recession. Yet as Brian Fallow writes, its measures here have been “pretty marginal in the overall scheme of things”. The Restart package for those made redundant is helping 5000, while there are 138,000  unemployed and 60,000  on the unemployment benefit.  The nine day fortnight is helping just 39 businesses.

      Then there is education. Jon Johansson in yesterday’s Herald says: “…the three R’s announcement is so mediocre it barely constitutes an education policy, let along being elevated as one of the six crucial policies to enhance our economic performance as Bill English recently stated”.

      So having done serious damage to Kiwisaver as a tool for turning around our poor national savings record, and axed the research and development tax credit, and replaced the Fast Forward Fund for commercialising agricultural technology with an inferior alternative, you are left wondering where is the plan?