Brian Fallow’s verdict on Peter Dunne’s income splitting idea in today’s Herald… “Unfair, unaffordable and unlikely to happen”
He concludes with the following “And at a time when [National's] policy is to encourage welfare beneficiaries into the workforce it would find it hard to justify dispensing middle-class welfare to make it easier for the partners of the well-paid to stay home”
Says it all really.
I have taken the most unusual step of reposting a blog I wrote a couple of months ago on income splitting. This is because as of 16th August (apparently) income splitting is back on the legislative agenda. Unbelievable. Would have thought that $500m/ann would be better off spent on creating jobs and economic growth rather than handing it back to those who are about to receive a big tax cut anyway. Is this an admission that there simply is no plan except give money to those on high incomes? Certainly appears that way.!
As the IRD noted in its report on income splitting “it might be perceived as unfair that the benefit from income splitting increases as primary earner income increases, providing more benefit to couples with higher incomes”
Part of the supply-and-confidence agreement between Peter Dunne and the National party is National supporting tax legislation around income splitting. I questioned English about the possibility of income splitting legislation when he appeared before the Finance and Expenditure select committee recently, and he pretty much ruled it out. Not surprising, considering the cost is estimated by the IRD to be around $500m per ann.
When I questioned Dunne at FEC a couple of weeks later, however, he cited the supply and confidence agreement. Earlier press statements seem to suggest that Dunne is serious about pursuing this course of action.
So, does income splitting actually help those who really need it: those who are torn between going back to work fulltime, working part-time and/or staying at home to look after children? (Dunne’s proposal is only applicable to families with dependant children).
The simple answer is no. Working for Families is in place to help struggling families. Dunne suggests keeping both. The median household income is about $60k and the median wage is around $32k. Therefore, many households have both parents working full-time now and would not benefit from an income splitting regime. Those families who genuinely do have a ‘choice’ around whether one or both parents work, tend to be those who earn the most – makes sense. ‘Choice’ implies a level of economic freedom: necessity does not.
How would income splitting benefit kiwis on different salaries? Outlined below are 3 scenarios (assuming a two parent household with at least one dependant child): ann salary $40k, $100k, and $140k. JK’s tax cut figure is $$ in the hand per week before GST, ETS, inflation etc. IS = income splitting. This is also a net figure from the IRD’s calculations in a 2009 paper. The actual figures will have changed slightly under the new tax thresholds, but you get the point…
$40k – JK’s tax cut – $23/wk + IS $23/wk = $46/wk
$100k – JK’s tax cut – $69/wk + IS $163/wk = $232/wk
$140k – JK’s tax cut – $108/wk + IS $200/wk = >$300/wk
So you see. If income splitting is to go through (and I very much doubt it will – but we will watch with interest as Dunne and Key/English fight this one out), once again, those on the highest salaries will be the real benefactors. Also remember that around 70% of Kiwis earn less than $40k. Even English admits income splitting is not well targeted. Would have to agree with him just this once Mr Dunne.
A recent report tabled in the House by the Office of the Auditor General on the IRD’s management of the child support system highlights some serious issues in this rather sensitive area.
Over $1.5b is owed in child support payments.! This is forecast to rise to $7b by 2018 unless something drastic is done soon to address the problem. Of the current $1.5b outstanding, only around $195m is actually owed to parents – the rest is owed to the IRD in penalties and interest.! The OAG concluded that the severity of the penalty regime can actually act as a disincentive to people meeting their parental responsibilities, as opposed to the incentive it is supposed to be.
I think most of us agree that any parent who doesn’t take responsibility for their children by providing for the necessities of life needs to take a good hard look in the mirror. ‘Front up and take responsibility’ is the message society needs to send to those who abandon their dependants. About 68% of parents do make the correct payments on time, but that leaves 32% of parents who don’t.!
However, we need to have a system that is fair and an agency managing the system that understands its own responsibilities to the country’s citizens as well. The data in the OAG’s report shows that the IRD only calls around 40% of those who enter into the child support scheme. Remember, people enter this scheme often at a time of great turmoil and emotion. IRD should be making an effort to contact EVERYONE and work with people to outline their financial responsibilities and how to best manage the situation. A staggering 96% of all those within the child support system have had to pay a penalty at some point in time. This is astounding. The penalties are harsh – as mentioned, the OAG acknowledged this - if you are a minute late in paying, your debt jumps by 10%, then a further 2% per month. A person’s debt doubles around every 3 years.
The thing I find a little disturbing though, is that the penalty payments collected by the IRD don’t go to the parents looking after children, but straight into the IRD coffers. How about this: if a person with a child support debt dies, the IRD tries to claim that debt from the estate – the estate doesn’t go to the children, who could well do with the funds – but to the IRD.! How perverse.
At a speech in October last year, Minister Dunne said that he would have a paper to cabinet in ‘a couple of weeks’. Almost a year later, and no sight of it yet. So, like the management of most issues, Key’s cabinet collectively fiddles while Rome burns. Its becoming a common theme. Does this govt actually care? Dunne has known about this problem for around 3 years (remember the man was Revenue Minister under Labour), and still hasn’t done a thing.! Where is the plan to remedy this situation? It simply doesn’t exist. And who suffers? Kiwis who can least afford it. That’s hardly fair Mr Dunne and Mr Key.
Okay – we all love the AB’s. Most blokes will admit to wanting to be one, and we tend to move heaven and earth to ensure we are near the TV (or, better still, at the ground) when a test is on (well I do anyway). I would, however, like to share a story that shows what true heroes they are – to the younger generation…
Last Sunday at 10.00am my children and I attended a function in Wgtn, hosted by Westpac, for the children of the bank’s clients. Charlie, my 5 yr old son, loves his rugby and the All Blacks, and in his eyes Ritchie McCaw is as close to a god as a mortal man can be. Well, we turned up to a programme that included Ritchie McCaw, Mils Muliaina, Ma’a Nonu, Cory Jane and Victor Vito not only signing autographs on anything and everything, but running skills training sessions on tackling (Victor), kicking (Mils), stepping (Cory) and passing (Ma’a) with Ritchie going between all stations.
Remember, this was only 12 hours after they had played 80 minutes of hard out test match rugby against the Springboks. They all looked a little sore, but they were brilliant with the kids.
Fantastic ambassadors for the All Blacks, rugby and New Zealand in general. And Charlie hasn’t stopped talking about it. True heroes.
Every now and again, political parties bring acknowledged experts into their caucuses (almost always on the list) in an effort to bolster core competency and skills in a specialist area. Sometimes these individuals do well; sometimes they don’t. What history does show, however, is that no matter how smart or successful a person has been in a previous career, political experience and smarts cannot be fast-tracked.
There is no doubting Tim Groser’s experience as a trade diplomat. The fact that a few in NZ’s international trade circles don’t speak as highly of him as he does of himself may be professional jealousy – or simply the size of his formidable ego, but that is another story.
The question I ask re the success of the Groser experiment has nothing to do with his trade negotiation competencies, but rather concerns his skills as a political operator around the cabinet table.
John Key and Bill English speak constantly about growing NZ’s export markets, and we recently heard Mr Key say that we should be aiming to double our trade with China. Well, most parties (Greens exempted – they’ve voted against every FTA this term) agree with increasing the level, volume, consistently, sustainability and quality of our exports, but how is the country’s business community supposed to take advantage of the potential opportunities that FTAs present when the Nats have just cut millions from successful trade development schemes? When I asked Groser about this in parliament he gave the typically smart-arse answer that he expected his staff to do more with less. Okay…
The bottom line is that the national rhetoric simply does not match the trade funding.
The advantage to the country in having someone like Phil Goff as Trade Minister is that not only was he excellent around the international negotiation table, but also just as competent a negotiator around the cabinet table. Someone as seasoned and smart as Phil knew exactly how to negotiate the minefield that is the budget process and who to talk to and deal with when securing funding for his portfolio. It is these skills – as well as portfolio competencies – that make a very successful Minister.
This is why I ask the question if the Groser experiment has been successful. There is no point negotiating FTA’s if NZ companies haven’t the competencies and / or backup and / or support to internationalise their products and services. The cuts to trade development funding during Groser’s time as Trade Minister cannot be ignored.
Do more with less Mr Groser.? Hmmm. Somehow I don’t think this is the right answer. Surely NZ companies with export potential deserve better. What it does prove, is just how effective Phil Goff was as a champion for NZ trade. And what a great PM he will make.!!
Myth – income tax splitting will allow New Zealand families to make choices around working versus bringing up children.
Reality. Income splitting financially benefits the wealthy but very rarely the great majority who actually need assistance.
Part of the supply-and-confidence agreement between Peter Dunne and the National party is National supporting tax legislation around income splitting. I questioned English about the possibility of income splitting legislation when he appeared before the Finance and Expenditure select committee recently, and he pretty much ruled it out. Not surprising, considering the cost is estimated by the IRD to be around $500m per ann.
When I questioned Dunne at FEC a couple of weeks later, however, he cited the supply and confidence agreement. Earlier press statements seem to suggest that Dunne is serious about pursuing this course of action.
So, does income splitting actually help those who really need it: those who are torn between going back to work fulltime, working part-time and/or staying at home to look after children? (Dunne’s proposal is only applicable to families with dependant children).
The simple answer is no. Working for Families is in place to help struggling families. Dunne suggests keeping both. The median household income is about $60k and the median wage is around $32k. Therefore, many households have both parents working full-time now and would not benefit from an income splitting regime. Those families who genuinely do have a ‘choice’ around whether one or both parents work, tend to be those who earn the most – makes sense. ‘Choice’ implies a level of economic freedom: necessity does not.
How would income splitting benefit kiwis on different salaries? Outlined below are three scenarios (assuming a two parent household with at least one dependant child): ann salary $40k, $100k, and $140k. JK’s tax cut figure is $$ in the hand per week before GST, ETS, inflation etc. IS = income splitting. This is also a net figure from the IRD’s calculations in a 2009 paper. The actual figures will have changed slightly under the new tax thresholds, but you get the point….
$40k – JK’s tax cut – $23/wk + IS $23/wk = $46/wk
$100k – JK’s tax cut – $69/wk + IS $163/wk = $232/wk
$140k – JK’s tax cut – $108/wk + IS $200/wk = >$300/wk
So you see. If income splitting is to go through (and I very much doubt it will – but we will watch with interest as Dunne and Key/English fight this one out), once again, those on the highest salaries will be the real benefactors. Also remember that around 70% of Kiwis earn less than $40k. Even English admits income splitting is not well targeted. Would have to agree with him just this once Mr Dunne.
During urgency last week, parliament ratified, through amending legislation, two new FTAs: one with Malaysia and the other with Hong Kong (technically, the HK treaty is called a Closer Economic Partnership (CEP) agreement).
Labour supported the passage of both Bills. After all, former Labour Trade Ministers Jim Sutton and Phil Goff did the ground work. However, I have major concerns about the government’s (and Grosser’s) ability to put the framework in place that will allow NZ companies to take advantage of these agreements.
In last year’s budget the govt cut $110m over 4 years from New Zealand Trade and Enterprise’s (NZTE) budget, thereby slashing the funding that Labour had directed towards developing NZ international markets.
Why is a government overseas development agency important? I could write a book on this, however, in a nutshell, 97% of NZ companies are SMEs (they employ 19 staff or less). This means the vast majority that may have export potential simply do not have the resources to: a) employ a full time International Marketing or Market Development Manager, b) set up an office in an off-shore market, or c) fund the level of due diligence necessary to justify capital expansion in order to become ‘export-ready’.
Only 12% of our exports now go to Europe – and these two FTAs were ratified with countries that have completely different cultures, customs, languages, legal systems etc. Exporting into Asia is a whole new ball game and success requires a significant level of competency that is in short supply in NZ. The Fonterra’s and Fletcher’s will be able to take advantage of these FTAs as they do have the resources, knowledge and networks, but as we know, these firms are few and far between.
This is where NZTE should come to the fore. This government organisation should, in my view, be NZ’s international eyes and ears (and a lot more besides…). About 6 months ago, I asked the retiring CEO of NZTE if his organisation was NZ’s international market development manager, and he replied “if only…”.
How can NZ achieve an international vision when $110m has been cut to the budget of the country’s off-shore operators? Quite simply, we can’t.
I think we all agree (except the Greens..) that if NZ is to achieve a high level of sustainable economic growth, it has to be though a much greater level of international engagement (ie grow our export volumes, value and competencies). Negotiating free trade agreements is an important step, however, helping NZ companies see the possibilities and reach their potential is vital if we are going to make it a reality. National is failing on this one I am afraid.
As those who read this blog will know, I have put up several posts about the role of Trusts and how many people use the Trust structure to avoid paying their correct rate of tax.
Well, in Saturday’s Dominion there was an interesting article briefly outlining the case, and the decision, behind one of the more significant tax precedents of recent times (amazingly, not reported in any of the Sunday papers, but written up in the NBR. Somewhat surprisingly for a business newspaper, however, the NBR reporter missed the point and therefore got the details wrong. To be fair, so did the Dom – as I understand the case…
The precedent came from a Court of Appeal decision in the case between the IRD and 2 orthopaedic surgeons (Penny and Hooper) who, according to the IRD, had set up family trust-owned companies to avoid paying their full tax entitlement.
As posted before, the disbursements from a Trust are taxed at a final rate of 33% (unlike, for example, company dividends, which are taxed at a person’s correct marginal tax rate). These two men had set up companies that were then owned by Trusts (on advice from their lawyers and accountants…) and channelled their salaries through these entities, thus avoided paying the 39% rate, by only paying the Trust rate of 33% on the bulk of their earnings. The tax avoided between 2002 – 2004 was around $168,000.
I am not going to post all the details of the case here, but needless to say, this decision will probably go to the Supreme court due to its significance, but if it doesn’t (or it does and is up-held) it will mean that the IRD now has the legal right to pursue possibly thousands of sole traders, who have, on advice, set up their affairs under the same structure.
The new tax regime that aligns the top personal rate with the trust rate at 33%, has rendered this particular tax structuring irrelevant, however, it still gives the IRD the power to chase thousands of sole traders who had also set up trust-owned companies in the past. This, in turn, could well set in course a number of legal suits against the lawyers and accountants who provided the advice… Watch this space, but there will be a large number of very nervous business men and women out there, and, no doubt, a few professionals checking their professional indemnity insurance polices come Tuesday…
In an interesting, and provocative, article in yesterday’s Herald, Gareth Morgan was his belligerent best http://tinyurl.com/2a6m4nl. But he raises a very good point. Was it really necessary to drop the company tax rate from 30% to 28%?
The Tax Working Group was adamant that the tax rates for top marginal, Trust and company rates needed to be aligned in order to make irrelevant the ‘tax avoidance’ industry that had arisen due to the rate differential. I agreed that the Trust rate and the top marginal rate needed to be aligned (and have blogged on this before), however, understand that company rate alignment wasn’t as important due to the way dividends are taxed.
Company rate alignment with Australia is often talked about as an economic and competitive necessity. However, we all know that taxes across countries are not equal. For example, Australia has a payroll tax, and Australian companies pay 9% compulsory superannuation payments (increasing to 12%). I once heard Dr Cullen ‘threaten’ a business audience, who were questioning him on the rate differential between NZ and Aust, to drop NZ’s company tax rate to match Australia’s but introduce all the other taxes paid by Australian companies. This was met with huge resistance, and the discussion around the necessity of transtasman company rate alignment suddenly went quiet. The fact that Dr Cullen did, in fact, drop the company tax rate meant that NZ companies enjoyed a tax advantage over their Australian counterparts.
The IRD understands that rate misalignment can foster the tax avoidance industry, however, only when it gets to the level where it becomes worthwhile to pay significant amounts of lawyer and accountant fees to organise and maintain these legal structures. The IRD are unsure exactly what this level is, but know that a 3% level probably isn’t that threshold: 5% probably is. Credit where credit is due though – Peter Dunne did get $119m in budget 2010 to chase the tax cheats. This is needed and the investment will be well worth the cost if past history is anything to go by (about a $60 pay-off for every $1 invested in chasing tax debt, let alone tax avoiders)
Who will benefit from a drop in the company tax rate? As Gareth Morgan pointed out, tax accountants and lawyers will be laughing all the way to the bank - and the very wealthy who can afford to pay for such advice. Other winners are the foreign-owned companies and investors, as many of the commentators have highlighted. Foreign owned companies and overseas investors tend to take profits off-shore (NZ shareholders already benefit from imputation which means most of the company tax on their shares gets rebated to them), therefore charging these characters less tax does nothing to increase productivity and stimulate economic growth.
The hit to government revenue from this rate drop is $340m in 2011/12 and $450m in 2012/13. Affordable in these economic times? No. Necessary? Probably not. Foster economic growth? The economic and Fiscal Update estimates that the total tax package in budget 2010 will increase GDP by 0.4% in 4 years time, and 0.9% by June 2017. So no, this will not stimulate economic growth at all. Will it attract Australian companies to NZ, or stop flight to Australia? No. Company tax burden is a lot higher in Australia. Will investors flood to the NZ stock exchange or suddenly invest in our ‘productive economy’? Not according to Treasury. So why was it done? Who knows. Ideas…
Well, at least its out there now – http://tinyurl.com/2c3b273 - Bill English has signalled that assets will be sold if the Nats win another term. First on the block – Kiwibank.
At Labour’s banking inquiry earlier this year, an analyst said that the introduction of Kiwibank had saved New Zealanders about a $1,000,000,000 in interest payments due to competitive pressure it had bought to the market.
Selling Kiwibank (and other assets) would be a disaster for the country – and is certainly something Labour would never ever contemplate.
The true Nat agenda (as if we didn’t know) is at least not so secret anymore…
Reserve Bank Governor, Alan Bollard, wrote a paper in 1992 titled “New Zealand’s Experience with Consumption Tax”. It dealt with the implementation of GST in NZ. He wrote “in 1989 when GST was increased to 12.5% the effect on retail sales and subsequently on growth was marked; after experiencing signs of a pick-up the economy dropped back to recession the following year”.
When asked about history repeating itself in the FEC select committee today, Dr Bollard said that the impact of the proposed GST increase on the economy would depend on the total tax package balance. Interesting. Remember when GST was increased by 2.5% in 1989, kiwis at the top end had just received massive personal tax cuts in 1988: the top rate dropped from 48% to 33%.
I hope for NZs sake, history does not repeat itself with this current budget, because it all looks awfully familiar.
Who is as insulted as I am over PM Key’s statement, reported in today’s Dom Post, around why the highest earners will get the tax cuts in this week’s budget, at the expense of the 92% who earn under $70k/ann (http://tinyurl.com/23natqb)? “We can be envious about these things, but without those people in our economy all the rest of us will either have less people paying tax or fundamentally less services they provide”
Well, my daughter is taught by a teacher earning under $70k, most of the police who put their lives on the line for us earn under $70k, nurses who fix us up when we fall over earn under $70k, and the vast majority of people who actually make this country tick – the backbone of the nation – earn under $70k. Are these people any less deserving? Do they not ensure that the wheels of industry are well oiled, the streets are safe and our citizens are provided with the services required of a first world country? Of course they do.!
How bloody insulting.! As I blogged earlier this year, there are a myriad of reasons people live and work in New Zealand – and tax is way down this list. These changes will, if anything, drive middle NZ across to Australia and further afield. Mr Key – just be honest with Kiwis and stop feeding us your propaganda: these tax cuts are not about creating equality of opportunity, driving higher productivity, developing a fairer tax system or building more equitable society – because they will not achieve any of these goals. If you believe they will, then I suggest you start studying your economic and financial text books and reading your case studies – those published this century – not last.!
Don’t get me wrong, I am not saying that our high achievers are not deserving – they are – but so is everyone else. The increase in tax through the GST hike to 15% is broad and all-encompassing – so should the tax cuts be.!
Here’s a challenge to TVNZ’s Paul Henry – lets see if you can live on the Auckland median wage for a month, and then lets see if you change your mind about Labour’s idea of removing GST from fresh fruit and vegetables.
Why the challenge..?
Watched Paul Henry interview Phil Goff on Thursday morning, and one of the issues that came up was Labour’s idea around removing GST from fresh fruit and vegetables. Phil reiterated that this was not Labour party policy, but an idea that the caucus was considering in light of the increase in GST to 15%.
Paul banged on all morning about what a silly idea this was. I suppose when you are one of TVNZ’s highest paid presenters (I don’t know exactly how much he earns, but if you look at TVNZ’s annual report its not that hard to figure out…), then a simple 2.5% increase in GST will be much more than off-set by the massive personal tax cut you are going to receive.
Personally, I think Paul has lost touch with reality. Two points Mr Henry: 1) there are many kiwi families who are really struggling to make ends meet, and a 2.5% increase in GST on fresh fruit and veges will be a killer. An Auckland University study has shown that if you drop the price of fresh fruit and vegetables, people will buy more; and 2) in this day and age of obesity-related diseases, anything that can be done to increase the consumption of fresh fruit and vegetables must be good.
As mentioned, this is not Labour party policy, but it is something that we re looking at and will make a call once we have all the information and evidence.
So come on Paul Henry – lets see how you survive on the Auckland median wage for a month – and then lets see if you change your mind about doing something to drop the price of fresh fruit and vegetables.!
Interesting to read that NZX CE Mark Weldon cashed in over 6 million of his NZX bonus shares, netting around $11.7m (see URL below). Of course Mr Weldon is entitled to pursue this course of action, but I find it a little strange that he would choose to do this 2 weeks before a budget that is offering to ‘overhaul’ a ‘broken’ tax system (by presumably removing some of the major incentives associated with the housing investment sector, thereby possibly freeing up money for investors to pump into the NZX), and at a time when National is trumpeting the beginning of the end of the economic recession.
While Finance Minister English and PM Key have both signalled that there will be no capital gains tax in budget 2010 – and a comprehensive capital gains tax would presumably tax profits on shares – I do find Mr Weldon’s timing a little puzzling.
Don’t get me wrong, I am not signalling in ANY way that Mr Weldon has acted inappropriately at all, and I think that he has worked hard to dispell some of the preconceptions about the lack of transparency that may have existed with NZ’s sharemarket. In fact, his bonus reflects the good work he has done to grow NZX earnings, but I just think his timing could have been a little better.
Budget timing aside, I do wonder what sort of message the sell-down sends to other NZX shareholders when the CE sells 6,000,000 shares; especially at a time of growing Eurozone economic concerns. Does Mr Weldon think that such woes will spread to NZ – or is it all simply a coincidence? My bet is a coincidence 
http://www.sharechat.co.nz/article/60fba2e5/weldon-cashes-in-nzx-bonus-shares-for-11-7-million.html
UPDATE: the information provided by the initial press release quoted in the post above has turned out to be incorrect. Thank you for all the feeback in the comments and for clarifying this issue.
Finance Minister Bill English has gone on about how high NZ’s total public spending is – that we have a bloated public sector that needs surgery to remove $1.8b of so called waste.
Is this the reality? You decide. The OECD has categorised total public spending as a share of GDP [2004 - 07 average] into low (below 40%), medium (41-49%) and high (50% and above).
At 38.9%, NZ is in the ‘low’ category, with only 6 countries spending less than us. These include the US at 36.7% (would you want their so-called public health system..?) and Japan at 36.9% (and who would want their long term macro-economic troubles). The OECD average is 43.6%. There are 20 countries that spend more than NZ. These include UK (43.9%), Germany (45.8%), Sweden (54.4%). Spain spends less than NZ, thus proving that a low state sector budget does not necessarily insulate against major economic woes.
So come on Mr English – NZ’s total public spending is not out of control by international standards – this is just rhetoric designed to soften NZers up for wholesale slash and burn policies. Ouch.!
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.!
One of the greatest robberies (and I do not exaggerate) perpetrated by this government is the theft of money raised locally through the implementation of the 5c/litre regional fuel levy. In Hawkes Bay the amount raised and sitting in the Regional Roading Fund was around $81m. The HB Regional Council had drawn up a regional roading plan that outlined five strategically important roading projects that this money was going to fund.
Purely co-incidently, two of these roads are being built as part of the government’s economic stimulation package, but the others are not. Two of the roads scheduled for a complete upgrade as part of the regional development plan would have had a significant impact on diverting heavy trucks away from the scenic Marine Parade and onto the current back route to the port. The Marine Parade is the jewel in Napier’s tourism crown, and yet amazed tourists – and locals – have their pleasant strolls around the Art Deco icons and earthquake memorials interrupted by thundering trucks on the way to the port. Amazing.
So where has this money gone? From the Regional Roading fund into the National Roading Fund. So money raised in Hawkes Bay from Hawkes Bay residents could well be used to build roads in Auckland, Wellington or Christchurch. If Hawkes Bay is to grow as a region then it needs to ensure that its roading infrastructure is world class. How is this to happen if the government steals our money? We want our money back Mr Joyce.!
You know what really annoys the hell out of me – the people of the Bay are STILL paying this 5c per litre Regional fuel levy.!
PS – there are also rumours that the government is going to close down the Gisborne to Napier rail link. So much for regional development.!
Myth – Everyone who has a trust is ripping off the tax system.
Reality – this is a complicated topic that I have tried to keep simple and to 600 words, but first let me say that, yes, there are a significant number of people who are using the trust structure to minimise their tax bill – the worst offenders are the approximately 10,000 families that use the trust mechanism to minimise their income and then claim working for families. The cost of this to the taxpayer is around $58m. As I have noted previously, I find this offensive.
There are many others who have structured their affairs to ensure they pay a maximum rate of only 33% when, in fact, they earn significantly more than $70k (eg, a trust owns a trading company: the owner pays himself a salary of $70k (top tax rate of 33%), and the rest of the company’s profit flows to the trust in the form of a dividend, which is then disbursed to the trust beneficiaries at the final 33% rate). Remember, the trust tax rate is the final rate therefore the individual beneficiary of income from a trust only pays 33% no matter what their personal marginal tax rate is, whereas the individual beneficiary of dividends from a company pays tax on disbursements at their correct marginal tax rate. This is a complex area, however, very simply, you see why trust and income tax rates need to be aligned, but not so important for company and income rates.
There are, however, many many people who use Trusts for reason other than tax optimisation. For the vast majority of these people, the trust tax rate is irrelevant.
There are 4 reasons why people set up a family trust:
1. Estate planning – the creation of a fund specifically aimed at providing an identified source of income for a widow, unmarried daughter, disabled child etc. Also allows for the devolution of assets from one generation to the next – or the retention of given assets within family ownership through 2 or more generations. Can allow for management and governance structure for given identified assets.
2. Asset protection. Here the driving motive is the shielding of assets from third parties. This could be aimed either at protecting the assets themselves or alternatively the settlor. Matrimonial Property Agreements frequently contemplate the formation of dual or mirror trusts isolating and identifying two parties in individual contributions to the matrimonial venture – this is particularly the case for second marriages or where there are children of 2 marriages to be separately provided for. (more…)
Acting Finance Minster Joyce couldn’t provide an answer to my simple question in the House during question time yesterday: “talking of equity and fairness, how will tax rate alignment and a significant cut to the top marginal rate for the 8% of kiwis earning over $70k help the 70% of kiwis earning under $40k?” Speaker Dr Lockwood Smith, without prompting, told Joyce that he hadn’t answered the question, preempting my point of order on the same issue.
Its a pretty fundamental and simple question I would have thought… but… perhaps the Nats haven’t an answer – because cutting top rates and implementing company, trust and marginal tax rate alignment won’t help those 70% earning under $40k one bit.! Wow.!
Myth: Countries are cutting their corporate tax rates. NZ also needs to in order to remain competitive.
On 27th January, in the first of the Tax Myth-busting posts, I exposed the myth that NZ’s company tax rate is relatively high. Now its time to discount the myth that we need to drop our rate, in line with the global trend.
In 2007, the same year that Labour cut NZ’s corporate tax rate, so did Denmark, Germany, Iceland, Italy, Spain and the UK. Since 2007, Hungary and Mexico have increased their corporate tax rate (both by one percentage point).
In the OECD, only Germany (8.5 percentage points), Italy (5.85 percentage points), and Czech Republic (5 percentage points) have cut their corporate rate by a greater number of percentage points than NZ.
Remember, NZ doesn’t have a capital gains tax, payroll tax, a financial transaction tax, stamp duty…
Cutting corporate tax is not a current global trend and I haven’t seen a paper yet that can mount a strong, rational argument for doing so: and certainly not from this government.!
