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 enjoy Mary Holm’s articles. Generally speaking, her advice is straightforward and focused on the long term (who else could conceive of a more appropriate book title than “Get Rich Slow”?)
Mary’s reputation for prudence and rational advice is well deserved.
I’ve just read her thoughts on Peter Dunne’s attempt to misdirect half a billion dollars of scarce taxpayer dollars in the name of ‘income splitting’. Mary’s article reinforced my view that while income sharing might sound fair at first blush, it’s a bad prioritisation of spending that will do nothing to help low, fixed and middle income kiwi families.
Tax changes: Part 2:
A year later the Government announces a “tax switch”. GST goes up to 15%. Income tax comes down.
A closer look reveals the obvious. The rich are net winners, the poor are net losers. The rich-poor gap widens, still further.
Loading ...Tax changes: Part 1:
Soon after the election, the new Government tells us that:
• they are out of money, but
• they can nonetheless afford tax cuts.
About 30% of the resultant tax cuts go to the top 3% (yes, dear reader, 3%) of earners.
But to pay for it the hi-tech research and development tax credit is scrapped. Hi-tech, high growth, high wage, companies take a hit. A number of (especially Aussie based) companies that were planning to relocate to New Zealand stay put.
Hi-tech exports languish.
Loading ...Rob Salmond in a guest post on Policy Progress gives an alternative approach to dealing with Dunne on income splitting – worth thinking about.
He says :-
There has been much chatter about Peter Dunne’s income splitting Bill. The common refrain on the left, most recently from The Frog and Stuart Nash, has been that this Bill represents yet another unaffordable give away to rich folk, and therefore it should be opposed.
Not so fast. The two oft-cited problems the Bill, its fiscal cost and its distributional consequences, are both fixable. They don’t represent principled progressive reasons for opposing income splitting as an idea.
and later:-
If I were advising the Greens or Labour right now, here is what I would suggest:
- Oppose this Bill as it stands, for the reasons you have already given, in the very realistic hope of giving National cold feet;
- If National does pull the plug on the Bill, then offer Peter Dunne the deal above. I reckon he is more in favour of income splitting than he is against tax increases for the really wealthy, and he may even vote for it in the House in order to express his displeasure with National;
- Watch the proverbial fly within the government. The Bill in that form would likely not fly (NACT 63 beats LPGUFM 59), but it could cause a decent stink for the government on the way down.
I think this represents strategic gain with no dilution of progressive principles. Certainly the parties have step one underway. But will we see steps two and three?
John Key’s all but endorsement of Christchurch Mayor Bob Parker last night indicates how out of touch he is with Christchurch voters. Key attended a widely-promoted ‘John and Bob’ gathering at Sticky Fingers in Christchurch last night, their handshake making the front page of The Press. http://www.stuff.co.nz/the-press/news/christchurch/4034228/Praise-from-PM-but-no-endorsement
Key praises Parker as having done “a very good job.”
Ok, as a Labour MP I’m not dispassionate here. I totally support Jim Anderton’s bid (though I will say Parker is an extraordinarily gifited speaker and his full-time unpaid Mayoress wife Jo deserves better than to be remembered for having muffins and coffee with the Mayor – (even Key referred to ‘muffingate’ last night)
Point is that it’s not just Labour supporters who are openly saying they want to see Parker go. So are card-carrying Nats and many others. On Monday my dentist, just returned from his European holiday, couldn’t wait to say how much he wanted to see a change. Last night at Saunders Unsworth’s bash, yet another senior Christcurch business leader told me he won’t be voting for Parker. His reason? The way Parker responded to criticism of the $17m bail-out of property developer Dave Henderson. To compound matters for Parker, ‘Hendo’, once praised, defended and befriended by Rodney Hide, has recently been exposed as having not paid IRD for the GST on the $17m paid to him. So ratepayers and taxpayers are both out of pocket from the deal.
Add to that, the council’s attempt to hike council tenants’ rents by 24% in one go (defeated in the High Court) and the $3m purchase of the “Ellerslie” flower show for Christchurch, have all led to a city-wide view that Bob has to go. Not that Jim is resting on his laurels; he has had a large and vigorous campaign team from before his launch several weeks ago capitalising on the mood for change.
Key’s handshake alingment with Parker at Sticky Fingers might be a touch of the tar baby for both of them.
The GST increase on 1 October is going to have a lot of consequences, from the price of stamps going up, to schools struggling to work out how they will pay for an additional costs. Marcus Ganley, the Labour Candidate for Lambton Ward of the Wellington City Council has drawn another matter to my attention in his recent post.
The Wellington City Council has sent out a note to ratepayers suggesting that one way they can avoid the GST increase is to make their next three rate payments before the 1st of October. A nice idea, but many Wellington ratepayers are struggling to make one payment at the moment, let alone, as Marcus says three payments in the next seven weeks.
Over at Policy Progress David Choat has written up a few observations on the future affordability of New Zealand Superannuation, based on presentations at the recent Retirement Income Policy and Intergenerational Equity Conference. Choat looks at various projections of the cost of the ‘retirement boom’ and some of the alternative options. He concludes by essentially arguing we have a choice: change our current entitlements or increase taxes to keep them as they are.
That conclusion highlights the folly of the arguments people like Don Brash have been putting forward. Brash argues that current Super entitlements are unaffordable. Fullstop. Brash and his contemporaries in National have spent years arguing that massive tax cuts are affordable and necessary. They’ve conveniently overlooked one of the biggest longterm implications – less money to pay for the baby boomer’s retirement!
I want to see New Zealand Superannuation remain as it is, a universal entitlement from the age of 65. But John Key’s promise to resign rather than cut it looks pretty hollow given his total lack of a plan for how to pay for it. In 10-15 years time when the crunch comes, Key will be off sunning himself in Hawaii while future generations work out how to plug the massive hole he and his crew have left us with.
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.
It’s official and it’s a shocker. Cameron’s first Budget puts VAT up to 20%. It cuts company tax cut from 28 % to 24%. Govt dept spending is cut by a staggering 25%. Capital gains tax is up from 18% to 28%.
A budget suplus in 3 years? – dreaming. The social dislocation will be too awful to describe.
This is an uber-Tory Budget that relies on neoliberal economic ideology.
Given that Brown had already cut spending by GBP 72bn and this cuts another GBP 40bn it contains real risks of stagflation/deflation. If that spreads through a Europe bound together by linked currencies, it could contribute to a double- dip recession that mayaffect us.
And of course we are now more vulnerable after Mssrs Key anad English borrowed more for unaffordable tax cuts.
For now, here is David Milliband’s reaction:
The Tory-Lib Dem Budget is a hammer blow to families and business across the country – and to the future of the British economy. George Osborne’s measures are driven by ideology not economic reality. And the price will be paid in higher unemployment and lower living standards for the poorest and those on middle incomes.
When they asked for your vote at the last election, David Cameron and Nick Clegg said they would reduce the deficit without hitting the frontline or hurting the poorest – but they have already broken that promise.
…
Below I set out what I would do differently – read on and then sign up to my Broken Promises campaign – help me show David Cameron and Nick Clegg that we will expose and oppose their Broken Promises every step of the way.
- I would make reducing unemployment a top priority. We must oppose the Tories’ decision to scrap Labour’s job guarantee, which provided work to the long term unemployed. The Tories are making the same mistake they made in the 1980s, of letting unemployment devastate lives and communities.
- I would not increase VAT, which is a regressive tax that hits the poorest hardest. Don’t take my word for it, David Cameron said it. And the Lib Dems promised to fight against a VAT rise until they decided to support it.
- We should be supporting the industries that will drive jobs and prosperity in the future – like Sheffield Forgemasters who have been robbed of a loan that offered world-beating jobs for Britain.
- The Tories’ four pounds of spending cuts for every one pound of tax rises is extreme. Even Mrs Thatcher went for a pound of spending cuts for a pound of tax rises. I would strike a fairer balance between reductions in spending and tax rises to reduce the deficit. If we need more tax let’s look at measures like a Mansion Tax on £2m homes not VAT rises.”
Sound familiar?
Hi RA readers – I’ve been off air a bit lately due to running around the country on the post- Budget speaking tour, and because my laptop died!
Today parliament shifted into a new stage of the Budget debate – the Appropriations Bill that legitimises the Supplmentary Estimates (amended spending lines) between Budgets 2009 and 2010. It was remarkable for what it does not say – nothing about a plan for protecting jobs or lifting incomes during the worst of the Great Recession. No new ideas over there.
Quick feedback from the Budget tour: spoke to about 20 groups, a mixture of Labour-organised public meetings, community sector groups and businesses. Hard to tote up exactly but would have seen close to 800 people face to face: groups of 160 down to about 25, plus individual business site visits.
The feedback was clear: most Kiwis understand that by the time inflation of 5.9% next year eats away the tax swindle, and wage growth is held down, they will be worse off. That includes increased govt charges like ACC and ECE, plus power bills, rent and higher mortgages. The Government made the classic mistake of overpromising and under-delivering. Kiwis hate the rise in GST. They know the tax cuts aimed primarily at the wealthy are unjust and inefficient.
Was it a coincidence the govt’s polling fell 5% in the week after the Budget?
Second, businesses and commentators understand that the Budget lacks a real plan for jobs, incomes and growth. Fiscal prudence matters, but it is no substitute for a strategy to address the yawning triple deficit around the savings gap, current account deficit and innovation deficit. Gutting Kiwisaver, the R and D tax credits and NZSF prefunding made these worse. The Govt’s innovation package, which represents only 39% of the value earlier striped out, has been almost universally panned.
Third, the added debt from the unaffordable tax cuts has opended up $1.1 bn fiscal hole over 4 years, $9.2bn over 12 years, and that makes the job of turning the boat around ever harder. National will seek to fill this “strategic deficit” through asset sales and service cuts. Don’t let them!
Future posts are going to broaden out somewhat to the rlated issues of monetary and fiscal settings that surround the needed economic strategy.
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…
Good fun in the House today grilling Bill English here and here on why the Government’s online tax/benefit calulator leaves out the forecast inflation rate of 5.9% in 2010, and thus overstates benefits. Its a blatant case of misleading the public. The Speaker rules it is a straight question that deserves a fair answer: Bill English doesn’t get it, and digs a hole deeper than the original mistake…
…It would be funny except it has misled many average income Kiwis who were encouraged by the Govt to believe that the budget left them “better off”, when in reality it left them behind until at least 2014. It will be no fun at the checkout queue for many hard working families.
The jigsaw pireces of the Budget are starting to click in the public mind if recent polls are any indication. In the last week :
In other words: give away taxes up front (very largely to their mates); run an out year deficit (deliberately); compress spending (as ‘prudence ” then demands); and flog off what is left of the family silver to fill the remaining gap (dressed up as mum and dad savings products, of course).
What does all this mean for the average Kiwi?
Moral of story: do NOT let National get a second term Stop the malign juggernaut before it does irrepairable damage.
Budget 2010 was not fiscally neutral. To fund its large tax cuts package of $14.5 billion the government has borrowed an extra $1.1 billion over four years.
The Crown borrowing requirement rises and interest costs roughly double before declining around 2021.
The current account widens from 3% to 7% over the forecast period. The trend in net internation investment remains negative.
Longer term the fiscal aggregates look even worse. We will have more to say about this in due course.
Meantime the world around us is poised on the cusp of a potential double-dip recession. Germany’s voters are tiring of socialising the Eurozone’s mounting deficits. The US and UK are already running huge deficits and accumulating debt due in part to the last round of fiscal stimulus.
World markets are highly fragile. Korea and the Gulf of Mexico mean we don’t need too much else to go wrong.
Why has National strained the fiscal envelope so far while achieving so little economic return?
Treasury forecasts less than 1% additional GDP growth from Budget 2010 measures accumulatng over 7 years.
We all know Budget 2010 was full of broken promises – from NOT raising GST – to being “fiscally neutral” while borrowing an extra $1.1 billion to fund tax cuts - to being “fair” while giving a third of all those tax rebate $ to the top 5%.
Most people now realise that the gains they thought they might get are more apparent than real: the proof – even on the Governmnet’s own numbers average gross incomes don’t catch up with inflation unitl 2014! That’s two elections away!
Most now know the results are economically desultory – the current account blows out to 7% of GDP, growth is static (taking 7 years to accumulate a measley 1% extra), and what empoyment growth there is is largely unrelated to Budget meaures.
What has become clearer as the debate has progressed is just how cynically National has attempted to buy votes through a Budget increasingly seen as highly political. John Armstrong - who is no Labour acolyte to say the least – politely nailed that in Saturday’s Herald.
The game afoot is this: fool middle income voters into thinking they have a win. Push through much larger tax cuts for the upper end under this smokescreen. Deliberately stretch the government balance sheet by borrowing more to fund the cuts. Begin compressing public services, but slowly, and hope the rosy glow lasts until the election…
But Bill English could not help the Freudian slip about selling off KiwiBank. (As if anyone believes that a mom-and-pop share issue would mean shares didn’t end up in institutional hands eventually – remember Contact Energy?)
This is important as a foretaste of things to come: extensive privatisation of assets the public already owns, and deep Budget cuts to balance the books that this Government has deliberately run up by cutting taxes too far. Both add up to shrinking the state, and with it the essential services that all Kiwi families need.
Budget 2010 is not a step change, and not a step up. It’s a set up - a sucker punch for the full flowering of the Right’s agenda should New Zelanders allow them a second term.
Now that the smoke has cleared from the initial media spin around the Budget it’s time to reflect on what it means for you, the average householder.
Last week’s tax package delivers windfalls to high earners and leaves lower income earners with only small gains and ultimately bearing more of the tax burden.
The expectations folk have of relief from the rising cost of living will be dashed at the supermarket checkout. Treasury predicts inflation will reach 5.9% next year. The income adjustment to those on national super to accommodate the rise in GST comes nowhere near. The inevitable increases in mortgage rates and prices from this inflation will mean most on middle and lower incomes will be worse off. In fact real gross wages won’t catch up to inflation until 2014.
Of course some will argue that the tax cuts change that, but let’s consider that idea carefully.
Money doesn’t grown on trees. Tax cuts don’t come from nowhere. Most of them go to top earners: some on $1 million p.a. get $1000 a week extra.
Meanwhile the government is slashing $1.8 billion out of government spending over the period of this Budget (as well as falling behind inflation). That means fewer and lower quality services for you and your family when you need them.
- Less available health services, with higher surcharges. Health is $300 million short of just keeping up with inflation in 2011 alone.
- Early childhood education loses $400 million over four years – costing parents up to $25.00 per child per week in lost early childhood subsidies.
- Not to mention the loss of what Bill English calls ‘low quality’ spending such as home help for the elderly, and his refusal to recommence pre-funding New Zealand Superannuation.
And all for what? Treasury forecasts that economic growth resulting from this Budget will total less than 1% over seven years – a far cry from the 2% per annum needed to catch up with Australia. Not to mention covering the yawning national debt chasm that is rapidly approaching one hundred per cent of GDP.
Please read the Budget carefully, and be informed of the implications.
Haven’t been feeling on the same page as Chris Trotter for a while, but think he nailed it with his piece on the Budget in yesterday’s ODT (and other papers). I’ve linked to it from his blog Bowally Road
He described the Budget as self serving lies. Which it is. Designed to make people think they’re getting something, when in reality they’re losing.
But this government may not be as clever as they think they are. I haven’t come across anyone in the community yet who thinks this Budget is going to make them better off. Short-termism doesn’t always pay off.
I know my Dunedin South constituents will find tax cuts and benefit hikes fade pretty quickly as the GST rise kicks in and electricity, rents, mortgage rates start to rise along with petrol ACC levies, you name it. Pretty dire. And then there’s the prospect now being raised of selling off some of our prize assets.
Not to mention the fact that people’s wages aren’t going up and don’t look much like they will. Unemployment in Dunedin leapt from 4.9% to 6.3% in the last quarter.
I wonder who the people are who did get a sense of hope and a boost out of this Budget.
Trotter says:
Perhaps it would all be bearable if, in return for the extra $300-$500 per week we’re allowing them to keep, our captains of industry, financial wizards and heroic entrepreneurs would guarantee the “step-change” this country so desperately needs.
But if History is any guide, that’s not what we will get. If History’s any guide, we’ll just see more of our industries fall into the hands of foreigners; more “Mum & Dad” investors lose their life’s savings; more holes in the ground; more half-finished palaces; more angry denials of any and all social responsibility.
And why, in God’s name, would we expect anything else? The Rich did not get rich by giving – but by taking. It’s what they do. It’s all they’ve ever done.
