David Parker speech – Piketty, Inequality and Climate Change

Conspicuous consumption amongst the super wealthy undoubtedly shows the world
that, in general, those with the most pollute the most.

Private jets produce 10 times as much greenhouse gas as a commercial airline
passenger.

Super yachts are even worse. The mega yachts of the mega rich are longer than
football fields.

Even the newly launched hydrogen fuel cell super yacht – called project 821 – pumps
out the greenhouse gas pollution.

Despite costing a whopping 600 million euros, it still can’t carry enough hydrogen to
power its 119m hull across the ocean on its fuel cells, and so uses fossil fuels for
voyages. Its green-hydrogen fuel cells do power what are called “hotel” functions .

It is said the R&D from the project will flow through to Norwegian ferries, but given
we already have the first hydrogen fuel cell ferries operating elsewhere, I’m not
convinced a super yacht was a necessary development pathway.

Perhaps the most extreme example is private space travel.

And with billionaires like Elon Musk and Jeff Bezos privatising space, blasting ever
more frequently through the stratosphere, the effects on climate are becoming more
significant.

Piketty makes the more fundamental point that some of that huge amount of wealth
concentrated at the very top of wealth holders needs to be redeployed to help
civilisation avoid catastrophic runaway climate change.

He has two main reasons for this view. One is about money. The transition to lower
emissions costs more than the status quo. It doesn’t always cost more, but
sometimes it does. And when it does, the money has to come from somewhere.
A real example is the cost of a battery electric vehicle cf a petrol or diesel car. The
price is converging, but is still apart.

Prices matter – after the clean car discount was cancelled by the incoming
government, the proportion of new petrol and diesel light vehicle imports increased
massively from 42% in November 2023, to 60% in May 2024. The proportion of
hybrids, plug in hybrids and battery electric vehicles plunged from 58% – more than
half – to 40%.

If, for arguments sake, the difference between the whole of life cost – including fuel –
for a battery electric vehicle was $10,000 more than a petrol one, then the 600
million euros spent on that one super yacht – a billion New Zealand dollars – could
instead pay for that difference for 100,000 cars.

One more super yacht or 100,000 fewer petrol cars – which is better for the planet?
Yes, some are philanthropists, albeit on average at levels that are less than even
modest tax rates.

And, yes some invest in the weightless economy, and others are striving to green
energy systems.

Nonetheless it remains true that the consumption patterns of the very wealthy often
drive higher emissions.

It is also true that globalisation has lifted a billion people out of poverty and reduced
the gap between rich and other countries, but substantial inter-country disparities
remain.

And we know that, internationally, if developing countries take the fossil fuel intensive
path to development, we all fry.

It is a shame that the clean development mechanism in the Kyoto protocol did not
survive, because that provided a rational way to help the world reduce emissions
cost effectively. In New Zealand, our ETS linked to the clean development
mechanism until the Kyoto protocol failed, after the USA did not ratify Kyoto. While
the CDM had implementation flaws in its early years, those were fixable.

International aid and climate finance, while very important, are an inferior alternative
for reducing emissions in other countries. Inferior, because they do not mobilise as
much capital.

Piketty’s other, perhaps more important, point is that increasing inequality within
countries also undermines societal support for the changes needed to clean up the
means of production and to green our consumption choices.

This should not be a surprise, because it is a subset of a wider truth. Increasing
inequality takes societies backwards not forwards.

Before diving into some detail I’m going to put up two general slides – the first simply
shows NZ is average for taxes cf other OECD countries.

Taxes affect the shape of the economy.

Gross inequality adversely impacts both the shape of the economy and many social
outcomes.

The economic effects include more speculation rather than productive investment. It
is one of many factors behind asset price inflation for land-based assets. Paintings
and rare cars are another example, where eye watering prices are paid by the
superrich as they outbid each other.

Get the shape of taxes wrong and productive investment drops.

Look at this graph for New Zealand of new capital formation over time as case in
point.

The anti-social effects of high inequality are clearer still.

I don’t have time today to rehearse the voluminous evidence in support of this. Many
others have. I’ll mention two.

The Spirit Level by Richard Wilkinson and Kate Pickett described how more equal
societies almost always do better. It presented data showing that once a country
escapes absolute poverty, relative inequality within a country drives physical ill-
health, mental illness, obesity, violence, drug abuse, big prison populations, lower
home ownership, and distrust.

And Tony Judt’s, Ill Fares the Land. A pithy book, whose title was drawn from a poem
penned by Oliver Goldsmith in the mid 1700s. “Ill fares the land, to hastening ills a
prey, where wealth accumulates and men decay.”

I know the language is old fashioned, and that men means and men and women. But
a decade and a half after Judt critiqued the paradoxical resurgence of unfettered
capitalism after the GFC, that sentence still sends a chill down my spine.

“Ill fares the land, to hastening ills a prey, where wealth accumulates and men
decay.”

It captures a raw emotional truth.

I lament that since that book was written inequality within countries has got worse.

Lower income people in New Zealand and elsewhere have long lived close to the
edge. What has changed is that the middle is ever more pressured.

Over the last decade, attention has moved from income inequality to the resultant
wealth disparities.

Wealth inequality piles up year upon year. Just as the investments of the super
wealthy compound in value, so too does wealth inequality.

Donald Trump may not have drained the swamp, but he did speak to a disaffected
middle class.

This is deeply ironic, given that he features in Peter Goodman’s Davos Man – How
the billionaires devoured the world. That book described tax data leaked in the USA.

“The details affirmed the audacity of the undertaking. In both 2007 and 2011 Jeff
Bezos paid zero in federal taxes. Others who achieved that distinction included Elon
Musk, Geoge Soros and Michael Bloomfield”

In this age of misinformation, allied with the disproportionate influence of the wealthy
like Rupert Murdoch, it can be hard to move the dial.

Surrogate organisations describe tax as theft – unless it’s paid by someone else to
protect their property rights.

Equality of opportunity is redefined to exclude social mobility. When it comes to
sharing the fruits of our economy, inherited privilege dominates over working and
saving. I’m not talking just a few mil each, but sometimes hundreds of, even billions
of dollars.

It’s easy to drop into the cynicism redolent in the phrase some attribute to Mark
Twain ‘Lies, damned lies and statistics’, and so it can be hard to break through the
power of the status quo.

But sometimes someone breaks through. And in my view that accolade deservedly
goes to Thomas Piketty.

What a treasure to read. Romantic literature, the belle epoque, the great depression,
the effect of wars, and post war policies that made a difference, and their demise,
and the consequences we now bear witness to.

The sweep of history augmented by recent data. Genius. He proved the math. And

people know that maths does not lie.

R > G.

I’ll come back to that.

In New Zealand, we tested the validity of Piketty’s findings for New Zealand with a
detailed study based on actual data. Not models based on population wide surveys
which are necessarily simplistic. Actual data.

This was born of the limitations of the Household Economic survey conducted by
stats NZ at the top end – as Piketty described. General surveys seldom encounter
the very wealthy. Their questions are necessarily simple to enable ordinary folk to
complete the survey, which then means the complex investment entities of the very
wealthy are not well covered. There are other reasons too, which I don’t have time to
detail here.

Back then only 1 participant in the household economic survey had reported more
than $20m wealth. That person had $30m. Three years on and the latest I heard was
the survey has covered two 2 such people. This, in a country with billionaires. It
shows the HES was and is pretty much useless at the top end.

We changed the law to allow CIR to collect information for policy puposes, not just
tax administration purposes. This was modelled on UK law. Until then tax
intermediaries, who ordinarily owe a duty of confidence to the taxpayer, could refuse
to provide information.

$5m was allocated in the budget to carry out the complex work.

Data was sought for 350 high wealth individuals – this included their life partner,
dependent children, and trusts where they controlled distribution or the appointment
of trustees.

The information gathered could only be used for the study, not tax enforcement. High
levels of compliance resulted.

In practice the information generally came from their tax intermediary – accountants
or lawyers

An expert reference panel and OECD advice guided analysis.

The data collected established the network of legal entities each HWI invests
through – often this is very complex with multiple trusts, partnerships, and hundreds
of public and private company shareholdings.

IRD had in depth information for just about all of these – the complexity arose from
putting the puzzle together. Which net assets, income and tax paid should be
attributed to whom.

The median wealth of those in the HWI study was $106m and average was $267m
each. Massive – an average of $267 m after the deduction of all debts.

What are their sources of income?

93% is from investments.

Of course, the HWI are the most successful investors in New Zealand. They can buy
the best of advice, they are long term professional investors, they are well connected
and can invest in projects unavailable to others, they have the ability to leverage
assets, to spread risk, and to minimise tax.

Before describing the results for IRD study of the high wealth group, I’ll cover the
companion work carried out by the Treasury on the 90% plus of the population the
government already had good information on from the HES survey and other
sources.

This too was a big piece of high-quality work carried out by officials, published
across a number of Treasury working papers.

New Zealand has a progressive income tax rate which applies to what is defined as
taxable income.

A lot of people who talk about tax focus on income tax rates. This is only part of the
story.

GST is a big part of the NZ system, and therefor is a big part of the tax most Kiwis
pay.

A lot of people who talk about tax focus on marginal taxable income tax rates. But
that is only part of the picture.

The GST slice of the pie changes a bit over time, but in all years is a lot higher in
New Zealand c.f. OECD generally.

NZ has a very broad GST. It covers just about all goods and services. Groceries,
electricity, clothes, appliances, repairs etc.

What doesn’t include GST? Rent, mortgage payments and savings.

Most people spend about 2/3 of their income on GST inclusive goods and services.

The GST rate is 15%.

2/3 income times 15% GST = about 10% of income being spent on GST.

Decile 1 is not shown on the graph because tax losses of some taxpayers render it
unsuitable for direct comparison. But extrapolating from the second decile we know
that low-income people on average pay 10 or 11% of their income on GST.

GST as a percentage of income is moderately regressive in deciles 1 to 9. Decile 9
spend about 7% of their income on GST (over and above their income tax).

At the top decile the average is misleading for a different reason – it drops sharply at
the top, and the average obscures that.

I will return later to why GST outcomes are more significant than most people
realise.

Going back to the general population, the income system is augmented by transfer
payments – benefits and the like, and these have to be considered. The statutory
definition of taxable income also excludes significant sources of income like capital
gains. All these different aspects of income were factored in to examples to enable a
fair comparison of the effective average tax rates paid by low and middle income

New Zealanders c.f. those in the HWI study.

You won’t be able to see the details of this, but it shows how our system is
progressive at the lower end.

Transfer payments and tax credits normally phase out at about $80,000 to $100,000
depending upon the number of children.

Myriad examples were calculated – high and low salaries and wages, with and
without transfer payments, home ownership, renting, rental properties, Kiwisaver.
Each different scenario divided the population into 20 subsets of 5% (a 5% subset is
a ventile). This was done by both income and wealth.

The tables were prepared before the 38% tax rate on the part of taxable incomes
over $180,000, and so it understates effective tax rates for high salary earners.

A middle-income salary or wage earner pays an average effective income tax rate of
22 or 25%. Some higher.

Plus GST at about 8 or 9 % as we’ve already discussed.

That’s a total effective tax rate of 30 to 34% on all of their income, including income
from capital.

For some the total is higher.

So, in comparison what were the results for those in the HWI study?

The high wealth individuals pay much less.

Their income tax averaged under 9% of their income

And their expenditure GST averaged under 1% of their income.

That’s a total of under 10%

That is 1/3 of the rate of tax paid by the middle class and less than half what is paid
by a low-wage single person.

Remember it’s 93% investment returns.

There was another interesting discovery from the study.

The larger the proportion of a company owned by a HWI, the lower the ostensible
rate of taxable income and tax.

How can that be? These are the best investors in the country.

It is evidence of structuring of investment portfolios for tax minimisation purposes.

Sensitivity analysis was done to compare the last economic cycle with earlier ones,
and the outcomes were not all that different.

We have proof that most income of the HWI is reinvested because fortunes and
incomes are so large they cannot be spent. Most are careful with money, and it’s
hard to spend that much income.

This showed up in the GST analysis I spoke of earlier.

Once you have a house, and holiday home and a few cars and a boat, imagine trying
to spend $20k per week in the subsequent years.

You’d have to be full time on the supermarket trolley and do overtime at the mall. And
even if you spent $20k per week, that totals “only” $1m per year.

If your income is $10m, you are only spending a tenth of your income on GST
inclusive goods and services, and your GST is 1.5% of your income.

If your income is $100m, your GST would be 0.15% of your income.

Remember that for most New Zealanders GST is about 8 or 9% of theirs.

So, if you’re not spending most of your income, what happens to it? It is reinvested,
either by way of retained earnings or investments in other entities.

Piketty was right.

R is > G

What does this mean? Why is it important?

R – is the rate of return on large pools of capital, after inflation and tax.

G – the economic growth rate within countries.

Those returns on large pools of capital are largely reinvested, rather than spent.

And Piketty was right about what this means.

When R – the rate of return on large pools of capital – is greater than G – the growth
in the economy, the share of wealth at the top grows ever larger, and the share of
wealth held by the rest of society decreases.

Ditto the income from that wealth. The same thing happens.

The transfer of wealth to the very top is compounding.

The maths is irrefutable.

This conclusion is grounded in data, not general surveys or models. Actual data.
More and more of this is sitting in trusts. For the first time we have decent data on
this too, because we also changed the law to require disclosures by trusts

Over $450 billion plus of wealth is now sitting in trusts – intergenerational asset
holding vehicles

Piketty’s work led to what we now know.

As a result of the IRD and Treasury work, Treasury was able to better calculate the
share of wealth sitting at the top end. Turns out it was more than previously thought.
The top 1% of household now holds much more than 20% of all wealth in New
Zealand. The figure is 26% of all wealth when calculated according to the
capitalisation of returns method.

Even this astounding 26% figure is probably an underestimate because, as the
literature suggests and the HWI study found, taxable profits and dividends are
suppressed for tax minimisation reasons. When this occurs, the valuation of assets
calculated on the basis of capitalisation of earnings understates the true value of
assets held by the wealthy.

This includes owner occupied housing. If you think that in some ways owner
occupied housing is different from other investments, as I do, then the share of other
net investments, wealth, held by the top 1% is much higher still.

Whichever of these figures is used, the concentration of wealth within the 1% is high,
and it is compounding. If that share keeps going up, whose share is going down?

There are only 100%.

The contrast is stark. The bottom 50% of households now hold just 6% of wealth.
Although there is an age/ stage of life component here, the overall position is clear.

That 6% can’t go down much. The saying goes, you can’t get blood out of a stone.

So, it increasingly comes at the expense of the middle. Most of the people in this
room.

Piketty’s work has enabled the world to better understand and highlight the raging
inequality we now have at the top end.

Which is why I was pleased to accept this invitation today to your forum on Piketty
and climate change.

Inequality is a serious problem. So is climate change. They are linked, and both must
be addressed.

David Parker
September 2024