David Parker’s inaction on tax.

Mr Parkers announcement of research data showing the wealthy are paying a lower percentage of tax is not news to most of us; but it is shameless political grandstanding from somebody who has been in power for 6 years. There has been articles that some/many of the wealthy would agree to pay more tax but as the massive perfectly legal tax loopholes allow some to run through with wild abandon, then it would be economic suicide for ‘good wealthy people’ not to stay competitive and do the same. 

Tax compliance needs strong simple rules that are hard to avoid so that people know others are paying their fair share so they know it is equitable to pay their share. Tax loophole problems have been known for years; and this is the problem.  The ‘left’ politicians are terrified of business tanking the economy so they do nothing; or worse they panda to business.  The right politicians are sucking up to those who benefit from lower tax and are actively making loophole exemptions as requested. And guiltiest of all, our mandarins have been ideologically captured by neo-liberal capitalism so they aren’t providing robust diverse advice (free and frank). E.g. Reserve Bank interest rate rises are basic neo-liberal theology. 

Linked to this is; why don’t we have a capital gains tax (CGT)?  Inland Revenue under the tenure of a few recent Commissioners has been against a capital gains tax. Because? 

• Our Tax Act is already 3 large books or two very large ones. The books would at least double with a capital gains tax. So taxpayer voluntary compliance would be difficult and the administrative burden for IR would be high. Isn’t that a dead weight cost to the economy? 
• ‘Income tax’ allows losses so that the highs and lows of income can be spread over several years so tax is in effect paid on an average income (a spreading privilege not given to salary and wage earners). So for consistency a capital gains tax should also allow losses. But capital losses can be huge, e.g. massive drops in share market values could wipe out some companies revenue stream for years. Without tax coming in governments would be forced into massive borrowing just to maintain existing services, let alone keynesian stimulating the economy to keep up demand. 
• Overseas capital gains tax are not large tax generators. Mainly because massive loopholes get built into the rules. Perhaps too much consultation occurs with businesses who lobby for exceptions which often get stretched later.  

These three outcomes would all be true if we design a capital gains tax along the lines of what has been done overseas. But the above problems are relatively easily avoided by having simpler tax rules, like: 

• Tax gross income rather than net income. Gross income is well established in existing law so nothing new to learn. It stops future losses, and existing losses would immediately cease. Losses are the risk of the entrepreneur who has the knowledge to take the risks. That risk should not be shared by the government or taxpayers through a reduced tax take as they did not take the risk or have the knowledge to take the risk.  Gross income would collect more tax than net income does allowing us to eliminate the regressive GST tax and its economic distortions The headline tax rate could be lowered but more tax is collected. It would fix a lot of economic behaviour distortions, e.g. running up expenses, and tax avoidance opportunities, e.g. deductability of interest on loans 
• Define ‘income’ widely in legislation for non-individuals. It is currently defined in common law and has three features. 
• It must come in.
• it must be periodic (if its a one off it is capital and not income so not taxed)
• It must have the character of income in the hands of the person getting it. e.g. they use it to live their day to lives or run day to day business). 

Simply use point (I) ‘it must come in’ for the definition of income. The second and third features establish the capital/revenue distinction but we should get rid of this as everything a non-individual does is it to gain or protect assets or income. The distinction creates so much tax avoidance.  What has ‘come in’ can be defined from the books of accounts used to get loans. This helps stop having two sets of accounts one for tax and one for other revenue raising purposes; like Mr Trump had. Or tax on what has ‘come in’ could be calculated from the highest set of accounts prepared e.g. a share issue prospectus may have higher figures . 

Item two would tax ‘all gains’ so capital is fully taxed – but by calling it income (for a non-individual). I had already written about what transactions could be exempted. e.g. Only loans from New Zealand registered entities/banks that are true third parties. Because income is so often run through multiple entities and it comes out as a loan (non-taxable).

This item two would generate a substantial amount of extra tax income, on top of what I have already said is generated from item 1 taxing gross income.  Tax to – address climate change, to fix our affordable housing crisis, to fix our infrastructure problems, and reward our people (teachers, nurses, scientists, etc so they stay in New Zealand and we have a functioning society). And all this would stimulate our domestic economy. But we would have to stop firms just using demand to price gouge. The pricing process is the current problem with inflation and New Zealand is importing most of that – see articles and commentary on greedflation. 

The best alternative to the above on capital gains tax, from a left perspective, is the deemed rate of return method. There are no losses. But it too struggles with lots of rules and valuations. 

But Mr Parker is presumably wanting to build a momentum to bring in capital gains, but he will be open to accusations of mudslinging at the moment, trying to make tax a moral issue. And he doesn’t need to risk this.  His government already had a previous mandate to bring in a capital gains tax but didn’t fight for it; I blame the mandarins as a significant player in that previous decision. 

Mr Parker rather than just finger pointing and innuendo about some people not pulling their weight – the fact is they aren’t behaving ‘illegally’; and Mr Parker controls that concept. So, how about you, Mr Parker, do some doing; so there is a framework in which paying tax is hard to avoid. 

And the solutions are actually very simple and clear.