Dr Bryce Edwards Political Roundup: Labour keeps the status quo on tax, but has it shot itself in the foot?

The ultra-rich can breathe easy and progressive voters can scream into the void, because Prime Minister Chris Hipkins has ruled out any meaningful reform to our broken and unfair tax system. The Labour leader says it won’t happen on his watch.

Official documents were released yesterday showing the Government asked officials to draw up ideas for how a wealth tax might work. They focused-grouped the idea and this exercise showed it wouldn’t be an easy win for Labour so, regardless of its merits, it was thrown on the bonfire.

Hipkins was then asked yesterday whether Labour might implement wealth taxes during its next term in government, and he categorically ruled out any such progressive reforms under his leadership.

The Progressive tax reforms that Labour rejected

We now know that Treasury put together a number of different models for how a major taxation reset could be progressed by the Government. The main model Labour considered involved two central planks, and was designed to be fiscally neutral, much like Bill English’s “tax switch” in which some taxes went up and some down.

Under Treasury’s proposal, a tax of 1.5 per cent would be levied on the assets of those owning more than $5m. About 25,000 ultra-rich would be affected, and it was forecast to bring in about $3.8bn a year.

The flip side of the tax increase would have been a new tax-free $10,000 threshold for every individual, which would amount to a tax cut for most of about $20 per week.

The Herald’s Thomas Coughlan reports today: “The documents show from the perspective of Treasury and the IRD how rather large tax cuts for millions of people could be paid for by slapping a tax on a tiny minority of New Zealanders.” And Treasury calculated that those paying more tax as a result had gained their wealth mainly in sectors of the economy involving finance, professional services and real estate.

Hipkins has dismissed this wealth tax idea as being an unwanted “experiment” at a time when his brand is about being focused on the basics. Furthermore, reports say Hipkins was “spooked” by the tax switch idea, taking fright at the potential for his government to be criticised by farmers and the rich for negatively impacting them.

In demoralising progressives Hipkins might be shooting himself in the foot

In ruling out progressive tax reform such as a wealth tax, Hipkins is keeping alive the possibility of winning over wealthier voters who might be considering voting for National. He’s made an electoral calculation based on the potential votes that could be lost, and whether he and his party have the capacity to successfully sell the concept of a wealth tax to the electorate. There are reports today that Labour’s focus groups made it clear that the wealth tax was a risk for the Government’s re-election. In that sense it’s an understandable decision.

But it’s a terrible move for Labour’s progressive reputation and standing. Voters who want to see progress made on inequality, poverty, and a genuinely transformational leftwing government after 14 October will be severely disillusioned. The question of significant tax reform has become a symbol amongst progressive voters of the need for radical change.

When Jacinda Ardern ruled out a capital gains tax in 2018 it was a major turning point for her reputation with leftwing activists and opinion leaders. There had been hope that Hipkins wouldn’t go down the same route. So there will be anger with Labour amongst some on the left, and it’s hard to rally the troops for the election campaign when the troops have lost faith in the leadership, or ponder what the point of a re-elected Labour Government is.

So the unintended impact of Hipkins’ captain’s call could actually be to reduce Labour’s chances of re-election. The demoralisation factor could hit the political left at a crucial time, when there are already concerns about whether the Labour-led government of the last six years has really achieved much at all.

Even on the question of Hipkins’ electoral calculation, progressives might well doubt whether ruling out a wealth tax was necessary. Is Labour really that reliant on the votes of those concerned about the fiscal wellbeing of the ultra-rich? After all, Treasury’s wealth tax proposal would’ve only impacted negatively on about 25,000 voters (something like 0.5 per cent of the population), while improving the lot of four million.

Labour is angering progressive voters

Political journalist Richard Harman writes today that Labour’s decision “infuriates its left-wing base”. Similarly, BusinessDesk’s Pattrick Smellie says “it’s likely that a goodly chunk of Labour supporters will be wild, seeing what Hipkins ditched.” He points out that those wanting substantial and progressive tax reform have essentially just been told that they will have to wait until 2026 at the earliest.

Leftwing blogger No Right Turn typified the angry leftwing response yesterday, writing: “Labour, ‘the party of the workers’, has sided with the ultra-rich to f*** over normal people, as usual. But then, should we really expect anything different from a man paid $471,049 a year, who owns three houses? Bluntly, he’s not one of us – he’s one of them. Of course he stands for their interests rather than ours”, and now it’s clear that Hipkins is “not going to offer us anything – just the awful, unequal, rusting status quo.”

And others will now wonder if Labour really believes in anything. Labour already admits that the current tax system is broken and highly regressive. And the public recognise this – two months ago a Newshub poll showed that 53 per cent of voters want a wealth tax implemented. Yet Labour has effectively shut down the debate.

Newshub political editor Jenna Lynch put this best yesterday: “It begs the question what is the point of Labour if even with this massive mandate it would not risk electoral punishment and stick to its morals of fairness”. And she asks: “What is the point of Labour? What do they stand for? Power is pointless if you do nothing with it.”

Business journalist Bernard Hickey has written a scathing analysis today. He sees Hipkins’ decision as a complete capitulation to vested interests over the common good: “That’s it. It will now be almost impossible for a wealth or capital gains tax to be implemented within the next decade or two. The future of Aotearoa’s political economy will now remain frozen in its stagnant, unequal, unjust, unproductive and unhealthy state for the foreseeable future. That’s what our leaders, and ultimately the only voters that matter, have decided.… The announcement yesterday of the freeze on the full wealth tax debate probably added another 10-20% overnight to land values, thanks to the removal of any uncertainty about a threat to the existing model of our ‘churn and burn’ economy of a housing market with bits tacked on.”

What happens next?

Labour is about to unveil its tax policy for the election campaign, and the signs are it will be very unambitious. Hipkins has already signalled that people should expect “restraint”.

Labour might still propose some sort of tax-free threshold on the first component of everyone’s income. But if this is announced it will be very limited because Labour don’t seem to have any way to raise the money to pay for it.

Likewise, they could imitate some of National’s tax threshold changes, effectively providing a tax cut. But this too would be minimal, because Labour hasn’t found a way to pay for such changes.

A wildcard would be the revival of Labour’s 2011 policy of removing GST from fresh fruit and vegetables. Pattrick Smellie raises this possibility today, saying “This policy has had political appeal for decades. And while it would make a mess of one of the world’s most effective indirect tax regimes, tax purity never won anyone an election. Making food cheaper during a cost of living crisis might.”

If Labour doesn’t find a way to reassure leftwing voters that they still have a progressive plan, then the risk is these voters will turn to other progressive options. Commentators are saying that Labour’s conservatism on tax will be good for the Greens. For example, today’s Herald editorial says: “The decision seems set to send Labour supporters keen on tax reform into the arms of the Green Party.”

But are the Greens really that well-positioned to mop up these votes? The party is also looking tired and ineffectual. Even on this issue, 1News’ Felix Desmarais says party co-leader James Shaw has been pretty pathetic in his “feeble stab at Hipkins’ political principles”. Shaw suggested that Hipkins’ ruling out of a wealth tax won’t stop the Greens campaigning to implement one and trying to negotiate for one after the election. But Desmarais asks: “if James Shaw can’t tear shreds off Chris Hipkins in a press conference, how strong can he argue around a coalition negotiation table?”

There’s another party that is perfectly placed to be the receptacle for voters who want to see more significant tax reform and progress on transforming New Zealand – Te Pāti Māori. The party is on a roll at the moment. Its last three poll results have put it on 7, 4 and 5 per cent. They are nipping at the Greens’ heels, threatening to push that party into fifth place in the election.

Right now, Te Pāti Māori are overshadowing both the Greens and Labour in terms of radicalism, freshness and being bold. The wealth tax debate, together with three big polls, may well have handed Te Pāti Māori the mantle of being the Real Party of Progressives in 2023.