A simple, fairer tax system for all New Zealanders

New Zealand’s tax and welfare policies are a mess and the solution is abolishing the current welfare system and radically overhauling the tax system.

The whole point of a tax and welfare system is to redistribute from the well-off to the rest. The Big Kahuna puts some radical changes to tax and welfare on the table.

Three simple components

Unconditional Basic Income

Targeted welfare is expensive to administer and strips people of their dignity. A UBI provides $12,000 per year to every Kiwi and replaces the welfare system.

Flat Income Tax

A progressive income tax that changes with what you earn does not actually target wealth and makes calculating tax tricky. A 30% flat tax for everyone is much simpler

Comprehensive Capital Income Tax

Both the wealthy and everyday kiwis who have a home exploit the same tax loophole to avoid tax costing us all money. The CCIT closes loopholes and make sure we all pay our fair share

Get up to speed with the basics of The Big Kahuna with our whiteboard sessions

How our welfare system traps people in poverty
How a flat tax is fairer than the current system
What is a Comprehensive capital income tax?
How we pay for a universal basic income
Is there a housing bubble in Auckland?
Tax system incentivises house buying

Why The Big Kahuna

The Big Kahuna recognises a long forgotten truth about modern market-based economies – they produce an ever-growing abundance of stuff but if left to their own devices lead to fewer and fewer people owning more and more of it – a growing ‘concentration’ of resources in the hands of a few. A growing concentration of wealth can bring wide-ranging economic, political and social problems.

If, as is the case in New Zealand at present, considerable wealth is only lightly taxed (or not taxed at all), this natural tendency is accentuated (and overall output is less than it could have been).

While Adam Smith is often quoted by economists keen to justify leaving markets to themselves, the truth is that Smith, the 18th century original architect of economics, was aware of this aspect of modern economic systems and keen to address it. He proposed policies that directly redistributed wealth.

The impression we get today is that economic policy addresses something very different – short term ups and downs in output and prices. Economists (and the politicians they advise) have become obsessive demand managers and, watching them, we’ve all been tricked into thinking that growing GDP is all we should be concerned about. That’s on par with focusing on driving the truck, but forgetting to maintain it. We’ve completely lost sight of the more fundamental purpose of economic policy – to ensure the economic system delivers improvements in well being. And the irony is that in missing this, we’ve created the conditions that have put the economy at risk, making growth more elusive and the economy more unstable than it needed to be.

The politicians and their bureaucrats may have missed the point, but there are plenty of high profile economists (Nobel prize winners among them) who have not. Most recently The International Monetary Fund has put the view that increasing inequality has contributed to the global financial crisis:

Restoring equality by redistributing income from the rich to the poor would not only please the Robin Hoods of the world, but could also help save the global economy from another major crisis. [i]

The Big Kahuna directly addresses a key objective of economic policy – to redistribute effectively from those with wealth and high incomes to the rest of society. It addresses the very issue that concerned Adam Smith. It does this by taxing wealth comprehensively and providing a basic income to all in society.

At the same time the Big Kahuna corrects for distortions in our tax and transfer system which have not only allowed those with wealth not to pay much tax, but has led to capital and labour being wasted – something which has hampered New Zealand’s growth record and made the economy more unstable (more vulnerable to asset price bubbles for example) than it had to be.

[i] Kumhof, Michael and Romain Ranciere (2010) ‘Leveraging Inequality” , Finance and Development December 2010 Volume 47 Number 4. Pg 31

Why an Unconditional Basic Income (UBI)?

Paying universal transfers acknowledges that every individual has the same unconditional right – to a basic income sufficient for them to live in dignity. The Unconditional Basic Income (UBI) provides this.

With this basic protection in place people are then free to add to that income through paid work if they choose. Equally, they can live on the UBI and pursue other activities – doing the unpaid work of caring for children or others in their community for example, or studying full time, or pursuing new business ventures. The UBI offers the prospect of ensuring everyone has the means to live while giving them the freedom to live their lives as they choose.

What is the alternative to a universal transfer?

The alternative – targeted transfers – involves discriminating between people. Some get more support than others. But on what basis should we discriminate between people? By the number of children they look after perhaps – but what about the number of dependent elderly parents they care for, or the step children that they care for when other parents also provide support? What about those who contribute a lot of time and money to their wider community, or who have high health costs? In practice it is not possible to credibly discriminate between people so many fall through the cracks of targeted transfers. As well, the very process of identifying “the needy” stigmatises people, removes the choices of those who receive help and exacerbates social divisions.

This is what the New Zealand Royal Commission on Social Policy had to say in 1988 about universal and targeted transfers:

“Universalism recognises that we are all members of society… being New Zealanders entitles and engages all of us, whatever our ages or circumstances, and support measures should be rights based. And those eligible for income support should not be subject to unnecessary and stigmatising procedures to establish what is theirs as a basic right.

A system designed only to assist the poor helps perpetuate existing social and economic inequality in the longer run by reinforcing distinctions between the poor and the rest of society, and at the same time it may lock the poor into a cycle of poverty by its system of benefit abatement. A further implication is that a highly targeted system will ultimately face considerable resistance from taxpayers unwilling to support a system perceived as rewarding the improvident and providing themselves with no return for their contributions. The longer run consequences could thus be an even more targeted system that provides continually falling benefit levels.”

The Comprehensive Capital Tax

The Comprehensive Capital Tax (CCT) is an annual charge calculated by applying the flat tax rate to a ‘minimum required return’ from real assets less interest costs (the minimum required return is set by government but 6% was assumed in the Big Kahuna). The CCT applies to real assets such as land and housing and the long term (‘non-current’) assets of businesses. The CCT is integrated with business income tax so businesses that earn more than the required return pay no more tax as a result of the CCT.

The CCT recognises and taxes the implicit returns possible from wealth while also acknowledging any cash income the wealth produces.

The CCT achieves two goals – it contributes to a set of policies that effectively redistribute from the well-off to the rest of the community and introduces a common tax treatment for all real capital.

The key to ensuring tax policies redistribute from those with lots of resources available to them is to recognise that it is wealth that matters (not just the actual cash income the wealth produces). Wealth can be used to produce cash income, and that is typically taxed, but it can also produce untaxed income (such as capital gains) and untaxed personal benefits. So it is important to tax all wealth equally, no exemptions. This is achieved by the CCT.

As well, the CCT removes current tax distortions which influence investment. Current policies, by omitting to tax capital gains and personal benefits, create incentives for more wealth to be invested in housing and lifestyle assets than would otherwise be the case. This is a drain on our economy which has hampered growth.

The Big Kahuna was last modified: October 31st, 2017 by Gareth Morgan