Who should pay to reduce poverty? Should it be you?

Gareth MorganTax and Welfare0 Comments

Max Rashbrooke’s new work has shed important light on the distribution of wealth in New Zealand. The question is, so what? His book includes a series of proposals to deal with the issue of rising wealth inequality. The first question is whether that’s an issue to be concerned about or whether we should simply focus on alleviating poverty. The second question is whether any of these ideas will work in making the rich poorer anyway – if that’s the objective.

What are we trying to achieve?

Is there really an ideal level of income or wealth inequality that we are aiming for? So far, there is no evidence base that supports such a notion, nor even a consensus on such a goal. So we’re rather bemused wondering, what exactly it is that Max wants.

In our view we can all agree that we are trying to ensure equality of opportunity – that all Kiwis get a fair go in life. We do know that poverty is a key barrier to people being able to take part in society and achieve their potential, particularly for children.

So we can empathise with the need to drag up the bottom end of the income and wealth distribution. But as for that necessarily being via crunching the wealth and income of the ‘rich’, who knows? Max suggests a number of ideas, which we will quickly critique below. Then we will look at some answers the Morgan Foundation has previously put forward, which we are in the process of reviewing and refreshing over the next year.

The Rashbrook ideas

Many ideas were put forward in the book, and we have grouped them so we can talk about them more easily:

Workplace bargaining – strengthening unions, employee shares, Living Wages, capping top end salaries

In a globalized age where anyone’s job can be outsourced to India, these old fashioned approaches to improving inequality are increasingly obsolete and irrelevant. These sorts of rules are great for people in jobs that are protected, but bad for people on the outside looking in. In Europe, where many of these policies feature, unemployment remains stubbornly high.

Income tax and welfare ideas – higher income taxes on the rich, higher benefits, child payments

Unconditional child payments are an interesting area, one that we are looking into as part of the Big Kahuna package.

The rest of these ideas are same old, same old – many wealthy people don’t pay the top rate of income tax so higher income tax rates simply sting salary earners. Higher benefits help poverty in the short term but also create a poverty trap – as people move off benefits they lose income and aren’t any better off – there develops a reduced incentive to work. That is why we have argued for an Unconditional Basic Income (UBI) – a payment that everyone receives no questions asked.

Wealth Taxes – wealth tax, capital gains tax, land tax, estate taxes

Wealth taxes drive money overseas, which is why few countries have them. It would require an international tax agreement to overcome that, which is the same issue confronting a Financial Transactions Tax.

Capital gains taxes are cumbersome to administer, especially with exemptions for owner occupied housing as Labour and the Greens put forward at the last election. Making payment dependent on sale means they take a long time to generate revenue, and provide a disincentive to sell.

As for a land tax – the benefits from owning land are certainly among of the biggest tax loopholes in the country, but why only tax land? There are other sizeable assets that provide their owners with value too – houses, baches, cars and boats. Taxing the income (whether in cash or in kind) from owning assets is the rationale for the Comprehensive Capital Income Tax (CCIT) that the Morgan Foundation has proposed. While taxing wealth is difficult, we can make sure we close the tax loopholes for the income derived from wealth.

Estate taxes are fraught with difficulty – in the UK the rich avoid them, leaving the unsuspecting middle class footing the bill.

Asset based welfare – Universal capital grants, helping poor families through Kiwisaver

Kiwisaver isn’t a very fair way to improve welfare, and the problem with universal capital grants is that they can get spent quickly by their recipients. That is why Morgan Foundation has suggested an Unconditional Basic Income –a regular payment made to all Kiwis regardless of criteria.  

Housing – rental controls, building more houses, reducing tax write offs for property investors, restricting lending

The Reserve Bank is already restricting lending in a number of ways, although that seems to have hit first time buyers more than investors.

There is certainly a problem with many businesses benefitting from write-offs, but how do you know which write-offs are being abused and which are fair without auditing everyone? A CCIT would ensure that all capital generates a minimum level of return, which would curb the most excessive areas of write-offs (farming and property investment).

Rental controls certainly protect renters and keep house prices down, but there is a tradeoff here – by eliminating the price signal they also destroy the incentive to build new homes in the places they are needed. Some countries with rental controls have had to subsidise new house building as a result. So there is a bit of a contradiction between calling for more homes and rental controls.

Morgan Foundation proposals

There is agreement that poverty needs to be addressed, that low income – including low income for some people in paid work – is a major problem. Whether ripping money from the well-off and sending it across to where needs are greatest is a sustainable solution is moot. It’s simple and appeals to one’s sense of justice, but smacks a bit too much of economic illiteracy with a total disregard of the consequences of such an arbitrary intervention.

On the other hand it’s inappropriate not to acknowledge that New Zealand has a high enough income and is wealthy enough to ensure that nobody goes without, that material deprivation if it occurs at all is a rarity only, rather than reality for a substantial minority of the population.

If paid work is neither sufficiently available nor sufficiently remunerative, then clearly a transfer of income in cash or in kind should be occurring, if we want to avoid the problem being passed on to future generations. The way we would address that is via a UBI.

Insofar as the funding of that unconditional income is concerned, then for sure the transfer has to be intermediated by government from taxpayers. Whether that should be a burden solely for the “rich” or a responsibility of all taxpayers is where the policy options need to be explored. We would start by closing the loopholes in the current taxation regime. Rather than just baying for the rich to be made less rich, we would start by making sure that everyone is paying their fair share of tax. We can all agree that wealth inequality shouldn’t be rising because of someone’s ability to exploit tax loopholes. A CCIT would achieve that, and our work suggests it could easily fund an Unconditional Basic Income.

Who should pay to reduce poverty? Should it be you? was last modified: December 15th, 2015 by Gareth Morgan
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Gareth Morgan

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.