Much of the kerfuffle globally around tax dodging pertains to the “rich” whoever they are – not paying their fair share. The more truth there is to this perception, the heavier the burden on those who do pay their full share of taxes. If the middle and working class bear an unfair burden of income tax, then the rising inequality that results is what economists’ would term “economically inefficient”. That means it impedes economic growth, and the income and employment that generates.
So how true is the perception? We have seen over recent weeks public anger over reports of multinationals dodging their tax obligations as well as the mere chance that New Zealand may be harbouring the world’s wealthy and corrupt so they can launder their money through tax havens.
There is more than a whiff of public anger at the notion that those in the know and with the means to hire tax-dodging experts that work for the global accounting firms are ripping the rest of us off.
But the story about the unfairness of tax is not one that is limited just to those evading & cheating, or even avoiding through the efforts of smart-arse, morally bereft accountants, it is one of poorly designed & leaky tax regimes that simply do not seek to ensure that income tax is levied fairly.
Indeed the extent of the tax lost through poorly designed tax regimes as opposed to unlawful and dodgy practices is many magnitudes larger.
In the report released last weekend, “Taxing Wealth and Property – What Works?” we’ve looked at what other governments try to do to make their taxation regimes fair. And it’s all around taxing the effective income from capital. What we’ve found is that many governments try but very few can claim to have been successful in ensuring the effective income to the wealthy is effectively taxed. The types of weapons they use include
- inheritance taxes
- gift taxes,
- land taxes,
- stamp duty
- capital gains
- wealth taxes,
- imputed rent taxes
What’s more, most OECD countries do this. By contrast, New Zealand does very little to tax the effective income from capital assets or wealth. And there is a very good reason for this apparent neglect.
Almost no countries do it well – there are far too many tax types, huge numbers of exemptions and minimum thresholds that owe more to the legacy of political cycles than to any sensible strategy around making tax equitable. Many have let their taxes become pretty ineffective rather than have the political battles each election cycle over tax incidence. And of course you can bet that those rich enough to have undue influence on the politicians totally oppose any measure that reduces their ability to legally shelter income.
The most challenging element of public education in this area of fair taxation is convincing people that simply by owning assets you always get a benefit. While we all accept we get taxed on any rent or any interest received, there’s no tax if you in effect rent out the asset to yourself. And that’s because no money changes hands.
This is where the public’s big mental gap arises. Clearly there is as much benefit received each & every year from simply owning a house or multiple houses, as there is whether you rent them out or not. You get to use them. This form of non-cash income is called imputed rent – it is recognised in the GDP accounts every bit as much as income as a cash income is. But because it’s not cash people have a mental block seeing that benefit as income and therefore taxable. That mental block is responsible for ever-rising inequality in our society.
Despite being in denial about the benefit that comes from mere ownership of assets, we all desperately want a slice of that action, we all want to buy more and more or bigger and bigger houses. And it’s that herd intelligence that drives their prices up higher and higher.
Now there is much about the New Zealand tax regime that we can be proud of – our GST is known as the best in the world for the lack of exemptions, we have a full disclosure regime wherein everyone has to declare their worldwide beneficial income. Those are two exemplars in global taxation regimes. But we have this massive loophole and we need to close it, sticking diligently to our ‘no exceptions’ credo as we do it. The tax relief for salary and wage earners, for instance, will be palpable.
If we continue in denial and fail to face up to the major driver of the mounting anger amongst those who don’t or can’t take advantage of this loophole, then four outcomes are inevitable;
- further polarisation of wealth, inequality of income
- harder and harder for people to own their own house – ever
- increasingly poor allocation of investment which holds back income and employment in our economy
- resentment of the greedies by middle & modest New Zealand citizens growing more bitter – making it ripe for Trump- or Peters-type backlash politics to thrive
The challenge is that everyone wants to get on this gravy train, so it’s getting harder and harder to get a political mandate to address it.
Just look at how much property the politicians own – I rest my case.