Gareth Morgan, Director of Gareth Morgan Investment, and Bernard Hickey, Editor at interest.co.nz
Comments available at interest.co.nz
Bernard: Hello, I’m Bernard Hickey from interest.co.nz, and welcome to another in our series of Double Shot Interviews.
Today I’m talking with Gareth Morgan, of Gareth Morgan Investments, who’s just spoken here, in Parliament, to the Productive Economy Session about his Big Kahuna idea, which came forward, in initial stages, at the Tax Working Group. You were on the Tax Working Group. Now you’ve fleshed it out. You’re about to publish your book. What are you saying our tax system and our redistribution system should be in this Big Kahuna?
Gareth: There are two elements to it. One on the tax side, Bernard, is that we’re not taxing all forms of income. There’s a blooming great whole in there that we need to plug because capital, in particular, is gravitating towards that hole for reasons of dodging tax. That’s a misallocation of capital, as far as the whole economy is concerned. Housing, we’re talking about, let decode it. We’re paying the price for that, because if we misallocate our capital like that, we don’t generate income, we don’t generate jobs, to the extent we just keep sliding down the OECD.
That’s one side is the tax hole. The other side is to take the welfare side and say, “What are we actually trying to do with welfare? Is welfare just about helping the poor and impoverished? Is that all it is?” Because if it is, there’s a hell of a lot of us impoverished now.
We’ve got Working For Families, which is giving money to families that earn over a hundred thousand a year. So you’re telling me that a hundred thousand New Zealand dollars – that’s nearly worth a US dollar now – is an impoverished state, are you? I don’t think so. I think we’ve lost the plot, when it comes to what are we actually trying to do with the transfers in this society?
The history of transfers, the philosophical origins of transfers is that it’s about redistribution. Redistribution for redistribution’s sake. It’s not just about helping the poor. It’s about making sure that you don’t get such a big polarisation of wealth and means in society that you actually undermine society’s cohesiveness.
Bernard: You’re saying we should have a single tax on capital and a guaranteed income for everyone?
Gareth: I think there should be an unconditional basic income. This is, relative to all countries in the world, a relatively rich country. You would have thought it would be a birthright here to have a level of income that enables somebody to live in dignity.
At the moment, you can only get income in New Zealand if you go into what’s called paid work. So what we’re saying is anybody who looks after old people voluntarily, anybody who runs community activities voluntarily, anybody who looks after children voluntarily is stigmatised, is actually a loser here. The only people worth anything, and they’re mainly white males, are in the economy earning money.
Well, I don’t think that’s a very balanced view of the human contribution to society.
Bernard: You’ve got some specific ideas on how much it should be?
Gareth: What we’ve done is we’ve done a few simulations on what you could do. The one that is fiscally neutral, in other words, we get as much money out of plugging the loopholes in the tax on capital. How much of an unconditional income can we afford with that is $11,000, after tax, per adult per year.
On top of that, you would get rid of all the welfare benefits then. Everybody gets that. The oldest, with their 23,000, or whatever it is, sorry, 11,000. That’s all you get. You get the biggest benefit of all. It’s completely unearned. It’s obscene actually, is the word I would use for them. 11,000 for everybody; 8,500 if you’re a youth 18-20.
There are other combinations where you could have 3 per child, or 3.5 per child, but they require a slightly higher tax rate. Instead of 30, it would be 32.
Bernard: Explain how this tax on capital would work.
Gareth: The tax on capital is a big hole in the tax system. At the moment, we partially tax capital. The way I explain it to people, if I want to dodge tax in this country, it’s real easy for me. I’m a wealthy guy, right? I can just go and buy half a dozen mansions. I wouldn’t put tenants in the bloody things. They’d just dirty the carpet. I just leave them for my own indulgence, and I just wait for the rest of you, speculating on property, to drive the prices up. Thank you very much.
What a misallocation of capital. If I had to pay my fair share of tax on that, I would probably say to myself, “I can do more profitable things than that.” So I would go and invest in a business or whatever.
This capital tax really is only going to penalise those people who are using their capital to earn less than, and this is the number, 6% a year. If you’ve got a business and you’ve got plant, equipment, land, buildings, and all the rest of it in that business, and you’re earning more than 6% on your non-current assets, that’s your rate of return, then you don’t pay another dollar on it.
Also, I should say, because I didn’t say it in the speech, it’s levied on the equity you have in the capital, so debt is deductible. Not debt, but the interest is deductible, but you can only deduct it once. You can’t deduct it from income taxes.
Bernard: Wouldn’t this encourage people though to load up on debt so their equity is low, and they don’t . . .
Gareth: I don’t care about that, if they want to do that. I do feel sorry for the lenders who actually give them the money to do that. The reason I don’t care about that is because the lender will be paying the tax. It’s taxable. They’re just shifting the tax burden. I think the lenders might have something to say about that.
Bernard: How would this change the structure of the economy, in terms of what sort of things we produce?
Gareth: Suddenly those guys who’ve got capital have to say to themselves, “How do I use this efficiently now to make sure I earn more than my 6%? Otherwise, I’m going to get hit by this, year after year.” It includes the house by the way. It includes unoccupied housing as well. That’s capital.
What’s the standard reply you get when you hear that? “I don’t have the money to pay the tax year in, year out.” Okay. Well, instead of living in a million dollar house, why don’t you try an $800,000 house and put $200,000 in the bank? From my point of view, looking at that, that’s a far better allocation of capital, as far as the country is concerned, so bring it on.
Bernard: This would be a pretty radical change to the way government operated. The tax system as we know it, it would in theory remove a lot of the tax advice, accounting community, remove a bunch of bureaucrats. There’d be some winners and losers. Some of the older people, single-family people. How would you adjust for that?
Gareth: We can bring patches in for, say, the solos, because they do get hit by this. But we’ve taken away the incentive for solo parents. That’s a very small part of society, but nevertheless, everybody’s important. We’ve taken away the incentives for them to team up with other solos and share their housing expenses, because we say, “We’re going to give you so many blooming benefits, plus add-ons, that you’re going to have the same standard of living that you had with the bloody bloke in the house and without all the hassle.”
I think that that’s the way it should go. I think you should say to people, “You arrange your own affairs. That’s your business, but don’t expect a handout because you’ve decided to change, or you’ve had your circumstances change. You must make the adjustments.” We put all the responsibility, now, on the bureaucrats to solve your and my problems, rather than leave any responsibility with the people involved.
As far as the old folks are concerned, they get too bloody much anyways. It’s disgusting how much they get. They are the highest benefit, by a mile. It is completely unearned. So there’s no justification whatever for it. You’re going to have a transition, because we brought this in overnight. They can’t do much to change their circumstances, but we can use the Cullen fund for that. Let’s use that money to transition people.
Bernard: This is a big idea. It’s highly unlikely any political party will adopt it.
Gareth: No, they wouldn’t adopt it straight off. You’ve got to educate them as much as everybody else. The main thing is to make sure it’s robust, which is what we’ve been doing in the peer review process. Then you just go out and you just thump the table and you educate people about it.
I think the glimmer is Labour. I know it’s in opposition, so therefore a little irrelevant, but not forever. They have already picked up on the idea that we’re wasting capital real bad in this economy. It’s hurting our incomes and we have to do something about it. All I’ve said about that, congratulations, but I don’t think you’ve got the policy quite right. But thank God you’re on the road that economists have been saying for 20 years.
Bernard: Gareth Morgan from Gareth Morgan Investments there, talking about his big tax idea, the Big Kahuna, which will become coming out in book form in the next few weeks. I’m Bernard Hickey for interest.co.nz. That was another in our series of Double Shot Interviews.