Since the election we have been talking a lot about tax – how we don’t tax all the income from investments equally. One of the common questions we have had is how much tax Gareth pays. While the question is a little off topic and irrelevant, we asked him anyway and he very kindly answered.
A quick recap – our position on tax
During the election campaign we criticised the Labour and Greens plan to increase the top tax rate on income. The issue we pointed out is that half of the wealthiest people in New Zealand don’t even pay the top rate of income tax. Hiking the top tax rate just hits PAYE earners, and pushes people to get their income in ways that aren’t trimmed by the tax system. This just worsens the existing distortions in the national tax collect.
Nowadays, the biggest tax loophole is that the income people receive from different assets is not taxed equally. Rather than reap cash, investors can instead just get personal benefits from investing in “lifestyle” businesses that have a low profit or owner occupied housing, which isn’t taxed at all. Meanwhile the relative safety of a bank account gets stung for every dollar of interest earned. We all want to hand over the minimum possible to the taxman, so many of us that can afford an accountant arrange our affairs to minimise the leakage to tax. It is completely legal but our tax regime is just naïve to hold that “one day” these schemes will – as the owner of course would purport – make a taxable profit. Fat chance – they are devices to generate tax-free returns, nothing more.
Does Gareth play the game too?
The question many of you have asked, in one way or another, is whether Gareth plays the game too. Of course, he won’t show you his tax return, but essentially people seem to be asking if Gareth pays very little tax. The answer to this is probably not what you are expecting:
Do I pay very little tax? – How much I pay each year depends on whether I wish to have any of what I earn to spend on myself. If the answer is yes then I pay tax and get to spend the rest. If I don’t need any spending money that year (because I already have saved enough) then I give all my earnings that year to charity and pay no tax, nor get any benefit from those funds. Each year I make that decision.
No surprises there – when you give your income to charity, you don’t pay tax.
The more important question – the one that people should be interested in but rarely ask – is whether Gareth exploits the weaknesses in the income tax system that he so loves to point out:
Do I pay very little tax? – How much I pay each year depends on whether I wish to have any of what I earn to spend on myself. If the answer is yes then I pay tax and get to spend the rest. If I don’t need any spending money that year (because I already have saved enough) then I give all my earnings that year to charity and pay no tax, nor get any benefit from those funds. Each year I make that decision.
In other words, as an economist and former fund manager he sits on the horns of a dilemma. If the tax regime tells him it’s best to invest in land and property, he is rational and so that is what he will do. But he hates to invest in things because of an artificial incentive, created only by the tax system. He would prefer the tax system treated all assets equally, so he could invest purely on the basis of whether they were a good investment or not.
If all investment were taxed equally, Gareth wouldn’t own as much property as he does now. What would he do with the money? He would do what he loves – researching and making investments in businesses that create wealth and jobs. But which such a strong tax incentive not to do that it’s easier to be lazy and just buy another house or lifestyle farm.
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