Taxing Logic

Gareth MorganTax and Welfare

Gareth Morgan, Director of Gareth Morgan Investments

Minister of Finance Richardson has overridden private sector objections to her proposed international tax regime which, as it stands, promises to impose NZ tax on the tax paid by NZ firms overseas. The argument goes that the government has no interest in equalising the percentage of profit paid in tax on foreign and local investments. It takes the view that foreign taxes are of no benefit to NZ, just as wages or other expenses of the foreign entity are of no benefit. By implication it is to be deliberate NZ government policy to require foreign investments to have higher pre-tax rates of return than domestic ones.

The Minister’s rationale is that of a tax collector rather than that of Minister of the economy. From a tax collector’s perspective it’s rational to hit every form of income with the same rate of tax – ie; broadening the base facilitates lowering the rate. But from the perspective of a Minister concerned with the health of the economy it’s important that tax policy be consistent with the objective of maximising taxable income generated by the tax base. On this front much of the economic reform of the past few years has made it absolutely clear to NZ business that to survive they must attain international competitiveness . For many enterprises an essential component of that strategy is to internationalise their business. Most often this is done by vertically integrating it across national boundaries, so the firm has control of production facilities, say in NZ, and marketing and distribution facilities offshore. This inevitably involves ownership or part ownership in strategic companies abroad. This way the firm secures its international presence , moves away from just being a weak seller down at the commodity end of markets, and becomes a robust international player securing a sustainable income stream.

The permanent benefits for an economy comprised of significant numbers of such firms is sustained employment and income levels and a stronger tax base. To the extent that the Richardson focus on tax grabbing inhibits investment by NZ firms in international legs to their businesses – because of the dilution of investment returns her tax grab implies – economic structure is weakened and with it the extent of future tax flows. Myopia over what can be defined as national benefit, wherein government’s focus is totally on today’s tax potential ignoring the erosion of income additional tax costs impose, will inhibit the tax base ultimately.

Rather than risking the heart of the economic recovery by imposing a tax on a tax for the firms at the core of the growth formula, the Minister might consider just ensuring all firms pay their 33% somewhere. Many of NZ’s export markets are in country’s outside the grey list so such an approach would raise NZ taxes paid by them but without unnecessarily endangering the viability of their offshore investment. Contrary to the recent declaration, government tax policy should be interested in the sustained income potential of the tax base rather than simply having the widest base.

Taxing Logic was last modified: December 15th, 2015 by Gareth Morgan
About the Author

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.