ANTIDOTES TO SILLY IDEAS
For nearly forty years since the Income Tax Act (1986), and the Goods and Services Tax Act (1985), New Zealand has had one of the best tax systems in the world. We should probably say least bad, because tax is not exactly something to celebrate, but it was well designed.
By well designed, it collects money with A) as little administration cost for Inland Revenue as possible (no love lost, but we’re all paying for everything they do), B) as little compliance cost for taxpayers as possible, C) as little effect on people’s behaviour as possible - make it simple so people spend more time producing a product their customers want at a price they can afford, instead of making decisions designed to minimise their tax.
This election, like never before, the simplicity of the tax system is under attack. New Zealanders risk ending up with exactly the kind of leaky, complicated tax system that ACT’s founder Sir Roger Douglas got rid of all those years ago. This attack must be resisted. People already spend too much time on compliance and not enough time on production. The last thing we need is for a Government to screw up one of the few policies New Zealand’s getting right.
This week Free Press gives a quick and dirty summary of why four ideas that sound good are really bad. They are 1) GST off fresh fruit and vegetables, 2) no tax on your first $x, 3) indexing tax brackets to inflation, and 4) a tax on capital. We hope it will help you talk people taken with these ideas back around (or come back around yourself if needed)!
What could be better than taking tax off something healthy? Surely no GST on fresh fruit and vegetables is the best of all worlds, right? Something for the tax cutters, something for the public health folks, something for the social justice warriors, something for those who think the poor should take some personal responsibility and eat better. What’s not to like?
First of all the benefits don’t go where fans of this policy think they do. When a tax goes on, the buyer and the seller share the hit. When a tax comes off, they both eat up the windfall. When the British Government took a five per cent tax off sanitary products, prices only dropped 1.5 per cent so only about a third of the windfall went to the buyer.
Next, the benefit that does go to buyers goes to those who buy the most. The Tax Working Group estimated that high income households would benefit three times as much from taking GST off food as poorer households. So, first up, the poorest households might get about one-third of one-third of the benefit or about ten per cent of the reduction in Government revenue, the rest going to those selling the food and those who spend the most on it.
As if the benefit isn’t paltry enough, the costs are enormous. The lost Government revenue must be made up with tax increases or spending reductions somewhere else, that’s true. But the real trouble starts when companies start to work out what is and isn’t GST rated. It’s not just whether fresh fruit and vegetables should include fruit juices, that are just as healthy (and what if they’re from concentrate)?
The real problem is with the space on the truck that brought the goods from the supermarket distribution centre. Does the supermarket need to pay GST on the space that the fresh fruit and veges took up? If yes, then aren’t you paying GST on the price of fresh fruit and veges? If no, then how far back up the chain do you go? Should GST be paid on the seeds the farmers planted to grow the vegetables? All of this adds to the bureaucracy Kiwis face, spending more time on compliance, and less on production. The more you think about it, the madder it gets.
‘No income tax on your first $x’ has similar problems. The tax free dollars have to be made up somewhere. You might pay no tax on the first dollar you earn, but you pay more on your last dollar. You pay more if you make an effort. If you work overtime, upskill, save and invest, basically anything that would actually make New Zealand a wealthier place, you attract more tax to pay for less tax on your first few dollars. It’s really quite silly.
Indexing taxes to inflation is really a version of a tax free threshold. Free Press covered it at length last November. Tax bracket indexation means your lower income will always be taxed low, but you’ll still pay the old high rates on your last dollar of income. That’s why the best policy is to cut the actual tax rates so you pay less when you work, save and invest to earn an extra dollar, as ACT promotes in it’s alternative budget.
Capital taxes are the nuttiest of all, and the Māori Party has shown why they don’t work with their truly nutty proposal to raise $23 billion from a capital tax of up to eight per cent. The return on the NZX for the last decade has been eight per cent. An eight per cent capital tax would make your after tax profit zero. Nobody would invest in New Zealand.
It may be this is the Māori Party’s policy to decolonise New Zealand, it’s certainly one way to do it. Even smaller capital taxes will have the same extent, they’ll just make investment less attractive and New Zealand poorer, even if they don’t wipe us out completely.
One of many reasons ACT is campaigning this year is to protect and enhance our Party’s low rate, broad-base taxation system. It’s not perfect, but every other party is threatening to erode it in some way or other, with the net effect that we spend more time on admin, and less time being productive. The last thing New Zealand needs right now.