Big Kahuna tax revamp is not about pulling the rich down, says Gareth Morgan

Big Kahuna tax revamp is not about pulling the rich down, says Gareth Morgan

Gareth Morgan and Susan Guthrie have authored a book called The Big Kahuna that proposes a single tax rate on all income, including from capital, and a Universal Basic Income for all.

By Susan Guthrie and Gareth Morgan

If website traffic is anything to go by, our previous articles on the widening income gap in New Zealand, and the type of reform needed to address it, have generated a fair bit of debate.

Some common themes have emerged amongst our critics, and we'd like to both air their concerns and address them.

CRITICISM 1:

"Dragging the rich down will hold our economy back, not make it better."

The Big Kahuna policy is not about dragging the successful down, but making sure that no activity that leads to personal success does so because it gets special tax treatment.

The policy results in a narrowing of the gap between the well-off and everyone else because it effectively taxes all income, not just that which accrues in a cash form.

Current policy should do this but, as a litany of tax inquiries have pointed out, it fails - it is inequitable because it rewards people for dodging tax as much as for creating wealth. That is indefensible.

It's also important not to lose sight of the big picture - the ultimate goal of economic activity is a society we want to live in.

The current system of targeting some groups for tax-funded benefits, but not others, creates a focus for envy, resentment and prejudice that at the end of the day leads to an unpleasant, unhealthy divided society, typified by high rates of crime, violence, youth suicide and so on.

Under the unconditional basic income (the 'UBI') a common, standard payment is made to all adults so no one can stigmatise beneficiaries or claim they are getting less from the Government than anyone else.

Anything more they get depends on their own efforts (or the wealth they inherited, though that's another debate). In this regard the reform better rewards entrepreneurship and effort - meritocracy is championed.

CRITICISM 2:

"Many people will choose not to work at all if they get the UBI."

It's important to be objective about the effect of the UBI on work incentives. On what grounds can anyone claim that a significant proportion of people will choose not to work at all? You can't use current beneficiary numbers as evidence that many people won't choose paid work - many of these people cannot find full-time jobs in the current environment and face effective tax rates in excess of 70% of any part-time earnings.

It is populist drivel to accuse others of being layabouts, an accusation sadly all too common under our benefit regime which stigmatises beneficiaries.

Because of benefit abatement rates, the current system makes it perfectly rational for people who rely on benefits not to supplement them with paid work. You wouldn't attempt paid work if it left you worse off - why should you? With respect to unpaid work, New Zealand has one of the highest rates of unpaid work in the world - hardly indicative of a nation of shirkers.

In fact there's evidence from elsewhere that UBI-type policies have positive effects on work effort. Community-wide experiments with UBI-type policies in Canada in the 1970s showed that the main breadwinners didn't alter their hours of paid work much at all, young men stayed in school longer (that's a good thing as they acquire more skills), and mothers spent more time in 'home production' after having children (also considered a good thing as this was a voluntary choice made possible by the UBI).

In other words, the UBI policies were found to affect 'effort' in positive ways. So much for the prejudice our current targeted regime engenders. At present the welfare policy is moving to more and more draconian measures to force people into paid work.

This is what the Welfare Working Group advocated and National has announced. But the success rate of this sort of approach is low (it tends not to lead to committed employees, or workers the employers value highly). It's little more than an impressive bit of theatre to keep taxpaying voters quiet.

The Big Kahuna proposal reinstates the incentives to accept paid work because every dollar earned pays tax at a flat rate of 30 per cent - every job, no matter how few the hours, is financially rewarding.

It is also important that there are paid jobs for people to do. We address this issue with the tax proposal. By leaving large gaps in the tax base, current policies have encouraged huge amounts of money to be invested in housing - but what paid work does this create? - the initial build, then cleaning, gardening, someone to fix the odd faulty tap. This excessive focus on housing has been at the expense of investment in real wealth creation.

Just like now, there will be adults who see no point in trying to improve their financial circumstances by taking on paid work to supplement the UBI. Making paid work worthwhile is one solution (dealt with by the flat tax rate), but education and families are where those problems lie and the solutions have to be found.

CRITICISM 3:

"It's ridiculous to charge a capital gains tax on owner-occupied housing."

We are not targeting housing for unduly harsh tax treatment, but ensuring all assets are taxed equally - this will help the economy's long-term performance. The Comprehensive Capital Tax (CCT) proposed in the Big Kahuna is not a capital gains tax, but an asset-based minimum tax.

The CCT doesn't explicitly tax the capital gains made in a year, but taxes the balance left after interest costs are deducted from a return "imputed" to the asset (the "minimum required return").

One of the reasons we propose the CCT is that if, instead of owning a valuable home, you had downsized and invested the balance in the bank, you would have paid tax on the interest your "property" in the bank earned.

By holding on to the house your wealth also rose each year as the value increased but you paid no tax on that implicit income. The result of this loophole in the tax system is that more New Zealanders' wealth was tied up in housing than it would have been, and less available to businesses.

One effect of the tax policy would be to drive farm prices down because cash income from the farm is likely to be less than the minimum required return we impose of 6% - an overdue adjustment in our view. The effect on house prices is less clear - sure the tax policy would prompt new sales, but many working people receiving average and low wages would see a significant income boost from the policy, providing new demand. The UBI policy would also mean many students could study debt free, so they could enter the housing market sooner.

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- Gareth Morgan and Susan Guthrie are authors of The Big Kahuna - Turning Tax and Welfare in New Zealand on its Head - published recently.
This item was first published in the NZ Herald.

Here is the link to Part 1 in this series, and to last week's Part 2 in the series.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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The Big Kahuna – for the nation not just for welfare.

Money generated with new NZtaxes should not be primarily invested into the welfare system, but in creating skilful, decent jobs, sustainable manufacturing, into the real economy. Of course this needs a major reform of our economy and a change in our culture, especially among authorities/ politicians.

Only then we have a chance of a decent standard of living in the wider NZpopulation, a better prospect to prosper, leading into a good working welfare system

In regards to criticism 3...I'd like to make these points:

1/ If u compare a chart of money supply growth with a chart of housing price growth.. ( over last 40 yrs ) you will see that they are very closely related.. ..  The growth is largely illusionary and is mostly the result of Monetary inflation. ....  Conclusion: Measuring the value of a house in nominal terms ( to money supply growth )...and then imposing a Capital tax is not just unfair ... but distortionary...  ( just like bracket creep in the progressive tax system)

2/ Calculating this Capital tax AFTER interest costs are deducted is also  distortionary. Housing is already highly " financialized"..( ie. look at a chart of housing credit...its gone from $54 billion in 1998 to $173 billion in 2011. )    .....  the incentive will be to stay leveraged.

3/ To call a house a Capital asset is only half true...  It is just as much a "cost of living"..    Just as we need to wear clothes we also need a roof over our head.

4/ We already pay a Capital tax on our homes... It is called RATES...  and rates are ALWAYS going up... at a compounded rate.

I believe that overall the Big Kahuna is a good idea....   BUT maybe it needs tweaking..

With other peoples input maybe this could evolve into something better..

cheers  Roelof

My understanding regarding taxing wealth, say in a house is that we have been bidding up the amount we are prepared to sacrifice for houses, eg two incomes rather than the single income it used to take to pay the interest bill and a small amount of principle. Banks have been complicit in this because they have been able to increase the supply of money- as you stated. I think that the idea of the tax on such property is to move us from paying a'tax' via interest payment to foreign banks and pay a smaller amount to ourselves through a real tax that we would pay to government. The option we have chosen for the moment is to pay the 'tax' to the banks, it does us no good, it has greatly devalued our currency- I would say that a NZD buys about half what it did 7 years ago- So instead we pay a tax on the same properties to the government- only NZ gets to keep the money, property price/currency devaluation (it is a combination) is reduced. It is not perfect but it is where we will have to go, either kicking and screming or withour eyes open.

I like that. That's a really insightful way of looking at it

Couldn't have said it better. I also think the Big Kahuna is a good idea, but have exactly the same thoughts as you do re-criticism 3.

Sorry...it's a pipe dream. The Big Kahuna is utopian stuff....

The policy is subject to political trickery...you cannot prevent this. The UBI rate would be fiddled with. The minimal asset tax would be fiddled with.

The problem at the heart of this idea is that it leaves the politicians and Parliament in charge of administering it....that is the weakness. The budget power remains in the Beehive.

The Big Kahuna will not work unless there is a way to remove the politicians and govt from control over the budget.....pipe dream stuff.

The proof is in the idea that the current farce can be changed to the Big Kahuna system...I would contend it can be changed back just as quickly.

So..????   That is how things are already..   U could have been decribing the CPI .... and u are probably  right ....BUT

We need a way to  change direction... 

I embrace this idea because it is a change in direction...  a start... .

Maybe it would be the catalyst for some good change.

As things are....   there will be NO change in anything  until we hit the "brick wall ".

The GFC was an opportuinty to rebalance... restructure.. to change direction.  I've heard those words from Bill English...  but nothing else.... we are still on the same course.

The way I see it we have two options for the big stuff.

1. we let foreign corporates run it

2. We run it ourselves through our own government

option 1 we have no control over anything - like  say the money supplynow inthe control of foreign bankers

or we do it ourselves through our own government- over this we have a little bit of control- if we use it.

I am not saying anything against private enterprise, competition or the free market. I am saying that somethings simply have to be left to the political system. There is no other way. Things where  there is no real market eg electricity supply - we have to control through the political process- bad as it is. Because there is no market in such things.

The money supply we also have to control ourselves- the independent central bank was a myth. The central banks gave up all control to private bank interests pretty mush everywhere including NZ. So Australianbanks determine the NZ money supply- not a good result.

Wolly's insightful comment cuts to the heart of the matter, it is a matter of governance. Tweaking and fiddling that won't change anything, it will take major structural changes to the way we are governed. A major overhaul if you like.

Sorry Gareth, while it makes sense of the face of it, it won't work within the current framework.

Christopher Alexander is on the money when he states people lose control when their governers step outside a retion of 5-10,000. Greater than that and the rulers are no longer personally accountable to everyone.

Morgan's proposal has it's merit....a minimum return to capital is basic Econ 101 stuff. although we have to come to a common agreement as to what should be the "minimum".

Gareth's proposal to link it to 10 yr Goverment (am i correct?) has it's own problem as the goverment can always game the system via the RBNZ....not to mention the invitable Fed's Helicopter tendencies and its influences.

Anyway, even if implemented, I am sure those highly paid tax accountants will be even better rewarded....... 

If you didn't want people to think it was about bringing down the rich, you shouldn't have opened your last article by pointing to the "ever-widening gap between the average wage and what those at the top of the paid workforce earn".

We probably have reached a point, almost, where we do have to bring down the rich. Afterall, Capitalism loves creative destruction. To create we must destroy. New enterprises will start etc, etc.

Only of course the top 1% like things they way they are for them at least.For everyone else they think that 'creative destruction' is best. Not for them you understand, they are far too important. But for everyone else.

My point is that they will be restructured. Events in the middle east are maybe just an opener,  there top 1% are being restructured down the road. Will it happen in other places- who knows. We all pretty much thought that nothing would happen in those countries- but it is.

Massive protests in Israel- 400,000 plus people marching in the capital very unhappy with the top 1% in their country. Same in Egypt etc.

In the UK, who knows what will happen- they have been repressed for 1000 years by the ansestors of the Normans, amazing- so maybe they are too beaten down.

Meanwhile in NZ - who knows, can the Nats keep a lid on things. We have doen some really cool things in the past, we built dams to provide affordable electricity, we built state houses- didn't do private enterprise any harm either- it created Fletchers- don't blame james for what happened, but even the bit that is left is still very large. We gave Women the vote- first country in the world to do so.

I think that Gareth is really onto something - it is new for us, it incorporates a lot of current thinking about how the way we do things now has stopped working and it is our answer- not something peddled to us by Foreign bankers and consultants - who are only interested in financialising anything we have left- schools, prisons, parks, hydro dams, anything that they can get us to bid up in price, then create the money they can lend it to us so they can cream it off the top or just sell it off to foreign interest- or a mix of a few of our rich- say some Todds, some mums and dads and maybe the rich chinese guy that buys up all the .

Many people here seem to hate ourselves so much that they think a foreign corporate can do a better job. They can't , manly they are just the same as us, only the economy they come from is bigger - thats all. They don't know the answer.

Suffering from envi itus PlanB?..... "people here seem to hate ourselves so much"....oh you poor wee socialist.

No sick of the rich raping the planet and 95% of the ppl on it.

regards

High per bowl steven....surely you can do better...there are Somalians who would gut you for a filthy rich foreigner ...it's all relative steven....

As far as socialism goes, I am strongly against socialism for the rich whhich is the curent system

 

Its like you have bi-polar Wolly, about half your posts indicate you have some nous the others indicate you have some serious complexes...

We probably have reached a point, almost, where we do have to bring down the rich. 

Interesting comment and indeed a 'theme' which is starting to be taken up by not only journalists and economic commentators, but also by some politicians (mostly EX politicians, I would add!).

Take the proposed FTT which is coming out of Europe's political elite for example.  But what do any of these additional tax proposals do to address the other side of the equation - that being welfare.  The problem is, what we don't want is more tax drawn from the wealthy to simply be used to reinforce failed welfare systems and hence, big government.

That's the beauty of the Big Kahuna - it uses the additional tax collected to break the cycle of welfare dependency.  I'm personally quite willing to pay more tax to achieve that objective - and I think many other NZers in higher income/asset brackets would be too.  

The other point is that under this policy setting, those with accumulated capital would start thinking about options to re-adjust the use of that capital toward more profitable ventures.

I think they are starting to do something, they are in the process of bringing down the corrupt government of Benjamin Netanyahu. That is worthwhile and constructive.

To be replaced by what PlanB?

Well not by your empty thought process that's for sure...

No doubt the hardest thing to do is accept the world is changing Wolly, and as you well know it is because of the greed, which has resulted from manipulated free markets, manipulated capitalism, manipulated politicians, and monopolitic controls over industry.

The pollution of the human species & its social structure and the environment is a result of all the above. It appears to me from your posts that you are beyond wanting to assist in any way to help change what is now so one sided that the excelleration on the breakdown is at warp speed.

Is it a genrational thing on your part that can't see what the options might be,, or even that there can be other options (difficult I admit), or why they must happen, or is it simply that you are so negative, that positive contribution is beyond you?

You also seem to not know the difference between being a socialist and a humanitarian!

yeah, he may have phrased that poorly. It'd be better to admit that some people at the top would be stung by this, and to emhasise the idea of favouring investment in productive business over housing markets or other 'safe' investments. 

Would he not get more support if he developed the image of a modern day Robin Hood. Lol.

But what I want to know Gareth, and you may have a plan for this in your book which, I must admit I have not read, is what do you do for people, and it will happen, who dreadful things happen to and who then need more to live. Would there be an emergency grant for them? Or do they have to go and live under a bridge. Is the UBI indexed to inflation?

I like the idea (however idealistic), but I wonder whether it suffers from believing that everyone will continue to behave essentially the same after a change in the tax system.

For example with the UBI in place, an employee can receive the same after-tax income with the employer paying a lower before-tax salary. (Up to a point, anyway - certainly true for the average wage at the moment). So there could be downward pressure on (before-tax) salaries. If the tax rate is set assuming that salaries will continue as they currently are, then it's going to end up short.

The CCT is also explicitly intended to make "dead capital" like housing less attractive. So presumably investments will move elsewhere. It's naive to think that a change in the tax system will suddenly make enterpreneurs out of every existing property owner, so much of that could well go into other types of passive investments that avoid the CCT entirely (and not necessarily investments within NZ, either - if anything this encourages buying shares with low/no dividend yield and benefiting from the untaxed capital gain - and that does not describe most NZ shares)

I did dig through Gareth's proposal presentation, but couldn't find the hard numbers backing up the tax rates to check what they're based on. Anyone got a link?

So there could be downward pressure on (before-tax) salaries. 

I think WFF has already "achieved" this unintended consequence.

 "and mothers spent more time in 'home production' after having children (also considered a good thing as this was a voluntary choice made possible by the UBI)."

It's already a voluntary choice made possible by the DPB where a woman can choose to be a production line popping out kids with no desire to actually raise them to be part of society and is encouraged to not have any personal responsibility or accountability for her decisions.  The father(s) chooses not to get a paid job because that would mean working rather than being able to bum about all day.  The children aren't encouraged to expand their education and instead choose the same path as their parents.  To have the material items that others have most of them will take it from others rather than earn it.

You'll find that this is the type of scenario most taxpayers are pissed off about when they bitch about our welfare system.  How does your Big Kahuna solve this problem?

What about when a family does earn enough to support themselves but then have more children than they can afford to support?  Is it the taxpayers role to support their irresponsibility much like we do already?

Mist, believe me I know how the child support system works and the inequities it creates.  It is only an additional tax to cover the cost of the DPB, but it is a seperate issue to my comment above.

My scenario was based that both parents are already receiving DPB/Unemployed benefit and whether combined as a household or not continue to breed without any desire to raise the children to participate in society or encourage them to take a different path.

The benefit system doesn't address the causes/problems and the UBI is still only a benefit.

The only off the bat fail is your post and it is an epic fail at that.

Did you even read any of Mr Morgan's proposals?

"Yet the only way to 'level the field' is to tax the higher incomes on their disposable income, and tax the lower incomes less because they can't afford as much"

Higher incomes would be taxed at a rate (25%) exactly the same as lower incomes (25%). That's about as level a playing field as you can get, except it could be slightly worse for those on lower incomes as losing 25% of a low income could be more detrimantal in terms of not being able to pay the bills than losing 25% of a high income might be. Nobody is saying anything about taxing higher incomes on their "disposable" income??? Higher incomes would be taxed on net income just the same as lower incomes.

The way in which the playing field would be leveled is by everyone paying tax on all of their real income rather than what is declared as income. It's essentially broadening the tax base. Nobody can complain they are paying more than their fair share as everybody is paying exactly the same rate. Nobody is being taxed "more than others" as you suggest. Sounds fair to me.

"Or even worse we have those who 'spend'(consume) their value/time/earning capacity by deliberately preferring low or non-paying activities  who then get to pay less to society for this choice."

Not sure really what you mean by this? If someone chooses to prefer a low paying job (assuming that is what you mean by activity) then yes, they pay less to society in terms of tax total but that is their choice. They will also have less wealth and will still pay 25% of their net income the same as everyone else. What's wrong with that? A wealthy person or a high earner will still receive the same UBI and can choose to not get wealthy and just live of the UBI if they want but I know which situation I'd rather be in. Believe it or not the vast majority of the population would rather be working and / or being productive rather than sitting around doing nothing and receiving a couple of hundred bucks a week which is a pittance. Just because someone is on a benefit doesn't mean they choose to be on one. But again, even the very wealthy would still receive the UBI, same as everyone else so where's the issue?

"others who are earning more" aren't subsidising anyone, they are paying 25% of their income just like everyone else. I can assure you most people will always prefer to keep 75% of a high income or much wealth rather than keep 75% of F*** all.

We already tax consumption by way of GST. Everybody pays the same rate but like all consumption taxes it affects the poor and those on low incomes much more than anyone else. This is because in general, a much larger percentage of their total income is spent on GST than that of a wealthy person or high income earner.

It's not about "taxing production", it's about ensuring everybody pays their fair share of tax on their income and unproductive capital. I can't see how anyone can find fault with that. Unproductive capital tied up in housing for capital gain at a later date is not "production", it is an economic activity deliberately entered into in order to hopefully generate some income. Therefore it should have income tax applied to it.

And all the landlords moaning and complaining on here like the guy that has 13 rental properties and goes on to say how bad they are as an investment. Have you lost touch with reality? Most people can't afford a house. You have more than 13 and are still moaning and threatening to take your capital over to Australia. Good riddance, there will always be someone else who will step in and make a nice little profit without moaning. How can you possibly think that someone with no house and no chance of ever owning one should pay 25% tax on their income whilst you sit on 13 properties worth millions yet pay a lower rate of tax than they do??

If someone puts money in the bank and makes a percentage return on that money over a period of time (however low the percentage) then they pay income tax on that return. Further, their capital is available for the bank to use in the fractional reserve system to generate bank credit for 'loans'. Why should a house be any different? You buy a house and sell it later for a profit, then you should pay income tax on that profit. Don't cry about having to pay a bit of tax on an investment property for goodness sake. Most people will never be able to afford a house, let alone any other investments.

There is a lot to admire about this idea. However given the Big Kahuna is one really enormous big step from where we are now and given we can't even make baby steps in fairly obvious transformative directions (so many working group efforts ignored), with all due respect, the poor ole' Big Kahuna is looking more and more like a Big Red Herring, I'm sorry to say. I think those that have the capability would be better off finding ways of selling some small steps toward Little Kahuna's, given the reluctance to change involving steps that are too big. However, really good effort and it's facilitating some very useful debate, good on you guys.  

I am OK on taxing the real asset andnot the owner.

That way overseas ownership will be taxed with no Big Kahuna to offset the tax.

.....the pollies love to control us by offering sweeteners...mostly via the tax and benefit sytem.  Its what gets them re-elected.

So why the heck would they promote the big Kahuna? 

Futile debatiing the merits of it...cause no polly in a milion years will give away the ability to bribe the populace.........with maaybe the exception of the Greens..

 

BUT...

What if there was a new party - "The big Kahuna Party".

I'd vote for it!

Was this Gareth's cunning plan after all?  

So cunning you could put a tail on it and call it a .....?

These are the sort of policies that the ACT Party should be promoting rather than the populist give tax cuts, slash spending, bash the beneficiary / Maori / student / Asian agenda.

Don't really understand what Acts purpose in the political landscape is hey !

One thing is certain. NZ will need some serious "outside the box" thinking now and in coming years. English, Key, Goff, King, Turei and the likes of Bollard are just not up to it.

They all are clueless and too set in their prehistoric ways

It is not up to them, only very occasionally would a country ever dig up a great politician. Who actaul knows what should be done and actually does it. I think it is up to us to tell them what to do.

  "I think it is up to us to tell them what to do"...by all means scream your head off but we live in a Kleptocracy PlanB and you are just a wee bit of shite on one of the minor cogs.

..."  just a wee bit of shite on one of the minor cogs ? "

Crikey ! ... and my teachers said that  I'd never amount to anything . Well , that's showed them .

Thankyou Mr Wolly , I feel so much happier now .

Actually people have all the power, they have just had it repeated to them that that do not. This has happened slowly , but does not take away the reality. You old buggers just need to stay out of the way if you don't like the change that is going to happen.

Double ....

How about a full-reserve banking system as a solution. This would allow the economy to function while debts are repayed. The financial sector does not make a valuable contribution to economic output and has too large a share of the economy and this would re-balance it.

There is a full outline of the policy necessary in the UK here,

http://positivemoney.org.uk

How could a full reserve banking system allow the economy to function? All money is debt. The only way to create new money is by creating a debt by way of bank credit (loan) or bond selling (borrowing, thus a loan). There is also physical printing, but that is only around 3% of the entire money supply. So under full reserve banking the money supply (and thus the economy) could never increase as banks could only loan out as much as they have in deposits. In order for an economy to function (under our monetary and economic system) it has to continuously grow. Also, there is the interest factor.

All money is created as a debt, but it has interest attached to it. Thus under full reserve banking, There would be no money in circulation to pay the interest on the money supply because the interest could never be borrowed as it wasn't created in the first place. The bankers would end up with all of the money or all of the tangible assets.

It is a mathematical certainty that our financial and monetary system will collapse. Our system relies upon perpetual and exponentially increasing consumption in order to continue to function. You can't have continuous exponential growth in consumption with a pool of finite resources. The only question in regards to that is the 'how soon?' A complete change of mindset and economic system worldwide is the only way for the future and will have to involve the removal of 'money' from existence. Money in itself is a hindrance and barrier to technological and societal progress.

Well said.

Money will always be around as a barter token, but the days of it growing exponentially ahead of the underwrite, are over.

I've long suggested a measure based on the calorie - nothing happens without the expenditure of energy, but it's real-time, not fiat/levered, so it couldn't be left stranded.

And the Kahuna Team responded to LAJs early ?'s posted here;

http://www.gmi.co.nz/bigkahuna/MessageBoard/Thread.aspx?tid=7 

Bit hard to follow - as a number of the posts had more than one issue/question in them, but would be interested to hear from LAJ in here to see if he/she thought the answers helpful.