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Te wiki o te tāke - the Minister of Revenue goes back to first principles as the final due date for submissions on two controversial proposals illustrates why, and the IRS drops the ball

Public Policy / analysis
Te wiki o te tāke - the Minister of Revenue goes back to first principles as the final due date for submissions on two controversial proposals illustrates why, and the IRS drops the ball
dp
David Parker.

Ministers of Revenue typically deliver several speeches during the year, mostly to business audiences or at the start of tax conferences.

On Tuesday, however, the Minister of Revenue, David Parker, delivered a speech at Victoria University Wellington entitled Shining a Light on Fairness in the Tax System, which is without doubt one of the most interesting speeches made by any Minister of Revenue in many years.

After some scene setting about the purpose of tax and how the Government has been able to use tax revenues to fund its COVID 19 response, Parker then pivoted to talk about beginning what he called a fact-based discussion. He started by challenging the assumption that our tax system is progressive overall.

“What’s hidden that the effective marginal tax rate for middle income Kiwis is generally higher than it is for their wealthiest citizens. Indeed, some of their wealthier Kiwi compatriots pay very low rates of tax on most of their income.”

The Minister then dived into the question of the lack of data on the distribution of wealth and capital income in New Zealand. He highlighted the fact that according to the Household Economic Survey, the highest net worth ever reported was $20 million.

This was, he said, ridiculous, given that we know there are billionaires in the country. As he pointed out, that meant the National Business Review's annual rich list is a better set of data than the official statistics. In fact, that's quite common around the world as statistics on capital wealth are rare and rich lists are often used to help revenue authorities gather data in this area.

So this lack of data, Parker explained, was the rationale behind the powers granted to Inland Revenue for the purposes of conducting research into high wealth individuals. As listeners will know, this is a somewhat controversial project, even though the Minister repeatedly stated that the intent was to gather better data for research and not as had been accused, so Inland Revenue could secretly work on new taxes.

“Until we have a much more accurate picture about how much tax the very wealthy pay relative to their full “economic income”, we can't really we can't honestly say that our tax system is fair.” And this led on to the most surprising part of the speech his proposal for a Tax Principles Act.

He referenced four principles of taxation that Adam Smith set out in Wealth of Nations back in 1776. And he noted that the many tax working groups and other reports that New Zealand has had over the past 40 years, such as the McCaw Review in 1982, the MacLeod Review in 2001, the most recent tax working group, and the all the work that went on during the Rogernomics period all basically followed these four principles set out by Adam Smith.

“They all endorse the same principles, based in that most core value of New Zealand - fairness. The main settled principles are:

 Horizontal equity, so that those in equivalent economic positions should pay the same amount of tax
 Vertical equity, including some degree of overall progressivity in the rate of tax paid
 Administrative efficiency, for both taxpayers and Inland Revenue
 The minimisation of tax induced distortions to investment and the economy.”

He also noted that recent reviews in the UK and in Australia both adopted similar approaches. Incidentally and perhaps not coincidentally here, Deborah Russell and I adopted the same principles when we wrote Tax and Fairness back in 2017.

And as you know, Deborah is now the Parliamentary Under-Secretary for Revenue and David Parker's number two. The proposal is that officials should periodically report to ministers on the operation of the tax system using the principles as the basis for the reporting.

The Tax Principles Act would sit alongside existing legislation, such as the Public Finance and Child Poverty Reductions Acts, which also require the Government and officials to report on specific issues. This is quite revolutionary, but in a way sits within the philosophy of open tax policy that New Zealand has adopted through what we call our generic tax policy process.

This open approach to developing tax policy is widely regarded as world leading by other jurisdictions. The proposed Tax Principles Act is not inconsistent with the existing approach. The intention is there will be consultation later this year and following that a bill would be introduced once the principles had been agreed and the reporting requirements had been established.

The resulting bill would be enacted before the end of the current parliamentary term, i.e. just in time for next year's election. The proposal caused quite a stir and there’s plenty of good reading on it. Bernard Hickey has a very good summary of the matter. 

It's also quite rare certainly to see Ministers of Revenue philosophise in quite a public way. David Parker referenced Thomas Piketty's seminal work, Capital in the 21st Century. He also acknowledged the very regressive nature of GST. Somewhat controversially he noted that because GST in transactions between GST registered businesses essentially zeros out and is a final tax for those who are not GST registered, it many ways it falls on labour earners.

As he put it, “GST is really paid out of our earnings when we spend it. In economic terms, GST is mainly a tax on labour income. Who pays that cost?”

The Minister noted we have limited data on the overall rate of GST paid by New Zealanders, either by income or wealth decile. So he's asked Inland Revenue to gather data and to provide feedback on this. I suppose from a political viewpoint this hints that potentially if there are changes to a tax mix at a later date, something may be done in relation to GST as it impacts lower income earners.

All this kicked up quite a stir. When I appeared on Radio New Zealand's the Panel following the speech, the panellists expressed some shock about the fact that we don't really have data about how wealthy people are. I think the reason for this, which wasn't discussed by Minister Parker, is that it's probably largely the unintended consequences of the abolition of stamp duties, estate and gift duties, and the absence of a general capital gains tax.

In other jurisdictions which have some or all of those taxes, this gives a reference point when a transaction occurs as to what wealth is held and by whom. Incidentally, the disclosure requirements regarding trusts I discussed last week although they are primarily an integrity measure, they also represent, in part, an attempt to gather some data about wealth held in trusts and help fill the gaps in Inland Revenue knowledge.

With National and Act already putting out their tax proposals, it looks like tax will feature quite heavily in next year's election. So it's very much a case of let's watch this space.

Moving on, today is the due date for submissions on Inland Revenue’s discussion document, Dividend Integrity and Personal Services Income Attribution. This contains a couple of controversial proposals.

Firstly, that sales and share of shares in a company with undistributed retained earnings would trigger a deemed dividend.

And secondly, changes to the personal services income attribution rules, which would mean more income would be attributed to a primary income earner.

Now, neither of these proposals have gone down particularly well and to describe them as controversial would be a bit of an understatement. The personal services attribution rules, in fact, may well have a very much wider effect politically than the Government might want to see.

Brian Fallow, writing in a very good column in last week's New Zealand Herald, pointed out that the attribution rules, if enacted, would affect very large numbers of small businesses quoting former Inland Revenue Commissioner Robin Oliver "It is likely to catch tradies — a plumber, say, or a landscape contractor — with a van and some equipment and just themselves or one employee doing the work,"

And Oliver raised the question, is this really appropriate? I expect a lot of submissions on this paper, and I urge you to do so because as you can gather from comments made by Oliver, it could have a quite potentially significant impact for the SME sector.

I personally think the proposals go too far. And incidentally, one of the reasons that the proposals have been made comes back to a longstanding topic in this podcast and something that wasn't directly referenced by Minister Parker in his speech, the absence of a general capital gains tax.

Inland Revenue proposes any transfer of shares by a controlling shareholder to trigger a dividend where the company has retained earnings. In jurisdictions which have capital gains tax, that transaction is normally picked up as a capital gain. But as we don't have a capital gains tax Inland Revenue is proposing a workaround which I don’t think is appropriate one.

I think there are other alternatives they might want to consider. The proposals on the personal services attribution rules are an integrity measure. They build on the Penny Hooper decision relating to surgeons from ten years ago.

They are understandable, but I believe go too far and are probably targeting the wrong group of people. Moving on Inland Revenue has a useful draft interpretation statement out considering what is the meaning of building for the purpose of being able to claim depreciation. 

This has actually become quite relevant because back in 2011 the depreciation rate on buildings was reduced to zero. But in 2020, in the wake of the pandemic, the depreciation rate for long life non-residential buildings was increased from 0% to 2% if you use a diminishing value basis or 1.5% if you're using straight line method.

What this draft interpretation statement explains is the critical difference between residential and non-residential buildings. it replaces a previous interpretation statement released in 2010 which has had to be updated following an important tax case in 2019 involving Mercury Energy.

A building owner will be able to claim depreciation for a ‘non-residential building’ and that can in some cases have some residential purposes. Generally, it's aimed at commercial industrial buildings and certain buildings such as hotels, motels that could provide residential commercial accommodation on a commercial scale. It’s a useful explanation and comments on the draft close on 2nd May.

Chump change for FATCA

And finally, a quite extraordinary story from the United States, where it has emerged that a very important tax act, the Foreign Account Tax Compliance Act, better known as FATCA, hasn't generated as much income as was expected when it was introduced in 2010. 

The projection was that over the ten years to 2020, it would raise about US$8.7 billion US. The US equivalent of Inland Revenue, the Internal Revenue Service, (the IRS) spent US$574 million implementing FATCA. But according to a report just released, all the IRS can show for all that money invested are penalties totalling just US$14 million.

Now, that's quite extraordinary. And this is important from a New Zealand perspective, because FATCA represents a huge compliance burden for all US citizens who are required to file tax returns, even if they may be tax resident in another jurisdiction.

FATCA was the template for what became the Global Common Reporting Standards on the Automatic Exchange of Information. The rest of the world looked at FATCA and thought, “That's a good idea. We'd like to have some information about what overseas accounts our taxpayers have”. And so, the CRS, as it's known, was introduced and has been in force now for about four years.

I would hazard a guess that Inland Revenue probably gathered well in excess of US$14 million as a result of the introduction of CRS. But to come back to a point that David Parker made about politics and tax being inseparable. One of the reasons that the IRS has done so badly is that the Republican controlled Congress won't give it the money to do its job. And that situation doesn't look likely to change.

As David Parker said, politics and tax are inseparable. And we're going to hear plenty more about the two in coming months.

Well, that's it for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.

Until next time kia pai te wiki, have a great week!


*Terry Baucher is an Auckland-based tax specialist with 25 years experience. He works with individuals and entities who have complex tax issues. Prior to starting his own business, he spent six years with one of the "Big Four' accountancy firms including a period advising Australian businesses how to do business in New Zealand. You can contact him here.

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55 Comments

The personal services attribution rule change will definitely put some sole traders operating under company into a spin.

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Golly gee whillikers  ... how many tax reviews have we had over the years  ... and , after every one , it's been dumped in the bottom draw  , decried as an " ideological burp " , and never seen the light of day again... 

... so , what's the point in the IRD in full Jaques Clousteau mode interrogating high wealth individuals & their families ... raking over every minute element of their spending  & investing  ...

Just bring in an LVT and be done with it ... so simple , and it'll rake in $ billions annually ... easy peasy

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There's a reason TOP flunked out last time and will continue to do so. Taxing the value of one component one asset class, that pensioners who don't work any more tend to own, ain't gonna fly. 

If you really want to tax people for having stuff go after inheritances. Even more than CGT that's something for doing absolutely nothing on the part of the people who inherit wealth, and since they usually don't need the place to live for the next 30 years they have the means to pay your tax.

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I think a combination of resources taxes ( land , air , water  ) plus an inheritance tax ought to level the playing field somewhat  ... taking some of the burden off the productive sector , workers & business  ... but , ditch the CGT entirely , it's a shocker in so many ways  ...

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As with pretty much every Labour cabinet minister, Parker is out of his depth. His laughable use of the Rich List as a better set of data than the official statistics, just proves this. Anyone who reads the list will realise that a good few of the very wealthy DONT EVEN LIVE HERE. They are NZ'rs sure, but they don't reside here. So why would he imply they should be paying tax here?

And the rich list, it you really want to know, is nonsense. It's NBR guessing at various peoples wealth. But hey, guessing is Labours game. We've seen that since they got into Government.

What Parker is really saying, is that he doesn't like people accruing assets that are not taxable. This Government wants to spend more of other peoples money. That is it.

People's wealth is none of the Government's business. Why should they know whether each of us owns a house? Or 5? Or a decent sized share portfolio? Since when did the Government get the right to delve into our affairs to this level? They should be told to bugger off. And because they are dumb as a sack of hammers, they don't realise capital is mobile.

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Re the use of the rich list, that was his whole point.

Re the delving into finances, you mean knowing everything like they do for the rest of us poor plebs.

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... does the IRD do separate in depth interviews of you & your partner ... then cross check the answers ... looking for discrepancies between their responses & yours ?

If we wanna piss off richlisters so much that they up stakes & leave , this is the way to do that  ...

... or  ... much cheaper , less intrusive   & more effective , introduce a simple  LVT ...

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To my knowledge as a partnership they have that exact right now to interview us both?

We didn't have to but my mother had to keep a dairy to prove they shared the farm work to be allowed to claim a partnership.

I've never been tapped for the household survey but I have for the farm one and they get real threatening if you don't do it.

But maybe if you have money you can ignore them.

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... I'm taking the stance that our taxation system is dreadfully skewered towards income  taxes , GST & company profits  ... and away from wealth or capital taxes  .. But , we dont need the time wasting & intrusiveness of David Parker to understand it or to redress it ... just a simple talk with taxation experts would give him all the info he needs  ... and , a study of what works & what doesn't overseas would help ... plus a dusting off of the past reports , McLeod , for example ... its simple really ... except , nothing this government done is ever logical , simple , or commonsense ...

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Totally agree on the skewing of tax take.

Skewering Parker on this issue I see as harsh. 

 

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... he's typical of Jacinda's ministers in that he wont accept outside knowledge  : he's insisting on a new report  , and using a heavy handed methodology ...

The reports are all in , the experts are champing at the bit to engage positively , the evidence from overseas is there ...

... but no , Parker has to blithely ignore all that , and take a silly route to nowhere ... 

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Yeah Gummy, you get a Government that decides to tax increases in "wealth". So the "wealthy" have to pay taxes on unrealised gains. So why doesn't the Government drive down interest rates, drive up asset prices, print money, cause inflation, drive up asset prices and presto, they get to tax the bejesus out of everyone, who then has to sell their assets that have been artificially inflated in price to pay the tax. And, even better, decline to make unrealised losses tax deductible! That'd be genius. A great leveller don't you think? I mean, a good dollop of equality of outcome is good for everyone?

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So... all I'd have to do is not own any land, and I still get to be a plutocrat? Sounds like the deal of the century to me., 

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In Vino Veritas,

Or in your case, drunken incoherent garbage. If you ever sober up and do some research, you might just find that we are very much out on a limb globally with no proper CGT and  no Inheritance Tax. We rely on taxation from incomes.

I spent most of my working life in financial services in the UK and advised many clients on just these issues. These were people who were by definition comfortably off right through to very wealthy.. of course they didn't much enjoy having to expend time and money on these issues, but almost all recognised that this was part of a citizen's contribution to society. if I have say a $10m estate, why on earth should my children inherit all of that. They have not earned it, so why not see say 25% of that go to the state?

To put it bluntly, I despise parasites like you.

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Ironic. Who best meets the definition of parasite here? 

an organism that lives in or on an organism of another species (its host) and benefits by deriving nutrients at the other's expense.

It is the socialists. You sir are the parasite. 

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You do realise that private land was once the commons right? The commons is of value to all humans and enclosing it so that someone can own it privately is theft from the citizenry on a grand scale right?  Why shouldn't the public get a share of the value increase in that land? Who sir is really the parasite?

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... spot on ... the ultimate ownership of all our natural resources ought to be vested in the crown ... and as citizens under the crown's care , we ought to benefit from those assets by taxes , such as LVT , on the users   ... 

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Lol Spiceeh, you should really read a bit. Common Right was granted to various people (commoners) by Lords of the Manor around the UK. And those rights were defined stringently, for eg: grazing pasture by each commoners stock, only a set number and type of animal was permitted. Fishing, only a set number and type of fish were permitted to be caught by each commoner.

The commoner never actually owned the land, he just had a right to use it for a very specific purpose, and that right could be removed by the Court of the Manor at any time. So theft from the citizenry? Wrong. They had nothing to steal. And who is the parasite? Those that do nothing, envy others wealth and expect others to pay their way. Sorted it for you.

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It's those who are living tax-free while working Kiwis pay all the taxes that fund society.

I.e. many making most of their money through untaxed capital gains. Property speculators et al. Those who live off society that others are paying for.

Parasites

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... I recall Sam Morgan expressing amazement that when he sold TradeMe to Fairfax , he made a tax free $ 200 million ... 

And , the recent opening of Transmission Gully , which has increased the value of the land bordering it by $ 7.8 billion ... again , tax free gains to the landowners  ...

... our system rewards accruing capital gains  , and punishes working for a wage or salary ...

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It's not called capitalism for nothing. Income tax laws weren't written for the benefit of the salary and wage worker. 

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And Sam was so amazed and disgusted by his windfall gain, he didn't make a voluntary tax payment to the IRD. So what the hell argument are you trying to make?

And do tell, how exactly are you punished for working for a wage or salary as opposed to a landowner who has bought his land from his wage or salary that he has been somehow punished for earning?

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Lets not forget water allocation - oh no I'm poking the bears now

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There's nothing stopping you leaving your money to the State if you don't want to leave it to your family to provide for their future in a volatile uncertain complex & ambiguous world. However, "to put it bluntly" you have no right to tell others what to do with their own wealth, we will make our own wise choices.

 

Also fyi, as you state that you spent most of your life in the UK: NZ had wealth taxes/death duties for over a century. Getting rid of these envy taxes & other economic inefficiencies such as stamp duty was the electoral mandate quid pro quo given for the original introduction of GST a few decades ago.

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I don't read anywhere that linklater is telling anyone what to do with their wealth. 

He is commenting on a tax policy that he would like to see changed for everyone. I couldn't agree more.

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"He is commenting on a tax policy that he would like to see changed for everyone."

= telling us what to do with our wealth. Not everyone agrees with you & him.

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If you are paying PAYE at 33 cents in the dollar then yes you have every right to tell others to pay some tax too.
Why should someone inherit tons of money and live off it, get all their healthcare, retirement etc paid for by the state, yet never pay any tax? 

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Because assuming the wealth was originally earned legally (including the tax legally due & paid at the time of earning which contributed to the required share of health pension & other state benefits), it's then up to the capital owner to dispose of/bequest it. Not those who think they have a right to steal it simply because of their envy.

Any subsequent income earnings from the capital are of course subject to taxation according to relevant legislation.

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Because the thing that is always missing from NZ tax debates is the nuances that make these taxes palatable in other parts of the world. In the US, for instance, death duties have such a high threshold that they're clearly aimed at plutocrats.

Here, we insist on screwing as much money out of the middle as possible, so we'll no doubt be going after everything after dollar one. 

The problem is, the people who stand to lose the most from this are the people the tax system already relies on to pay the vast lions share of tax out of income taxes. So there's not really much of a compelling argument around 'fairness' to be had there, given how small our net taxpayer pool actually is. 

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If they are inheriting Jimbo, it's likely that they are living off the INCOME from the capital, and it will be taxed. I'd respectfully suggest that they have every right to retirement, healthcare etc, but they would pay for it anyway, as they can. I reckon there should be a tax deduction for those that pay for their own healthcare. That would be fair. And what's fair about someone else paying for your retirement and healthcare?

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Hmmm Linklater, your political leanings stink just from a post. I'd suggest that you weren't very successful advising anyone, and that is most likely the reason you are so bitter.

NZ has had a "proper" CGT for decades. It's just that the real "parasites" want more of any increase in value of assets so they can throw it down the dunny.

And do answer your question as to why children should inherit, its because we have a capitalist|market economy and have property rights. We get to do whatever the fuck we like with OUR assets. Clearly a rabid socialist, else you would have couched the question, "why should my children NOT inherit all of MY assets?"

And Linklater, I pity you. Carrying such bitterness must be difficult. But then, socialists are never happy with what they have. Take care, God loves you.

 

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Hi Vino Veritas. You are sailing close to the wind on personal abuse here. It  reflects poorly on you. Linklater01 you too. Please keep it civil.

We welcome healthy debate in interest.co.nz commenting, but please stick to the issues. Thank you.

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Apologies Gareth, I was called a parasite, waited for that to be moderated and when it wasn’t, responded in kind.

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Ha and capitalists are happy with what they have? If they have enough don't they want others to have enough too?

Methinks you've swallowed that envy narrative well and truly. Maybe it's you that is envious and it's what drives you to achieve the same. No judgement from me.

Most "wealth" is unearned and is actually due to many contributing factors provided by external conditions. Capital gains on homes are the most obvious. Why shouldn't those gains go back into the community?

How did those Lord's of the Manor acquire the commons in the first instance?

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I'll give you a hand: because housing and basics are many many times more expensive than they are overseas, and the reality is the state hasn't earned the right to a share of that money either. You can resort to name calling all you want, but your argument doesn't even pass your own test of logic. Furthermore, you'll be familiar with things like carve-outs, rollover relief and how living costs in other countries are far lower than they are in NZ. Many young people today have no chance of being mortgage-free on their first home without an inheritance - and remind me, who drove the policy environment that lead to that situation? 

The reality is that the contribution to society was extracted from me while I was working. For the state to then help itself again, after I've managed to hoard whatever scraps are left over are covering my ever-inflating costs (driven by their monetary policy decisions more than anything else) is verging on triple-taxation. 

I am happy to pay my share, but by the time I've died, I will have more than done that. Given I will be working into my 70s to keep a roof over my head, the idea that the government should then get to tax my meagre estate should be treated the same way we treat home invasions - which it is not functionally dissimilar to anyway.

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I think the government should bring in a tax free threshold similar to Australia,  this would help compensate for gst paid by low income people.  I don't understand why both sides won't touch it with a barge pole . This would also provide an incentive for people to work and be much fairer than nationals proposed tax cuts . Like most people I a suspicious of their reasons behind this "investigation " .

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Hello Terry

I read Mr Parker's speech, and was surprised that there was no reference to the cornerstone papers in "modern" tax theory - those written by the Nobel prize winning economists James Mirrlees and Peter Diamond on optimal tax theory in the 1970s. Since then most countries have tried to find a balance between the principles of equity, efficiency, and simplicity, and in the course most countries have adopted a very different balance than New Zealand. This suggests either that New Zealand politicians and voters and tax officials have very different preferences over the equity-efficiency trade-off than those in other countries, or the efficiency consequences of tax interventions are different in New Zealand than other countries, or that New Zealand has got it wrong, or that all the other countries  (many of who have much higher living standards and less inequality than new Zealand) have got it wrong. As you know, New Zealand has the most unusual set of taxes in the OECD, with very low rates of tax on labour income and very high rates of tax on capital income. It has no capital gains tax, hardly any social security taxes that are applied to labour but not capital income, and and very unusual method to tax retirement income savings. It has rejected the approach used in most other OECD countries that means labour income is taxed at higher rates than capital income, partly through the use of social security taxes that minimise the incentive difficulties of high taxes by linking payments to the amount of taxes that people pay.  Most Scandinavian countries have now made it a cornerstone feature of their tax systems to tax labour incomes at higher rates than capital incomes in order to generate and preserve a high wage economy  - almost the completely opposite approach to New Zealand.

I am interested if you could comment on three things. First, why is New Zealand's tax system so different to the tax systems used in most OECD countries and whether you think other countries that are famous for both high incomes and low inequality such as Sweden and Norway and Denmark have got the balance between equity and efficiency objectives wrong? If not , do you think adopting this legislation is a back-door means to make New Zealand adopt the Nordic Tax System, as they have found a way to make a tax system efficient while having much less inequality than New Zealand. It sort of makes sense that if you make it law that a country has to have an efficient equitable tax system then you probably want to adopt the international best practice systems.    Given that no other countries have seen fit to adopt a tax system like New Zealand's, and given that New Zealand has neither high incomes or low inequality, it doesn't seem very likely that we have the best designed system in the world. (Three major tax reviews in 20 years also suggests  many people believe our tax system is fit for purpose.) 

Secondly, do you think the treatment of residential property income taxes in New Zealand will have to be changed if this law is passed. It is hard to think of a less principled set of taxes than those applied to residential property income: they ignore the standard practice of allowing depreciation of assets that is near universal in all other sectors in New Zealand and overseas; and they are phasing out the deductibility of interest payments on many classes of investment property, even though tax is paid on these interest earnings, which is inconsistent with the treatment of interest income in almost all other sectors in New Zealand and overseas. These measures appear completely ad hoc, and are not consistent with any tax theory I have ever seen. They are, of course, an adhoc response to the unwillingness of the New Zealand government to tax real capital gains. 

Thirdly, neither the IRD nor the Treasury seem to use the standard types of overlapping generations models that are used to measure the intergenerational incidence of tax in most countries. They do not appear to have "general equilibrium" models that estimate how the tax system affects land prices, which changes the incidence of tax away from the people who actually pay the tax to those who bear it once prices changes. Do you think they have the technical ability to make estimates of the distributional consequences of our tax system without being able to properly estimate incidence, say in the way that the US government has done? 

 

Perhaps these are questions for another column, but it seems that they need answering. I have often found that a good way to find out if you are doing something appropriately is to find out why other people are doing things differently.

thanks 

Andrew Coleman  

 

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Well reasoned argument. Particularly agree with your comments around how investment property is (over) taxed in New Zealand. How can they make up a system that taxes profit but ignores the expenses side of the equation such as building depreciation and the large interest cost beggars belief. This goes against best practice tax principles developed and tested over hundreds of years. The way David Parker has mucked around with it you can effectively pay over 100 percent tax. This is why we have no confidence in anything that they are planning to reform. 

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Building depreciation?  I thought house prices always went up in NZ? 

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Most if not all income earning assets held by so called rich listers will be held in company’s & trusts, those entities will by law pay the required amount of tax.

Its common practice not to have assets held in personal names.

Theses ridiculous comments made by a minister just show is own silly biases & naivety, and unbecoming of a minister of the crown. 

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Where did he say they weren't paying the required amount of tax?

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I was referring to these comments

 

“The Minister then dived into the question of the lack of data on the distribution of wealth and capital income in New Zealand. He highlighted the fact that according to the Household Economic Survey, the highest net worth ever reported was $20 million.

This was, he said, ridiculous, given that we know there are billionaires in the country. As he pointed out, that meant the National Business Review's annual rich list is a better set of data than the official statistics” 

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You haven't pointed out why that makes Parker's comments ridiculous. That, surely, is his point - that the use of trusts and other vehicles obscures an individual's true wealth. The Rich List, an informal and approximate guess, comes closer to measuring something meaningful (effective net wealth of individuals) than the IRD's statistics do. I can't see anything ridiculous or illogical about that point at all.

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Well it's simple. Someone's 'wealth' is no business of the tax department. If they're filing returns correctly on income then that's as far as IRD's mandate should go. 

It only becomes relevant if you're on an ideological fishing trip in a bid to make wealth relevant.

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"The problem with socialists is that they eventually run out of other peoples money"

Maggie Thatcher 

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Firstly, that sales and share of shares in a company with undistributed retained earnings would trigger a deemed dividend.

This seems completely bizarre. Retained earnings are reinvested in the business, shareholders are foregoing present income so that the company can use their capital to grow in the future. Do I get a tax credit every time I participate in a rights issue because the company doesn't have any retained earnings and needs some capital? If I sell a share in a company that has retained earnings, and I pay income tax on the deemed dividend income as described in this proposal, and then at some later date the company pays out dividends from that retained earnings, does the bloke who got the dividend on my old shares also pay income tax on it?

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I suggest Terry should be very cautious in his endorsement (albeit surprise) at Parker's speech based on the four Adam Smith taxation principles.

Going back to such "first principles", and even legislating to include them is one thing, but it is quiet anothing thing if your real intentions are based on other, unstated principles. 

And we can guess Minister Parker is much more committed to more important, socialist principles. i.e...." government always have more needs than it has (taxation) funds available." (And Soviet & Chinese history affirms this principle applies even when then target taxation population is contributing 100% of both their income and assets!)....as the death by starvation of (est) 3.9 million Ukranian peasant farmers (kulaks) attests.

The second principle is that,...."funds raised by taxation, should first be used to assure the comfort of the governing class."

And finally, that,..."taxation is not so much about obtaining  government revenue, but more about destroying the monied section of society".

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They'll make us all into beggars, 'cos they're easier to please...

Government Cheese....

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Socialism can be summed up as hate the man with more money than you. That’s David Parker’s first principle.

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They did it on purpose 

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I rather liked a comment from  Bob Jones, some years ago..."Both socialists and Christian's seek to be their brothers keepers, the difference between the two is that socialists do this by taking, Christian's by giving.

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Good article, thanks. This initiative sounds like it could either be a meaningful reform, or just another pointless layer of bureaucracy, depending on the willpower of politicians and public servants. No doubt all resulting advice will be ignored by a (likely) future National government. It's sad, but I doubt Parker will be rewarded for his attempts to clearly state principles and processes before embarking on reform. He'll be allowed to state the principles, but anything of real-world relevance will be put on ice either by his boss or the next one.

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Correct, a number of things in our current tax system clearly do not pass the muster on a basic sanity check, let alone tax principles (FIF regime, aspects of Brightline disposals, the huge reliance on middle-upper earnings for most of the country's tax income, etc) but we can't even convince the current mob that not adjusting tax brackets on salaried labour is 'fair'. Instead we get told it's a 'tax cut'. 

It's no more a 'tax cut' than not increasing them is a 'tax increase', but it's funny how the Finance Minister doesn't seem to refer to it like that. 

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Another great update, thanks Terry.

Brian Fallows article is behind a pay wall unfortunately, as new small business owners I am keen to be across these kind of tax changes and how / if it may affect us. Hopefully more will be written on it soon.

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I believe this whole effort to get a few people to pay more money in "fairness" is a distraction. Before the Government even bothers with this, why not look at the results of the outcomes of the tax money spent so far over the last few years?  Great intentions, granted. Results? Not that I can see.

I have a few questions - such as: After so many big Treaty settlements from both National and Labour Governments, why is Maori poverty worse than ever?  Where has the money gone, and who is controlling it? What is their duty to actually pass it on to Maori in need?

After the billion $ spent on Mental health - why do we have only one or two extra beds available than before the money was spent? 

After the money poured into Education, Why do we just now hear we have a truancy rate of about 40%? No point playing around with a few curriculum changes if we cannot even get the kids to school.

There is a huge amount of money being received by the Government, right now, in tax money, collected fairly or otherwise. Surely governments of any party have their first duty to spend the money wisely and then show conclusively that we, the taxpayers of every kind, are getting value for money? I do not remember that happening as far back as I can remember.

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