Tuesday, January 3, 2012

Mike Butler: Taxing the family home

The term “big kahuna” could refer to the Hawaiian surfing god, or could mean “important person” but for economist Gareth Morgan it is part of the title of his new book “The Big Kahuna – Tax and Welfare”. The basic idea is a variation on one that surfaced in New Zealand in 1987 when then Finance Minister Roger Douglas introduced a policy of a 23 percent flat rate of income tax and a new form of income assistance called guaranteed minimum family income.

Morgan’s proposal differs in that his unconditional basic income is available to every individual working or not working -- $8500 a year for those aged 18-20 years and $11,000 for those 21 years and over. This would be funded by a flat tax of 30 percent, as well as a comprehensive capital tax which includes owner-occupied housing.

Interesting to note that Douglas promoted a capital tax while the Tax Working Group sat and he noted that Morgan was on board with it in late 2009. The Douglas capital tax was at a rate of 0.08 percent with the first $31,200 of income tax free and a flat tax of 16.66 percent. Morgan refers to Tax Working Group discussions but not to any input by Douglas.

The Morgan bio is a rags-to-riches story. After completing a PhD and working for the Reserve Bank, with a business partner he launched twice weekly horse racing form guide, Bettor Informed, which he sold to Independent Newspapers. He founded economics forecasting company Infometrics Limited, established Gareth Morgan Investments Limited, a personal investment portfolio management service, and launched the Gareth Morgan KiwiSaver Scheme. He is father of Sam Morgan who founded TradeMe and invested $75,000 in the online auction site, receiving with his wife Joanne $50-million when Fairfax Media bought it.

Noting that even ancient states taxed to redistribute wealth, Morgan quotes from 18th century Scottish philosopher Adam Smith (who wrote “The Wealth of Nations”) and John Stuart Mill (19th century English) to argue the necessity of progressive taxation. Interestingly, Mill originally held that that progressive taxation penalised those who worked harder and saved more and was therefore "a mild form of robbery".

Morgan outlines what he believes are five essential principles for redistribution – vertical equity (progressive taxation), horizontal equity (equal treatment for everyone), efficiency, individual responsibility, and adequacy – which he uses to damn Reaganomics, Thatcherism, and the Welfare Working Group. Claiming moral values are overlooked in economics, his bid to widen the tax net to achieve the unconditional redistribution of wealth to all members of society may be described as applied ethics.

Aside from his proposals, he provides a useful account of the ad hoc history of the New Zealand tax and welfare system, a hard look at the eye-glazing convolutions in both systems, and a helpful rundown on the elements of taxation accounting. (I’m sure a few accountants would be scratching their heads as to why anyone would want to read this over the New Year break.) He details poverty traps in the tax and welfare system better than the Welfare Working Group did.

The concept of the unconditional basic income is not new. A Joseph Charlier came up with the idea in 1848, and British civil servant Juliet Rhys-Williams promoted it for the Liberal Party as negative income tax during World War II. Monetarist economist Milton Friedman was sympathetic to the idea, the then president Richard Nixon introduced a bill to launch the scheme to Congress in 1970, and the Mirrlees Review of the United Kingdom tax system (2010) favoured such an approach. Such schemes have been trialled in New Jersey, in Gary, Indiana, and in Winnipeg and Dauphin, Canada.

Our Treasury costed an unconditional basic income for the Welfare Working Group without extending the tax net to cover all assets, including the family home.

The immediate criticism is that if people are given money for nothing they won’t work. But since an unconditional basic income of $11,000 is only $211.53 a week, only a bit more than the single dole, the industrious will probably continue to work hard and the lazy, well they will probably stay on the couch in front of the TV. The important point is that everyone has an incentive to work more to have more – abatement rate barriers creating poverty traps are eradicated.

Various calculators are available on The Big Kahuna website so you can put in your details and see how you would do under Morgan’s proposal. See.

Morgan works in financial services and he appears to be gunning for residential property investors, especially those who are negatively geared, and put their properties into trusts or loss attributing qualifying companies, and claimed Working for Families payments. It is interesting to note that the calculators show that tax to pay under his scheme is the same as current tax since the ability to claim depreciation has ended and loss attributing qualifying companies can no longer benefit individuals in the way they used to.

Morgan concedes that there are winners and losers under his system. The biggest losers are superannuitants, who have 38 percent less income and are a further 80 percent worse off with the tax to pay on their home, and farmers with $1.5-million equity, who are 49 percent worse off. The biggest winners are full-time workers on a minimum wage who are renting. They are 28 percent better off.

The semi-enlightened self-interested would see that the greatest advantage would be derived from earning $10,000 a year (work two days a week or 20 weeks a year at minimum wage) and receive the $11,000 unconditional basic income. Therefore logically, Morgan’s system would foster a nation of laid-back under-achievers – yes, surfers, as the book’s title suggests.

Back in 1988, I remember former prime minister David Lange’s infamous “cup of tea” break scuppering of the Douglas flat tax. We had taken on board GST of 10 percent 18 months earlier and were waiting for the lower flat tax -- which never came. GST has since been increased to 12.5 percent, then 15 percent, and Morgan has a scenario that involves a 20 percent GST. The danger of a new tax such as the comprehensive capital tax controlled by big-spending governments is that the only way for the tax rate to go is up.

While Morgan favours the rich paying progressively more tax, the rich show that they will go to the ends of the earth to avoid it. For instance, the Clark-Cullen government’s 39-cent top tax rate created the incentive for some of those earning more than $60,000 a year to rort the system. Treasury had told the Tax Working Group how 9700 families used losses on rental property to reduce their taxable income and these families went on to claim Working for Families tax credits.

Benefits and fishhooks by the mile, mostly explained with recommendations, “The Big Kahuna – Tax and Welfare” shows that Morgan is still a hippy at heart but it would take the politically independent commission he recommends to set up such a system.

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