Saturday, April 18, 2020

Frank Newman: Straight talk - Dumb idea of the day

Congratulations to Dr Simon Chapple , Director of the Institute for Governance and Policy Studies in the School of Government at Te Herenga Waka—Victoria University of Wellington, and recipient of the dumb-idea-of-the-day Award. The day is not over yet so at this stage the award is provisional.

Here's his idea.

"The readiest tool in the box and the most equitably appealing solution here to share the burden of the virus is simply legislating for more temporary steps in the personal income tax system and a more progressive marginal income tax rate. We could have, for example, an income tax rate of 40 cents in the dollar from 70K (up seven cents in the dollar), 50 cents in the dollars from 100K (up 17 cents in the dollar) and 60 cents from 150K (up 27 cents in the dollar). The top rate of 60 cents would apply also to all trust income – if you’re well off enough to generate income from a trust, you’re well enough off to share 60 cents of that with the less fortunate. Company taxes could stay the same as they are currently, encouraging businesses to retain and reinvest profits."

It's dumb for a number of reasons but the main one is it won't work.

Companies will retain income within a company and pay tax at 28% instead of paying it out to shareholders. That does not mean shareholders of closely held companies will be deprived - they will simply favour more "tax efficient" ways to transfer money to shareholders - like using the surplus retained earnings to buy back shares. No doubt a myriad of refinements would be proposed to close the loopholes, and the legislators will be forever be two steps behind the smartest brains in the accounting and legal professions. It's for this very reason that governments have been at pains to more or less synchronise the highest marginal income tax rate and company tax rate (currently 33% vs 28%).

Then there is also the reality that people will move to Australia, who to date have the advantage of coming up with fewer dumb ideas than New Zealand. The result will be less tax for the NZ government, fewer employment opportunities for the former pilots who are now washing houses, and an even greater fall in property prices than the 15% that is widely predicted. As yet our government has not yet taken the bold step of countries like North Korea to prohibit people from leaving, but I am not ruling that idea being proposed before the end of the day.

Then there is the question of sharing the burden. Increasing tax on a certain segment of the economy is not sharing the burden. It targeting a certain segment of society that Dr Chapple seems to think will remain immune from the financial effects. He goes on to say their sacrifice will be forgoing their annual holiday in Bali, which is actually highly prejudicial and ignorant.

The real risk of course is that there will be many in Parliament that will be all too ready to sling their grappling hook onto suggestions like those proposed by Dr Chapple.

Frank Newman, a writer and investment analyst, is a former local body councillor.

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