Saturday, October 10, 2020

Gerry Eckhoff: Tax

When politicians call for reform of the tax system, they are really saying there needs to be more taxation in order to meet their expenditure. The perpetually aggrieved present an implausible argument that is deficient in equity and logic, which is - the more you distribute other people’s income, the wealthier the nation becomes.  

It should come as no surprise as the election looms closer that political parties attempt to outdo each other by promising to spend more and more of voters' money.


Currently, some parties are beguiling the electorate by promising to increase the tax on ‘Peter to pay Paul’. They do so in order to lock in the support of Paul on election day.  Political parties have a vested interest in ensuring their traditional supporters are not targeted and given some immunity from a plethora of new taxes on the so called well off.

It also seems that many academics and or social commentators from the left think that other people’s assets should always be freely available for distribution in the name of equality. Such people have an unshakable faith that there is a simple answer to inequality which is of course -more broadly based tax such as a capital gains tax and a tax on water. Their solution to inequality is therefore obvious, accessible, uncomplicated, and inevitably wrong. Taxing the rich is always fashionable with politicians who for the most part fail to understand that the creation of wealth is essential in any economy and is surely a better outcome than fast tracked poverty through excessive tax.

Statistics from Treasury NZ shows that 48% of the Governments income tax comes from just 12% of the working population. Put another way, almost half of the income tax in NZ is paid by only 446,000 out of 3,850,000 taxpayers so it is entirely wrong to suggest that the more well off do not pay their fair share. The Minister of Finance has overlooked the inconvenient reality that the top 12% pay 17.6 billion in tax when announcing an increase for those earning over $180k - in the interests of fairness.

Inequality is given as the reason to increase the tax rate on those with the ability to pay. Few would disagree with equality of opportunity but equality of outcome will require punitive not just progressive taxation yet that seems to find favour with some academics. Such people ignore the reality that equality depends on how it is measured. If the income of an eighteen-year-old with no experience is compared with a well-established person nearing retirement with 50 years of experience, then inequality is entirely obvious and reasonable.

A fleeting glance in at the current tax situation is already enough to scare seven bells out of the taxpayer.  Income tax (33%), Goods and service tax (GST@15%)  City Council rates/ tax , Regional Council rates / tax, ACC  charges , road tax , fuel tax, plus a unrelenting array levy’s and license fees indicates a never ending call on the taxpayer. When does enough tax really become enough for those who get out of bed and go to work in the hope that they will improve their lot through effort and risk?

A wit once observed that a fine is tax for doing something wrong and a tax is a fine for doing something right.  We should be seriously incentivising hard work and productivity.  Most understand that reality and are prepared to accept that reward only comes as a result of risk. The vain hope of accumulating capital through winning a lottery with ten-dollar ticket is no substitute for development of a sound business case and borrowing against personal assets or using your house as security on a loan.

For so many taxpayers in a raft of industries, income is negligible as their asset base and (hopefully) capital value grows which becomes the easy target for rapacious Governments determined to court popularity by spending more and more OPM (other people’s money).                                                      Farmers and small business do not as a rule take large drawings or even make any profit annually. They rely on a developing their business to ensure there is some money to retire with should they decide to sell the property or the business. If that capital value is to be taxed on retirement, it is likely that large sums and effort will be spent on mitigation of that tax liability.

 Government money does not exist to pay 403,000 public sector employees, there is only ever taxpayer money appropriated by Governments for public good projects (eg health, education) which we would all agree with. It’s the expenditure on many Government Ministries (32) which achieve little or nothing but are funded during good economic times that must be reviewed and discarded before any new tax is even considered.

Gerry Eckhoff is a former councillor on the Otago Regional Council and MP.


Anonymous said...

Gerry, Why should farmers and small business who make no taxable profits as income and therefore pay little tax not pay tax on the gains they make from selling their farms and businesses? After all none of them could argue with a straight face that they did all that work with no expected return at the end! PAYE earners don't end up with an asset to sell at retirement and they pay tax all the way through. Your argument against slapping more taxes onto highly paid and highly taxed people is correct but you miss the point on taxing those who live off untaxed capital gains.

kp said...

I'd like to see figures on both those arguments first... Govt inflation will destroy any capital gain over 40years unless prices go up by more than that, and from what I've seen in rental housing here in Oz the Govt stamp duties, sales taxes and capital gains tax makes sure you don't come out on top unless you're in Sydney or Melbourne!

Official CPi figures are meaningless if food doubles but you can buy cheap TVs. When I see mushrooms at $11/kg & steak at $15/kg again I will believe in their "seasonal fluctuations" myth.

A better answer is to get the Govt out of our lives in so many aspects that we can slash their spending and put 250,000 public servants into productive jobs. The dose of personal responsibility that would come with it would do society a power of good.

Anonymous said...

Ray I think you have missed what exactly farmers do. They are wealth and job creators. In the production of their product they require the services of other industries...retail farm suppliers, Stock transport, butchers , Supermarkets, freezing works to name just a few. There very existence enables other industries to grow and employ. A farm dollar is a working dollar. Far more so than a PAYE dollar. Farmers pay TAX. To tax them more will simply result in farmers cutting budgets. Less working dollars circulating. That means less jobs, who knows maybe even -yours.

Ken Millward said...

Anonymous has spoked like a true socialist who has obviously never created or owned any sort of productive business. The fact is the vast majority of Farmers and business people never get to enjoy any taxable profit during their careers as they are generally paying off massive debt which is done with tax paid income leaving a usually small residue to live on and support their families. I know, been there and done that, lived on the smell of an oily rag
whilst paying massive tax. Keep your politics of greed and envy away from my hard earned and justifiable reward for a life time of hard work and frugal living!!!

Ken Millward

Kath and Ray said...

This is a very interesting debate and I congratulate Gerry on a constructive start. Payment by the population is essential for public services to all, whether they be poor or rich. However the means of providing that has to be balanced between need and want of the recipient. Need being essential for a harmonious and prosperous society and want being for those who can afford to pay or enhance a profitable business. No system is perfect so lets have one that is as fair and equitable as reasonably possible. GST and Income tax have served very well for a considerable period. Apply the KIS principle - keep it simple. Income tax and GST generally fit that principle as presently structured. In the past there have been other taxes such as Death Duties, a form of Capital Gains Tax, which is reliant on inflation to a large extent and not manageable by the asset owners descendants. Complex taxation systems produce an expensive non productive business for accountants and lawyers as opposed to exportable product produced by by growers, processors and all those in productive business, the end product of which is paid from funds from overseas purchasers that has been produced as economically as possible while maintaining a beautiful sustainable country.

Ray Ward-Smith

Mike Giles said...

back in 1986, I asked my Accountant to calculate the amount of Tax in all its guises, that the government and local bodies take from us annually.

We have never been aware of the true figure, always well hidden in a filing cabinet somewhere.

The answer came in at 74%. I imagine that the figure today is no less, which is disgraceful, and they are considering even more of a burden on the Taxpayer.

There does not seem to be much room left to take more and leave enough funds to live on. Is this a reason that so many ore on the breadline?

The Governing parties don't seem to have any idea of the real state of affairs and the problems will be exacerbated by Christmas as more jobs disappear.

Anonymous said...

Many years ago an editorial in the NZ Herald on taxation asserted that for every dollar you earn, you get to keep 20c and that 80% disappeared in taxes of some description. The State is a thief.