Frank Newman: A Budget of Low Expectations

The Budget has sent us yet another reminder that New Zealand has become a miserably dependent and introverted society.

It’s a sad state of affairs when reducing prescription costs by $5 is heralded as a great initiative and roundly applauded as a policy of significance by those in charge of the taxpayers’ wallet.

Let’s face it, a government giving back a few dollars that the government has taken from someone, is not going to be a life-changing event. It’s not going to make people who are currently dependent on the state less dependent – and it’s certainly not going to make them more aspirational about the future. Nowhere in the budget was there any hint of transitioning people from welfare to work.

The one thing I hope for from the annual budget is a government that says it will do less, not more. I’ve been hoping for that from every budget for the last 40 or so years, and each has been a disappointment.

Doing less is not in the nature of interventionist politicians who crave relevance, and doing less is the antithesis of the fundamental belief of the socialist politicians that now dominate our political landscape. Even those on the “right” appear to have gone soft on the principle that governments should not do what people can do for themselves.

The Prime Minister said his Government had focused on creating the conditions for a growing economy but there is nothing in the Budget that substantiates that rhetoric. He seems to forget that governments consume wealth they don’t create it. The best way for a government to grow the economy is to create an environment that inspires and encourages others to grow their business – and then get out of the way.

The closest thing to that is ACT’s Alternative Budget which would introduce a flatter two-rate income tax system, abolish the carbon tax and refund the contributions, abolish the bright line test, and reverse the Government’s interest deductibility changes.

What Labour’s spend-more-do-little Budget does do is lay the groundwork for the general election campaign. Major tax changes are likely, presumably so Labour would have a mandate from the electorate to introduce them. Despite a promise of no new taxes, there was some tinkering with the tax rate for trusts. The tax rate has been increased from 33% to 39% to align it with the top personal tax rate that kicks in at $180,000. The government would argue semantics and say that is not a “new tax”.

The first foundation stone for new taxes was the IRD “report” about how the wealthy avoid paying a “fair” amount of tax.  To arrive at that conclusion the report conveniently redefined income to include unrealised capital gains. In the Ministerial Foreword Revenue Minister David Parker says,

“The study finds that high-wealth individuals usually get their income from returns on investments. Around 80 percent of their economic income is capital gains, and much of it is earned through trusts or companies. The report shows that when personal, company and trustee taxes are included, the median family in the high-wealth group paid 8.9% of their economic income in tax. When GST is included, the median family in the high-wealth group still only pay 9.5% of their economic income in tax. For this group, GST paid is tiny, relative to their economic income compared with the other 90% of taxpayers. It shows the effective tax rate paid by middle income New Zealanders is at least double that paid by the wealthier New Zealanders in this Inland Revenue study. Our tradies, nurses, school teachers, hospitality workers, hairdressers, cleaners, engineers and small business owners all pay much higher effective tax rates than their wealthier fellow Kiwis.”

The report concludes the obvious: That wealthy people – those with savings – will make more from capital gains than those who have never saved enough to invest; and those who spend all of their income will pay more GST as a percentage of their total income, than those who save. By some irrational logic, the Minister comes to the view that these truisms result in a tax system that is unfair.

The politically convenient conclusions of the report are achieved by referring to capital gains as “economic income” even though the gains are on paper and not realised – and are measured over a period of extraordinarily high investment asset appreciation between 1 April 2015 to 31 March 2021. Had the study period been 1987 to 1992 or 2003 to 2008, or from 2021 to today there would have been a very different result.

By declaring the “mega-rich” are not paying their “fair share”, the stage is being set for a wealth tax of some sort to be promised during the election campaign. A highly targeted wealth tax would not affect Labour’s voter base – and indeed it would appeal those who resent the financial success of others. It would also put National and ACT into a corner with a very big “I support greedy rich people” sign around their necks, while Labour feints concern over fairness and giving ordinary Kiwis a fair go. Introducing the tax would of course open the door for a future government to change the rules and extend the tax net as they have done with GST and the bright line test.

The second foundation stone was the letter signed by 96 “wealthy” individuals asking the government to introduce a capital gains tax.

The NZ Herald ran the headline, “Group of rich New Zealanders want to pay more tax”. It should have read “Group of political activists want others to pay more tax”.

The letter appears to have been initiated by Tax Justice Aotearoa and Oxfam Aotearoa. It starts as follows:

“We write as people who are frustrated with how much tax we pay. We want to pay more.”

(The full letter and list of signatories may be seen here: https://www.sharingwealth.nz/)

For the signatories to declare they want to pay more is incorrect. What the letter is actually calling on is for you to pay more. That was obvious from a Mike Hosking interview with Malcolm Rands, one of the signatories and a spokesperson for the group.

Mr Rands was at pains to say he is not a tax expert, but he clearly thought he was enough of an expert to suggest others should pay more tax. He did say he did not mind paying more tax, but, as a Newsroom article by Jonathan Milne revealed, he would only be prepared to pay more if everyone was compelled to do so.

He is quoted as saying: “But Rands… confirms he’s not offering to pay more tax unless others are required to do the same. ‘Even someone who’s as big-hearted as me would not feel good paying more tax when other people aren’t – you just want to feel that things are fair. And that’s part of the Kiwi mindset, a fair deal’.”

The article explains Malcolm Rands and his wife were co-founders of Ecostore, which they launched in 1994. They sold the last 10 percent holding in 2016. Malcolm Rands said, “I paid no tax on that, which was lovely at the time, but maybe I should have.”

Clearly Mr Rands has overlooked the fact that gains on the sale of investment assets are taxed in certain circumstances. If he wanted to pay tax on the gains arising from the sale of the shares he could have simply advised the IRD that it was always his intention to sell the shares at a profit. Those gains would then be treated as income and taxed accordingly.

The Newshub article also quoted Phillip Mills, the owner of Les Mills Fitness centres which was founded by his father.

Mills says, “it’s ‘crazy’ that particularly unproductive asset classes like real estate are advantaged by New Zealand’s tax system.”

Clearly has he not heard about the bright line test or the exclusions that apply to interest deductibility – presumably he too is not an expert in relatively simple tax matters.

What we do know about Mr Mills is that he is a significant donor to the Labour and Green parties. Between 4 December 2013 and 6 December 2022 he made various donations to Labour and the Greens, totalling $277,799 and $240,000 respectively. He appears to be the Green Party’s largest donor, aside from the Green MPs who tithe part of their salary. Elections.nz has no record Mr Mills making donations to any other political party.

A search of the COVID wage subsidy database shows that Les Mills New Zealand Limited was a significant beneficiary of taxpayer funding, receiving $4.51m. Perhaps Mr Mills could consider a voluntary repayment of that amount so the money can go to addressing the social ills mentioned in the “we want to pay more tax” letter.

There are many things the 96 individuals could do if they are genuinely concerned that they are not paying enough tax.

The IRD does accept voluntary tax payments and the IRD’s bank account number is available. Perhaps the 96 individuals could put out a press statement advising how many will be doing so. Do they not understand that tax is compulsory up to point, but voluntary after that.

And there are other ways the signatories can put their “big-hearted” generosity to good effect. They could individually make a charitable donation (and forgo the tax rebate of course). Or they collectively could form a charitable trust and pass the collection plate around. Given the wealth of the likes of Phillip Mills and the Rands, that should come to a substantial sum. I am sure the Starship Children’s Hospital would love the extra funding so they can treat seriously ill children who would otherwise not receive the medical care they need. Or perhaps some money could go into social housing for families that are currently living in cars – a problem that has become worse over the last six years under the current government that Mr Mills has supported. Or what about using the funds to build some new homes – because the government has not done that particularly well. Or perhaps a mentoring scheme to address the youth crime problem. The last six years has delivered many more opportunities for the 96 charitable folk to address the concerns they raise in their letter.

The point here is the government does not have a monopoly on charity so there is no need for these individuals to force their values onto other people.

The sad thing about the letter, besides its underlying hypocrisy, is that it perpetuates the false belief that the multitude of problems our country now faces can be solved by a government that taxes more and spends more. A tax and spend government is exactly what we have had for the last six years. What makes these 96 luminaries and influencers think another three years of tax and spend will deliver a different result?

Perhaps the government is the problem rather than the solution.

There is no question there are some talented and successful individuals among the signatories, and well done them. What is tragic is they have not stated what many know to be true: That government should get out of the way and let business people do what business people do best – make money and create wealth. That would grow the top line (Gross Domestic Product) and everyone would be better off. The government would be better off because it clips the ticket when income is earned – and clips it again when the after-tax income is spent. Growing the top line means more tax revenue available to the government to spend on essential services. The only thing preventing that from happening is that socialists need to put aside their prejudice and envy and accept that the price of having a prosperous nation is that some individuals will be more prosperous than others.

That may be too much of an attitude change for socialist politicians who are doing very well out of growing dependency and squeezing those who have done well for themselves.  

Frank Newman is an economic analyst, accountant and former local body councillor. This article was first published here: https://www.nzcpr.com/a-budget-of-low-expectations/