Gareth Morgan: Not All Tax Reform is the Same

Wealth taxes kill entrepreneurship – and New Zealand needs entrepreneurship these days more than ever. Our abysmal productivity record will not be reversed any other way. Real incomes cannot rise without productivity gains.

Against this backdrop the tax reforms proposed by Labour, the Greens and now Opportunity are regressive for New Zealand. There exist far better ways to facilitate productivity gains, lifts in real income per person, and equitable outcomes.

Labour proposes a capital gains tax. Capital gains aren’t income, they are increments in wealth accruing as a result either of entrepreneurship or from economic rent (unearned or surplus income accruing by virtue of limited competition, or fortuitous changes in regulation, eg; zoning of land). The selling of shares for capital gain is not income as the gain merely reflects the change in the expected tax-paid future earnings of the company. That is, they account for the effect of future income tax to be paid. Opposite for losses. Labour enters treacherous ground deeming capital gains as income and losses non-deductible – its tax proposal is a poor substitute for an efficient income tax. Rather, it will end up taxing the income to capital twice. You’d be stretched to find a better way to kill entrepreneurship – although the Greens do offer one.

The Greens unashamedly propose a wealth tax. They are not fans of private sector entrepreneurship, they have a deep belief that New Zealand’s productivity dilemma can be solved through government investment and regulation. The Greens have a fixed idea on what constitutes “excessive” wealth and deem it immoral. Their policy is to remove it via a wealth tax. They either have no understanding or no respect for the entrepreneurship required to generate wealth. Theirs is a world where public goods must be immune to the state of the private economy. And to achieve that in the face of a crowded out or struggling private sector you just keep taxing it more. Contrary to what numerous tax taskforces have highlighted, the Greens do not acknowledge that a significant driver of wealth disparity in New Zealand has been a poorly designed income tax regime. Nor do they accept the danger of them commandeering wealth is that wealth creators will move their wealth to a different jurisdiction. This hollowing out of a country’s productive capability has never been an outcome the Greens are concerned about. They offer no solution to New Zealand’s long term faltering productivity performance, productivity is not part of their vocabulary, money apparently grows on trees. A higher tax take is the free lunch central to the Greens mantra, Marx would be proud.

Opportunity – this party’s tax and benefit policy differs from that proposed by TOP2017 in a crucial way. By taxing land, Opportunity introduces a selective wealth tax. Land taxes of course were a feature of tax regimes two centuries ago when agricultural production was the main source of income for countries. These days land is just another factor or production, with no special distinction. Apart from any wealth tax being anti-entrepreneurial, the land tax of Opportunity appears to be a very poor substitute for the income tax on imputed rent that TOP2017, proposed. The TOP tax proposal was about closing a loophole in New Zealand’s income tax regime. Opportunity’s land tax is at best a poor proxy of taxing income from land, but more accurately can be described as a regressive wealth tax much like those proposed by Labour and the Greens. A properly designed land tax would be a hypothecated or corrective one, seeking only to tax economic rent.

With the TOP2017 tax on imputed rent, account was taken of taxable income already earned from capital (including property), and as well the cost of debt (interest) being a deductible expense. This was to ensure that double taxation was avoided. Opportunity’s wealth tax on land includes neither of these, making it a major step backwards in terms of the enlightenment of New Zealand’s tax regime. This alone, highlights Opportunity’s policy being far more Left than Right wing. Placing no value on private entrepreneurship as the cornerstone of wealth creation in a democratic, capitalist society is the hallmark of Left wing politics. Wealth taxes are hugely dangerous to living standards. There’s no way Opportunity can appeal to centre Right voters with its selective wealth tax. 

Thankfully Opportunity has not fatally tinkered with the UBI that TOP2017 proposed. The core rationale underlying that policy is to boost the efficiency of the welfare system and to recognise that those on minimal income need their income boosted. Traditionally targeted welfare has been deployed to do that job, but it is so cumbersome and vulnerable to mis-targeting and administrative waste, that replacing that wing of central government bureaucracy as much as possible by the UBI (or a negative tax) has become a no-brainer. The economic and social efficiency gains to be achieved by having low income folk qualify directly for the UBI, is a major corrective step (bit like superannuation for all). It also addresses the well-documented growth in the disparity between productivity and real wages.

While it looks like Opportunity may have a role in the next parliament, by de-emphasising its tax reform in order to win votes, the risk is it will be swept up into a Left leaning coalition where it can readily be branded as a lookalike Green Party, so nothing special. For centre-Right voters the reason to support Opportunity will fall away quickly once the allure of its refreshingly telegenic leadership passes. 

In the unseemly race to be part of the next parliament the choices for voters have been shut down thanks to the compromises already from Opportunity. For centre Right voters then, the tired old National/Act/NZ First triumvirate is looking increasingly attractive. That is a real shame and an opportunity lost for Opportunity to truly be a neutral player. Given the cost-of-living is the Number 1 issue, the important redeeming feature of the Right in New Zealand, is that it does not despise the poor anywhere near as much as the Greens despise the wealthy. Encouraging entrepreneurship as the lever for higher productivity is the priority. Pity about the unabated and vile racism from NZ First and the denial of the Treaty by Act.

Gareth Morgan, a businessman and economist, is the founder and former leader of the Opportunity Party. This article was sourced from his Facebook page.