Ardern argues in defence of more complicated taxes

Some people (including me) hoped that a decent review of New Zealand’s tax (and welfare) system would lead to simplifications. Complexities add to costs, and they tend to lead to distortions and unfairness – rich people are generally more successful at finding ways around complex tax law.

Jacinda Ardern keeps pushing more ‘fairness’ as a primary reason for tax reform, and she did this again in Parliament yesterday, but she also appeared to concede that this justified a more complicated tax system.

David Seymour: Is it possible that a proposed capital gains tax could be revenue-neutral?

Rt Hon JACINDA ARDERN: That is certainly the request that we made of the Tax Working Group. It was to consider options around making the package revenue-neutral.

That sounds lie a very fuzzy lack of commitment to ‘revenue-neutral’ tax changes.

David Seymour: Why would a Government request advice that would make a tax system more complicated, to get the same amount of revenue?

Rt Hon JACINDA ARDERN: Two points: firstly, to make the tax system fairer—which seems like a pretty good reason to members on this side of the House—and secondly, almost every member of the OECD manages to deal with what is being asserted to be complicated; why can’t we?

Ardern didn’t dispute “a Government request advice that would make a tax system more complicated” – in fact she justified it  “to make the tax system fairer”.

The more complicated it is the greater the chance of unfair anomalies and loopholes.

After a year how transformative has the Labour-led Government been?

Not much, yet.

The Labour-NZ First-Green government is now a year old. Thomas Coughlan at Newsroom asks whether the current Government is truly a government of change – One year on: Change worthy of its name?

Transformation is a word we hear a lot to describe this Government.

The Government’s speech from the throne promised a “government of transformation”, and followed that up in May with a Budget that Finance Minister Grant Robertson said was “the first steps in a plan for transformation”.

The second word we hear a lot is “transition”.

What they mean to say is “government of change”, which was Ardern’s wording in what became known as her reset speech, which she made in September.

All governments change things, and the world changes. The pertinent question here is whether Ardern and her government are living up to her hype.

The Government has finished just 18 KiwiBuild homes (although it has started construction on more), the waitlist for social housing has grown, and the $2.8 billion investment in fees-free tertiary education hasn’t changed enrolment numbers, although the University of Auckland has tumbled down global league tables.

As for climate change, apparently our “nuclear-free moment”, under the current Government, big dairy can still dial up a a $600 million M. Bovis bailout for a self-inflicted crisis, while the much-lauded Green Investment Fund gets just $100 million.

Nuclear-free moment? Pardon me, but I think I can smell the methane on your breath …

The problem for this Government is that it knows what change looks like and it’s afraid.

It knows that true change is ugly and real people get hurt.

People living under the big-change governments of the 1980s knew they were living in a time of massive change.

So, can Ardern be kind and transformative at the same time?

One year on, we’ve seen this Government’s definition of change.

With the exception of KiwiBuild, its flagship change policies signal change in direction without enacting specific policy.

Supporters say this means the change will be more lasting – and they’re probably right. Both the Child Poverty Reduction Bill and the Zero Carbon Bill have bipartisan support, meaning they will likely survive into the future. Likewise, the Wellbeing Framework has the potential to change how we look at the economy, although proof of that is many years away.

But, especially on the issue of climate change, its slowly-softly policy platform absolves the current Government from making any of the tough decisions necessary when implementing change.

It’s an unpalatable truth that change means picking losers as much as picking winners.

The question hanging over the Government now is whether there is time to implement what it calls a “just transition”, to a halcyon economy of low unemployment, high productivity, and fair incomes.

“Just transition” is essentially the oil and gas exploration ban writ large — big change, but slowly. But a just transition doesn’t need to be slow and there’s nothing just about waiting 30 years for house prices to stabilise.

Just transitions could mean using the power of the welfare state to cushion the pain of change, like the governments of the 1980s should have done.

There’s little room to be complacent. The window of opportunity is closing.

Change is the sword of Damocles hanging over all our governments. And while this Government thinks the lesson from the 1980s is that slow change is best, it would be wise to pay attention to the other lesson from that decade: governments are not the only agents of change and those who fail to act in time will often find their hand forced by events.

Governments are always forced by events to act. They need to manage forced change along with reforming or transformative change, if they can.

In their first year the Government has changed some things, but they have only talked about most changes they propose, and it’s still not clear what they are going to change this term as they await the outcome of their many working groups/inquiries etc.

Also from Newsroom – One year in: the fault lines ahead

The first anniversary has provided a chance for Ardern and her team to look back on their successes and failures so far – but what challenges lay in wait for them before the next election?

Here are some of the fault lines the Government may need to navigate if it is to hold onto power in 2020:

Waterfall of working groups

National’s gleeful mockery of the coalition’s working group fixation seemed a little insincere at the start, given the party was not averse to the odd policy review and panel during its first term.

However, there is a kernel of truth in that the Government is now waiting on the results of numerous inquiries into some critical policy areas, some of which will not report back until just before the next election, until it takes action.

As the reports and recommendations trickle in, the potential bill for implementing all that is asked for will slowly mount up.

Justice reform:

The Government’s plans to shake up the criminal justice system loom as perhaps its highest-risk, highest-reward reforms.

If Justice Minister Andrew Little and Corrections Minister Kelvin Davis succeed, the prison population will be reduced by 30 percent within a decade, addressing what Bill English once called the “moral and fiscal failure” of prisons.

However, National’s cries of the coalition being “soft on crime” provide a taste of its likely campaign against any firm proposals for reform, as well as the outcry which may result from any crimes following law changes (no matter their merit on balance).

Tax reform:

Part of that proliferation of working groups, but worthy of mention in its own right, is the Government’s Tax Working Group – a political slow-burner that could divide the coalition right up to the next election.

Chaired by former finance minister Michael Cullen, it will present its final report on the future of New Zealand’s tax system next February.

However, the Government has committed to putting any recommendations from the group to the electorate in 2020, meaning any changes would not be implemented until at least April 2021.

The sticking point is the issue of a capital gains tax.

So at best this will be a plan for transformation put to voters at the next election.

Climate change

It’s one thing to call climate change the nuclear moment of our generation, it’s another to do something about it.

Climate Change Minister, and Green co-leader, James Shaw said the IPCC report was broadly in line with the Government’s direction on climate change. But talk, as they say, is cheap.

There have been some climate-related policy changes, including a ban on new oil and gas permits and the establishment of a $100 million green investment fund. Also in the wings are a Zero Carbon Bill, emissions trading scheme changes and the creation of a Climate Change Commission.

The biggest pressure on the Government is its own rhetoric. Those disappointed by the environmental record of Helen Clark’s Labour-led coalition will be looking to the Green Party to push the Government into taking stronger, tangible steps.

Ardern has talked big on climate change, but we are yet to see how her Government will transform things.

Also, not mentioned in the Newsroom article, is another issue that Ardern has staked her reputation on, child poverty. Her Government quickly increased some benefits, but there has not been much sign of a revolution on poverty yet.

The Government has another two years to prove to voters that they are capable of walking the walk and delivering meaningful transformation at the same time as they competently manage normal management and also dealing with things that are thrown at them.

Greens also have a lot at stake – they have talked about a green revolution for long enough. They have to deliver something significant to justify voters’ trust in them.

NZ First probably just need to deliver Winston Peters to the voting papers for the party to survive.

As a whole the Government has been far more talk (and working group) than walk.  They may end up sprinting to the next election hoping voters will pass them the baton for another term.

US “massive tax cuts and tax reform”

As promised the Trump administration is proposing “massive tax cuts and tax reform”.

Fox News: Mnuchin vows ‘biggest tax cut’ in US history, confirms plan to slash business rate

Treasury Secretary Steve Mnuchin confirmed Wednesday that the Trump administration aims to lower business tax rates to 15 percent, saying a forthcoming proposal will constitute the “biggest tax cut” for Americans in history.

“This is going to be the biggest tax cut and the largest tax reform in the history of our country,” Mnuchin said, as administration officials prepare to outline Wednesday afternoon what he described as “principles” of their tax plan.

Mnuchin, speaking at a Washington forum, would not reveal many specifics but confirmed that they want to lower the business rate to 15 percent.

“I will confirm that the business tax is going to be 15 percent,” he said. “[Trump] thinks that’s absolutely critical to drive growth.”

He indicated that the rate for small businesses and the corporate tax would both drop to 15 percent. The top small business rate is 39.6 percent; the current corporate tax is 35 percent.

Mnuchin also said the administration wants to “do the whole thing,” and not pursue tax reform piece by piece. Amid concerns that such sweeping tax cuts would significantly reduce revenue for the government, he suggested economic growth will help pay for the plan.

But there is no current plan to increase revenue to make up a massive shortfall.

The plan, though, is likely to run into tough questions from Democrats and some fiscal hawks about the impact on the federal deficit and national debt.

On Tuesday, the official scorekeeper for Congress dealt a blow to the argument that tax cuts pay for themselves.

The nonpartisan Joint Committee on Taxation said a big cut in corporate taxes, even if temporary, would add to long-term budget deficits. This is a problem for Republicans because it means they would need Democratic support in the Senate to pass a tax overhaul that significantly cuts corporate taxes.

US tax rates are relatively high and that encourages tax avoidance, so they could attract business back into the US.

They hope that the tax cuts will pay for themselves with economic growth – and at the same time want to clamp down on trade. A huge gamble.

TOP tax policy

Gareth Morgan has unveiled The Opportunities Party (TOP) tax policy.

Morgan obviously wants to present himself and his party as serious and competent on major policies but a new small party is extremely unlikely to succeed in introducing major tax reform.

Small partner parties in coalition arrangements have to date been allowed small policy gains, but TOP doesn’t even want to be in a coalition, they say they want to operate from the cross benches.

TOP does not seek to be the government, we seek to substantially influence the policies the government of the day implements.

Our electoral ambition is to have a sufficiently significant share of seats to get our policy priorities implemented. We envisage a cross-bench position as the most effective means to that end.

TOP takes a long term, evidence based view. Our policies aim to make most New Zealanders better off in the long term.

Our country needs to make hard choices, but in the short term people are afraid of change. The current bunch of politicians are mostly focussed on the short term goal of getting re-elected, so they avoid the tough decisions. Half the time they propose policies that won’t even achieve what they say they will.

Opposition parties propose policies that rarely get anywhere. They hope to get into Government so they can implement then.

A new party on the cross benches is likely to struggle to be listened to on major policies.

The Opportunities Party tax reform page is quite vague and waffly unless you are prepared to drill down into it. It’s introduction:

The current tax regime favours owners of capital and unjustly burdens wage earners. This is not only inequitable, it results in poor utilisation of capital and lower than necessary income and employment.

Nowhere is this more obvious than in the property sector, where speculators and home-owners benefit while those that are renting are punished. It is unfair, pushes up house prices and drives even greater inequality. Ultimately, it is in everyone’s interest that we address the loophole in the tax regime.

So TOP is looking at capital gains tax on property.

Our proposed reform will not collect even one additional dollar in tax – we want to change what is taxed, not the amount of tax collected. Any increase in revenue will be used to reduce income tax rates.

This is confusing. I presume they meant that if tax revenue increases they will then reduce rates so it doesn’t increase any more. Will they give back any additional tax dollars?

Under the reform we propose, around 80% of the public will be better off, the 20% that aren’t can well “afford” it.

Trying to appeal to the majority.

The current system encourages borrowing and speculating on land values. This comes at the expense of investment in our productive businesses, which are held back by a lack of investment.

In the middle of the waffle is probably the key point:

All productive assets – and that includes the house that provides you with your accommodation each year – are or can produce income each and every year. All income should be taxed, whether it is in cash or in kind. By only taxing the cash income from assets, Establishment parties have hurt many people, and in effect given a handout to property owners.

A capital gains tax on all property, including the family home. This would be simpler than CGTs with exclusions, but it would annoy a LOT of voters.

Not only will plugging this leak in the tax regime make tax fairer and boost economic growth it will over time improve housing affordability, by erasing the reason for property speculation.

There is not one single reason for property speculation. Various types of capital gains taxes are used around the world and they don’t stop property inflation.

Plugging the hole in our tax regime will be done gradually to ensure house prices remain stable while incomes grow.

A blanket CGT with gradually increasing rates?

We acknowledge this is a cultural change and some people will struggle to separate their own self-interest from the matter of what’s fair and reasonable.

In other words, many voters will hate it. Not just property owners – if the cost of property ownership goes up then the cost of renting will have to also go up. And if rental property ownership as an investment is discouraged through tax then there will be less rental properties available, pushing up rents even more.

However we believe that a well-informed public is astutely rational.

I doubt they will be well informed by this.

While the property-owning group is a big one, the implications of an ever-rising property to income ratio is that future generations will struggle to rent let alone own, businesses will be starved of the investment capital they need to grow and create jobs, our reliance on foreign debt will keep rising and inequality will get worse.

If anyone has read this far and feels well informed and is supportive of this tax reform please say so.

National has resisted comprehensive capital gains tax, and Labour has also backed off them. A small new party is unlikely to change their minds.

And if you want to be better informed you can download the full policy document (PDF).