As we wait to learn where the government has setttled on the idea of a capital gains tax, Radio New Zealand had an interview this morning in which their presenter Guyon Espiner talked to a business lobby group opponent (John Milford of the Wellington Chamber of Commerce) of a capital gains tax. I’m someone who is, at best, sceptical of the merits (and potential revenue gains) of a CGT, but it wasn’t the most effective case made against such a tax.
But what really prompted me to pay attention was when Milford argued that business was already quite highly taxed. The interviewer responded along the lines of “oh, come on, the company tax rate of 28 per cent isn’t high at all”, and Milford simply let it pass and moved off to a claim that regulatory burdens and other costs were high.
We should not lose sight of the fact that we have one of the highest statutory company tax rates of any OECD country. Here are the OECD’s own numbers for 2019 (incorporating all levels of government – some countries, including the US, have state level company taxes as well as national ones).
As almost everyone knows, headline corporate tax rates can mask a multitude of exemptions and deductions. So here is the data on the tax collected on the “income, profits, and capital gains” of corporates, expressed as a share of GDP. Data on actual tax collections takes time to compile, so these data are for 2017.
In this particular year, we took the second highest share of GDP in corporate tax revenue. That rank bobs around a bit from year to year (in the year the Tax Working Group used in their discussion document, we ranked number 1) and it appears to matter a bit whether countries collect taxes from central government entities or not (we do), but no one seriously questions that however one looks at things, New Zealand is one of the handful of countries collecting the highest tax (share of GDP) from corporates.
The picture is further complicated by the fact that New Zealand (and Australia, but almost no one else) runs a dividend imputation scheme, such that for domestic resident shareholders (only), corporate tax is really a withholding tax, and tax paid at the corporate level is credited against the shareholder’s personal tax liability. In most other countries there is a double taxation issue (profits and dividends are taxed with no offsetting credits), and partly as a result dividend payout rates tend to be lower. (This, incidentally, is one reason why there is a stronger case for a CGT in other countries than there is in New Zealand or Australia.)
Incidentally, here is how corporate tax revenue (same measure as in the previous chart) in New Zealand compares with that of the median OECD country over 50+ years.
If anything, the gap appears to have been widening over the last 25 years or so.
It is worth remembering here that New Zealand is not, by OECD, standards a highly taxed country. Over that entire 50 year period we’ve been around the median OECD country for total tax revenue as a share of GDP (currently just a bit below). We also have relatively low levels of capital in our production processes (recall low rates of business investment, relative to population growth, over many decades), and yet we raise among the largest share of GDP from companies of any OECD country.
We also get quite a lot of revenue from taxes on good and services (mostly GST here).
We are also a bit above the median OECD country in the share of GDP taken in property taxes (mostly local authority rates, levied on property).
And, by contrast, the area where New Zealand collects hardly any tax revenue at all, as a share of GDP.
I can’t highlight the New Zealand bar. There isn’t one. On this definition, we collect nothing (on other definitions one might include ACC levies, but their equivalent is presumably also excluded in the calculations for other countries).
Most advanced countries fund a significant chunk of their welfare systems (unemployment, disability, age pension) with explicit social security taxes, typically levied only on labour earnings (although some are directly paid by employees, and some directly by employers). Of course, as the chart indicates there is a wide range in practices, but we (and Australia) are at one extreme, and partly in consequence we are the two OECD countries taking the largest share of total tax revenue in corporate taxes.
Does all this have much bearing on the case for a CGT? Personally, I don’t think so. A decent CGT – that didn’t tax pure inflation and allowed proper loss-offsetting – would be expected to raise very little revenue over time. If there is an argument for a CGT it is mostly in some conception of “fairness”, which needs to be weighed up against problems such as lock-in, and of the consequent biasing of asset holdings towards big institutional entities and away from individuals.
But don’t try to use as an argument for a CGT that business activity in New Zealand is lightly taxed. It isn’t. In absolute terms, business tax revenue as a share of GDP is currently well above the average for the last 50 years. In international comparative terms, we tax business activity more heavily than almost OECD country – and perhaps it isn’t entirely coincidental that we sometimes anguish about why we don’t have more business activity.
I listened to more of Morning Report than usual this morning (kneading hot cross bun dough as I did) and had the misfortune to hear Business New Zealand chief executive commenting on government proposals to crackdown on the “exploitation” of migrant workers. I haven’t looked into the details, so have no view on the substantive merits of the specific proposals (sympathetic as I am to the cause generally). But people shouldn’t be able to advance their cause with straight-out lies. Kirk Hope claimed that what the government was proposing was quite inappropriate in part because we currently have “record low” unemployment. Perhaps his memory is short, but Business NZ used to have an economist who could have briefed him. In the absence of that person, here are the data
Perhaps you might want to discount the first 20 years (although it was a real phenonenon), but current unemployment rates haven’t even reached the lows we managed for several years prior to the last recession. And these days older workers (aged over 65) are a much larger share of the labour force, and naturally tend to have a materially lower unemployment rate (in other words, what might have been unsustainably low 15 years ago, is probably rather more sustainable now).