Cutting the cake not baking a bigger one

There has been a series of Tuesday events (“Tax on Tuesday”) held at Victoria Univerisity recently, jointly promoted by Tax Justice Aotearoa, the PSA, and the university’s own Institute for Governance and Policy Studies.  I wrote about one of the earlier events here.

The final event was held this week, marketed as “Where’s the party at?”   Political parties that is.   In an event moderated by the Herald’s Hamish Rutherford, speakers from four political parties (NZ First declined the invitation) each spoke about some aspect of tax policy for 8-10 minutes, with plenty of time for questions.   It wasn’t a hugely well-attended event, but it is pretty safe to assume that the overwhelming bulk of the audience was on the left of the political spectrum, and I guess the speakers recognised that in what they chose to say.

First up was ACT’s David Seymour.  He started well, talking about twin challenges for New Zealand around (lack of) competitiveness/productivity and about (insufficient) social mobility and the spectre of entrenched disadvantage.  He was bold enough to note that there is a large group, mostly Maori, who  – rightly and reasonably –  feel that the last 30 years has not done much for them, in economic terms.  I was still with him when he argued that the way to fix the housing market was at source –  around the RMA and associated land use restrictions –  not by trying to fiddle the tax system.

But his centrepiece was an attempt to make the case for a flat rate of income tax (I think set at 17.5 per cent), scrapping our current progressive system.   He attempted to support this with the suggestion that all the rest of our tax system was flat, but I couldn’t quite see the relevance of his point, since (a) personal income tax is almost half of government revenue, and (b) we’ve chosen to achieve the desired progressivity through the income tax rather than, say, the consumption tax.    Attempting to engage his (left wing) audience he attempted to argue that we should think of “fairness” as involving the same rate of tax on every dollar of income (with a half-hearted suggestion that a poll tax could be considered even fairer, but probably wouldn’t fly politically).  Progressivity, he argued, simply doesn’t fit with New Zealand’s culture and values as an “aspirational society” and sends the wrong message, wrong values.  It wasn’t a  description of New Zealand I could recognise, at least any time in the last 100 or more years.

Anyway, Seymour then proceeded to undermine his own argument by addressing the question of “but what about the low income people whose marginal and average tax rates would then rise?”  Consistent with his logic, I’d have thought he should have just said “well, tough –  this is what fairness is, all paying the same rate on every dollar” (while perhaps making the fair point that many people on the lowest marginal tax rates aren’t there for long).  Instead he suggested two possible responses.  The first was to use the tax/transfer system to offer a credit to these people to leave them no worse off (ie progressivity, at least at the bottom, by another name) or…..and this is where I had to check I was hearing correctly…..the minimum wage could be increased further (noting that employers could “afford it” because their own tax rates would be lowered).  In a country with one of the highest ratios of minimum wages to median wages, the MP for the libertarian party appeared to be seriously proposing increasing that impost further……

The Greens finance spokesman (and Associate Minister of Finance) James Shaw –  the calm and relatively sensible face of the Green Party – was up next.  I’d never ever vote for them –  the party that, among other things, whips its members to vote for abortion –  but there was something refreshing in hearing a serving minister frankly state (in answer to a later question) that he really didn’t think taxpayer money should be spent on subsidies for the America’s Cup.  Perhaps he could next offer some thoughts on (New Zealand) film subsidies to makers of propaganda films vetted and controlled by the Chinese Communist Party?   He also spoke highly of a recent NZ Initiative report.

Anyway, on tax, Shaw was clear about where his priors were (and, of course, most of the audience weren’t minded to object).  He is keen on Northern Europe and Scandinavia.  He characterises those countries are starting by identifying what they want to achieve (desired outcomes) and then work from there to an appropriate tax system.    In all cases, that means much higher tax/GDP (and, of course, spending/GDP) ratios than in New Zealand.   From his perspective, he’d be keen on more environmental taxes and –  the Elizabeth Warren side in him coming out – on taxing wealth relatively more.

Perhaps somewhat at odds with the environmental point, he made the interesting argument –  with which I’d sympathise –  that we should hypothecate (ring fence, not into general government revenue) revenue from Pigovian taxes, lest government forget why the taxes were imposed (to deter the behaviour) and become reliant on the revenue (eg tobacco taxes).   That sounds fine –  and he went on to note, in the same vein, that his ideal carbon price in 2050 would be zero (carbon emissions would have been successfully eliminated or out-competed) – but it would leave the pot of general revenue not looking any much larger than it is today.   Despite his evident preference for a much larger government, he didn’t dwell on where the credible sources of much higher long-term revenue were in the Green Party’s view of the world.

Deborah Russell, chair of the Finance and Expenditure Committee, and a former tax academic and official, represented the Labour Party.   As she noted, she came along –  rather than the Minister of Finance or Minister of Revenue –  because people would pay less attention to her.  As she noted, Labour doesn’t have much to say because –  having junked a capital gains tax –  they are in “pretty intense” debate as to what their tax policy next year should be.

Russell –  who people seem to regard quite highly –  was an odd mix of the conventional and aspirational.   She ran a very similar line to Shaw in suggesting that we should first identify what we want to spend money on –  while noting that Labour hadn’t done those conversations that well – and only then identify how best to pluck the goose.  Since she went on to answer a question about inequality later, claiming that she wanted New Zealand to be “the most equal” country in the world, wanted “real radical equality” and supported more support for children, including a return to a universal family benefit, it seemed pretty clear that she too wanted a bigger government and thus materially more tax.

But at the same time she was talking about broad agreement on the “broad base low rate” mantra that has (mis)guided New Zealand tax policy for decades –  even though the high tax countries (eg Scandanavia) she seems to admire don’t have BBLR because they can’t (they recognise a need not to overburden business investment).   And she noted that when her Labour people talk about taxing the rich she often reminds them to think harder about “who are the rich?” and how many (few) there might be to pluck.   The Stuff article on this event played up talk that Labour is looking at campaigning on a higher maximum marginal tax rate, although it is hard to imagine there is really much money in such a proposal (and while it is one thing to campaign for higher taxes from Opposition at the end of a tired old’s government’s term –  as in 1999 –  it might be another thing now, campaigning for re-election, with Budget surpluses).

National’s Paul Goldsmith –  who has actually written a fascinating history of New Zealand tax policy –  spoke last.  He was pretty underwhelming on this occasion, perhaps concluding his audience wasn’t likely to be sympathetic anyway. He repeated the BBLR mantra, talked briefly of National’s (sensible) policy of indexing income tax thresholds, and repeated the promise of no new taxes in the first term of a National government.  He sounded quite pessimistic about fiscal prospects –  talking about the risk any new government could inherit material deficits –  which would act as a constraint on any desire National might have to do something more about lowering taxes.  As for growth/productivity/competitivess, all we heard was the short-term stuff about current low business confidence etc.

Question time followed.  James Shaw was challenged on his line, from earlier in the year, that the government wouldn’t deserve to be re-elected if it didn’t introduce a Capital Gains Tax. To his credit I guess, he looked abashed, mumbled a bit, and didn’t really pretend to have an adequate answer.

Herald columnist Brian Fallow asked about low household savings and low business investment/ “capital shallowness” (including the alleged ”overinvestment in housing” and asked what parties were proposing to do.  Here, my view of Russell started heading downhill.   There isn’t a low savings rate, she claimed, just the wrong measures of savings, and as for business investment, why 1 per cent interest rates might bring about desired change –  as if rates aren’t low for a reason –  and repeated that (deeply flawed) Adrian Orr line that interest rates are now just returning to more normal long-term historical levels.   Goldsmith and Shaw at least both suggested that any housing issues were housing market problems and need to be fixed at source.  But not one of the three of them (Seymour had to leave early) even mentioned the company tax rate (or cognate issues).     All three –  Russell and Shaw more than Goldsmith – actually seemed keen on taxing multinationals more heavily.  None showed any sign of engaging with the literature that much of the burden of capital taxation falls on wage earners.

The chair of the Tax Justice Aotearoa group noted that on OECD measures New Zealand is around the middle of the pack on inequality and asked the speakers whether they were happy with that, and if not which country they would aspire to be like.  I’ve already mentioned Russell’s response, although shouldn’t omit her suggestion that as a result we need to look a lot more seriously at what we don’t tax: wealth.  The CGT had been rejected but she argued we need to relook at options that tax wealth.

Paul Goldsmith responded that he wanted to emphasise equality of opportunity, while noting that the state –  rightly in his view –  does lots of redistribution as it is.  James Shaw, while rejecting the idea of a single country to aspire to, was quite open about aligning more with the Nordics –  in his view they had the best outcomes and were the best run.  By contrast we had “emaciated social support over several decades”, and he went on to note that we couldn’t, in his view, have equality of opportunity without much more government spending (“investment”).

It was interesting to hear both Shaw and Russell suggest that there should be more focus on desired outcomes, which should then lead us to design a tax system that would raise the (more) money.    Arguments on that sort of point are part of what politics is about.  But it was also interesting to hear both of them talk about how politicians end up disguising revenue increases in various not-very-transparent guises (levies etc) and how hard it is to make the case for higher taxes (although as Paul Goldsmith noted, one of the striking things of the CGT debate was the way Robertson/Ardern simply didn’t engage in making the case).  Perhaps the left really can make the case for much more spending, much more tax, but their own words suggest they have something of an uphill battle.

As for me, I probably came away still disinclined to vote at all next year.

But, for what it is worth, two final points.  First, it is easy to admire the Nordics.   But they’ve built really strong economic foundations, which we simply no longer have.  Here are the latest OECD real GDP per hour worked numbers

Denmark 65.4
Finland 55.3
Iceland 56.9
Norway 80.5
Sweden 61.9
New Zealand 37.3

And not one of the speakers showed any real emphasis on getting the conditions right for markedly lifting productivity (not even Seymour, despite the opening reference).    Parties just don’t seem to take the failing seriously, and continued failure to do so will increasingly constrain both public and private consumption/service options.

And, as for wealth taxes, I happened to see this table in a Cato Institute piece the other day.


You might end up favouring a wealth tax for some principled purpose, or just as an “envy tax”, but it isn’t likely to be the sort of option that is going to dramatically transform the size of government, in New Zealand or anywhere else.