Tax, tax and in­fra­struc­ture



a reg­u­lar reader of this col­umn please don’t be put off by more com­ments on tax as it is the stan­dard ‘ no go’ area for pol­i­tics in the Western world, with the mis­taken be­lief there are no votes to be had from in­creas­ing taxes. The per­pet­ual call for ever lower taxes is, when prop­erly ex­am­ined, counter in­tu­itive and in the case of com­pa­nies only leads to ever lower pro­duc­tiv­ity and the il­lu­sion of greater pro­duc­tiv­ity.

At the risk of an­noy­ing you, taxes are too low in New Zealand for busi­nesses and in­di­vid­u­als alike if the pub­lic want de­cent pub­lic ser­vices and in­fra­struc­ture. 1

Let’s start with some his­tory. Fifty years ago busi­ness con­trib­uted ap­prox­i­mately two-thirds of all taxes with the re­main­der com­ing from per­sonal tax­a­tion, levies and du­ties. To­day that po­si­tion has re­versed with com­pa­nies con­tribut­ing a third or less of tax­a­tion re­ceipts.

This sit­u­a­tion is sim­i­lar in the US and EU. The mas­sive change has oc­curred when, in real terms, wages have, since the GFC, barely kept pace with in­fla­tion2 and com­pany prof­its and stock mar­ket val­ues have soared.

In re­al­ity, the in­crease in cor­po­rate prof­its, par­tic­u­larly of the large multi­na­tion­als, is il­lu­sory and based on sleight of hand by ac­coun­tants. The huge in­creases in direc­tors’ salaries, prof­its and div­i­dends have been paid for largely from lower tax rates and min­i­mal growth in wages.

The growth in cor­po­rate prof­its has been paid for by or­di­nary work­ing peo­ple who have si­mul­ta­ne­ously been as­saulted by the ob­scen­ity of ‘user pays’ and lat­terly by the fraud of Pub­lic Pri­vate Part­ner­ships. The lat­ter al­ways end up cost­ing more than bud­geted and the state (the PBT3) picks up the tab, mainly as a re­sult of very poor pro­cure­ment con­tracts by the state sec­tor which a cynic might de­scribe as giv­ing all the up­side to the pri­vate sec­tor, es­pe­cially when things go wrong.

What does this have to do with the SME sec­tor? In my view a great deal as the pop­u­lar and pop­ulist mantra of ‘lower taxes’ is now a rou­tine clar­ion call across the busi­ness sec­tor and from in­di­vid­u­als.

A re­cent lo­cal (Span­ish) study on tax­a­tion by a gov­ern­ing party func­tionary and a lead­ing aca­demic4 has pro­duced a very in­sight­ful study of some glar­ing changes in the cor­po­rate sec­tor over the past 11 years. Fur­ther en­quiries re­veal the changes are not unique to Spain and have oc­curred across most of the Western world in­clud­ing New Zealand.

Look­ing at com­pany tax re­ceipts over the pe­riod 2006/7 to 2017 the au­thors found a ma­jor de­cline in tax paid – by a mas­sive 48.89 per­cent – whilst gross prof­its and es­pe­cially div­i­dends rose.

The rise in prof­its took no ac­count of in­fla­tion which av­er­aged 2.29 per­cent per an­num in Spain and 2.6 per­cent across the EU. Div­i­dends in one year alone (2017) rose 18.2 per­cent and direc­tors’ in­comes in the same year by 15.4 per­cent. This data was taken from the Span­ish Stock Ex­change fi­nan­cial re­turns and con­firms there is some­thing wrong with a sys­tem when com­pany tax re­ceipts have de­clined and prof­its have soared.

Whilst I have yet to find an equally well re­searched pa­per in New Zealand cor­po­rate prof­its have con­tin­ued to grow ( just look at the stock mar­ket over the same pe­riod) and tax re­ceipts have been lack­lus­tre, de­spite a mas­sive growth in div­i­dends. The prob­lem is par­tic­u­larly acute with multi­na­tion­als who seem to think that pay­ing tax in sin­gle fig­ures, if at all, is a good thing. The likes of Ap­ple, Ama­zon, Google, Face­book, ‘big pharma’, fi­nan­cial ser­vices and oil com­pa­nies’ con­tri­bu­tion to tax re­ceipts in the coun­tries in which they op­er­ate has reached such low lev­els as to be im­moral.

Even Mon­sieur Macron, the neo-lib­eral French Pres­i­dent, is suf­fi­ciently con­cerned to be look­ing at ways of tax­ing lo­cally de­rived sales rev­enue rather than prof­its. In UK the tax de­part­ment has set up spe­cial of­fices to deal specif­i­cally with each sin­gle multi­na­tional. It seems that once you reach the point where your tax rate is re­duced to sin­gle fig­ures you get to bully the tax au­thor­i­ties di­rectly. As the re­la­tion­ship be­tween ma­jor busi­ness sec­tors and govern­ment gets ever closer (usu­ally driven by pro­fes­sional lob­by­ists), ef­fec­tive tax rates fall. The only groups that don’t have this ‘clout’ are salary and wage earn­ers whose pro­por­tion of the to­tal tax take gets ever larger.

There is no pol­i­tics in this as govern­ments of all po­lit­i­cal hues act sim­i­larly across the world.

As for those who con­sider per­sonal taxes in New Zealand too high; try and find a non-US al­ter­na­tive with lower rates. If the pub­lic and busi­ness sec­tor want first world in­fra­struc­ture it is go­ing to have to be paid for with higher taxes from higher wages in economies that are wed­ded to pro­duc­tiv­ity im­prove­ment as op­posed to fis­cal sleight of hand. 1 As a for­mer UK res­i­dent, I once paid 60 per­cent in­come tax on my ‘ top slice’ of in­come plus three per­cent so­cial se­cu­rity and 40 per­cent cor­po­ra­tion tax on my busi­ness prof­its. I was never bet­ter off! 2 In UK real wages are 10 per­cent lower to­day than in 2008. 3 Poor Bloody Tax­payer. 4 Manuel Es­cud­ero, sec­re­tary of po­lit­i­cal econ­omy and em­ploy­ment in the Span­ish Labour party and Je­sus Ro­driguez, tax law pro­fes­sor at Com­plutense (a pres­ti­gious Madrid univer­sity).

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