Taxing the rich no simple equation

It’s one of the great ironies of modern social democracy: the richer you are, the more able you are to avoid tax. It goes with the territory, that the wealthy can afford the lawyers and accountants needed to structure their affairs in the most “tax efficient” way.

But is that fair in a world where the rich appear to be getting a lot richer?

New data shows that the number of super-rich earners in New Zealand has soared in the past five years and 350 people are now worth more than $50 million. The associated entities of the 350 superrich individuals totalled 11,585.

Some of those individuals are in disputes with the IRD over more than $85 million in potential tax.

Fundamentally, New Zealand still has a progressive tax system. Despite a swing towards lower tax rates in the past 30 years, most of us still expect those who earn more to pay more.

We have an economy where inflation and economic growth are low for almost everything except property and equities — heavily favouring those who are already wealthy. And their trusts and investment structures are as complex as you would expect.

And although high-profile left-wing politicians, such as Bernie Sanders in the US and Jeremy Corbyn in the UK, have talked about a return to mega-wealth taxes, there appears to be no groundswell for that on the New Zealand political landscape. New Zealand’s centre-left Coalition has focused instead on tougher enforcement.

The tide of public opinion has turned against multi-national corporations that draw profits from countries in which they pay little or no tax.

We’re also seeing tougher enforcement of the “bright-line test” around property investment — as an alternative to the more politically problematic introduction of a capital gains tax. On face value at least, that tougher enforcement policy appears to be working with high wealth individuals as well.

The numbers for the amount of tax assessed for this group suggest the Government coffers have benefited to the tune of more than $100 million in the past four years as the top tier of wealthy grows. Meanwhile, the amount of tax in dispute is down from $112.8m in 2014.

Legitimate concerns about widening inequality remain. Relying on “trickle down economics” alone is not enough. There is still a crucial role for the State to ensuring social balance and, dare we say it, the wellbeing of everyone in society.

But the numbers confirm that the rise of the mega-rich has been beneficial — boosting the tax take. That’s before factoring in the jobs the wealthy may have created, either through their business investment or simply through their spending.

A small nation like New Zealand can’t afford to discourage wealth creation. We should encourage and celebrate business success.

What is fair is that the IRD should have the resources and regulatory power to match the sophistication of the mega-rich. We need a simple and efficient tax regime. One we can enforce for the benefit of us all.