Greens point way to a fairer world
Thomas Piketty’s ground-breaking 2014
Pattrick Smellie
analysis of the difference between wealth and income, Capital in the Twenty-First Century, continues to be a useful tome.
For one thing, it helps raise the PC monitor on my desk to an appropriate height.
Its far greater contribution has been to prove uncomfortably and irrefutably the argument that people who own assets become wealthier than those who don’t. This happens as a matter of course, but not necessarily as a matter of skill.
Piketty documented how wealth accumulation is a primary driver of social and economic inequality — far greater than disparities in annual paid income — while also being far less likely to be taxed than take-home pay or consumption.
He established with great clarity that societies seeking to be fairer and more cohesive need to find ways to tax wealth if they are to take the burden of taxation off wage and salary earners.
They also need to do that in a way that doesn’t discourage wealth creation in the first place.
The argument is broadly understood in New Zealand, and the Tax Working Group that recommended a capital gains tax for New Zealand last year produced ample evidence that wealth is heavily concentrated in the top 10 per cent of households.
Some 70 per cent of all assets owned by New Zealanders were concentrated in the top 10 per cent, and 82 per cent in the top 20 per cent of households, the working group reported.
Yet those households pay no taxes on the capital gains they may realise from selling those assets, unless they make their living trading in shares, houses or other capital items.
Nor will they pay death duties on inheritances, stamp duties on the sale of property, or gift duties, all of these wealth taxes having been abolished years ago.
Indeed, the only taxing thing about capital gains and wealth is the perennial, unresolved political debate on what to do about all this.
The Labour-led Government had promised to enact capital gains tax legislation before the election this September, and put it to the people. However, a combination of NZ First’s opposition and scaremongering by a few asset-rich individuals scuttled that commitment with alarming ease. The issue is political poison.
However, for Labour supporters who’d hoped that talk of transformational politics would be matched by political action, that decision was an early scar.
Enter the Greens with last week’s announcement of a Poverty Action Plan that has at its centre the intention to levy a 1 cent in the dollar wealth tax on any individual’s net assets worth more than $1 million.
Or, in the case of someone owning assets worth more than $2m, taxing that wealth at 2c in the dollar.
To deal with the fact that some, often elderly, people with substantial assets may not have sufficient income to pay such taxes, they would be able to defer payment until after their death.
At face value, this looks quite an elegant solution.
If you own a house in Auckland and holiday house somewhere else — both mortgage-free — the likelihood is that you will have assets worth more than $1m.
Say their combined value was $1.4m, you would be paying 1c in the dollar on the $400,000 value above $1m. In other words, $4000 a year.
Hardly the end of the world: equivalent perhaps to the doubling of a city council rates bill.
Where those wealthy homeowners are more likely to feel the pinch is in the new personal income tax rates the Greens would impose, at 37c in the dollar for incomes over $100,000 and 42c in the dollar over $150,000.
This is problematic since the current top income tax rate of 33c in the dollar kicks in at $70,000. Given that the average annual personal income of a New Zealander is around $53,000 a year, that top tax rate is already cutting in at far too low a level to be truly called a tax on high income earners.
In fact, one of the dirty secrets of recent governments’ achieving Budget surpluses year in, year out has been that income tax thresholds have not shifted for years, meaning more and more average income earners are paying higher and higher personal tax rates.
This is called “fiscal drag” and, thanks to the massive government borrowing for the Covid-19 response, it is most unlikely that any government will fix that problem any time soon.
However, the precise detail of the Greens’ policy is not the point.
Like Helen Clark, Sir Peter Gluckman and Business New Zealand all advocating a strategy to open up New Zealand’s borders, the Greens can raise arguments that Labour ministers may agree with but can’t possibly discuss. Especially not 11 weeks out from an election.
By raising the issue of wealth taxes, the Greens allow a debate to begin that not only should, but deserves to be had, even if the answer is neither clear nor easy.
After all, the Tax Working Group crisply dismissed wealth taxes in half a page of its interim report, despite agreeing that they would “reduce the assets of wealthier households and provide for redistribution to poorer households”.
The trouble was that almost all wealth taxes end up with exemptions. The
Greens exempt normal household goods, allow the value of any outstanding mortgage to be deducted from the calculation of asset values, and have the two thresholds described above.
But otherwise, the Greens are advocating as wide as possible a net for wealth taxes to be applied, using the broadly accepted mainstream argument that the most efficient way to collect any tax is to make it broad-based and applied at a low rate.
That principle is quietly abandoned in arguing for a much steeper personal income tax scale, but let’s face it, it’s a hard road finding the perfect tax policy.
However, a broad-based wealth tax would theoretically deal with the tendency for wealthy people to skew their investment to assets that aren’t taxable. If everything’s taxable, there’s nowhere to escape — except perhaps offshore.
A broad base doesn’t solve the equally problematic question of asset valuation. How, for example, would you value the shares in a closely held business where there’s been no trading for years? Will taxpayers happily accept an annual house revaluation in the middle of a pandemicinduced global recession?
What would be the taxable valuation of a volatile publicly traded share? Does anyone really know what a beach-front bach or a Colin McCahon is worth from one day to the next?
None of these are reasons not to try to overcome the imbalances that the absence of wealth taxes engenders.
But they hint at the complexity that would ensue and the potential for such taxes not to raise the very large sums the Greens assume, let alone the political backlash that opponents could whip up to frighten even those who might never face such a tax.
The nub of Piketty’s appeal to a fairer economic system boils down to arguing that only the creators of new wealth — entrepreneurs — should be allowed to accumulate that wealth during their own lifetimes.
Inherited wealth would be taxed to make good on the promise of economic liberalisation that has so far failed to arrive: redistribution of income to make a fairer society.