Battlers versus the big end of town
OPINION: Tucked away in the terms of reference announced last week for the Tax Working Group was a reference to a policy that seemed at first glance to be no more than a sop to NZ First.
The working group is asked to consider ‘‘whether a progressive company tax (with a lower rate for small companies) would improve the tax system and the business environment’’.
In other words, should larger companies operating in New Zealand – many of them foreignowned or multinational corporations – pay a higher tax rate than the small and mediumsized businesses that represent the bulk of the country’s companies by number, if not size.
In its pre-election pitch, NZ First advocated raising the minimum wage to $20 an hour and cutting the company tax rate for small and medium-sized enterprises to compensate them for the extra cost.
And in one of her first speeches as Prime Minister, Jacinda Ardern asserted that most workers were employed by ‘‘big, profitable companies’’. Such companies could handle higher minimum wages but ‘‘there are some small businesses that will feel the effects of larger staff costs more acutely’’, she said. ‘‘That’s why one of the tasks of the Tax Working Group will be to look at models overseas for lower taxation for small businesses,’’ she continued.
Large companies would surely argue the toss about that assertion, but the domestic political appeal of such an approach is obvious – the Government backing little Kiwi battlers instead of the big end of town. It fits the new administration’s wider narrative of a policy shift to more nationalistic settings.
Add to that the belief among some senior tax practitioners and policymakers that large, especially foreign-owned, companies operating in New Zealand are often able to capture so-called ‘‘economic rents’’ from their operations here.
Economic rents is a polite term for being able to make bigger profits in New Zealand than they might expect in larger markets where there’s greater competition. If so, then such companies are unlikely to be sensitive to tax rate differentials since they are doing fairly well anyway.
Or so the theory goes. Lobbyists for large businesses will be cranking up the counterarguments already.
Leaving aside whether big companies really are more profitable than local tiddlers, differential company tax rates would inevitably complicate the imputation credits system that lets shareholder-owners of SMEs pay themselves dividends that are largely tax-free. The value of startups’ tax losses would also be reduced.
Then there’s the lesson Labour learnt in its last term when it allowed personal income and trust tax rates to get out of kilter: Differential tax rates are a breeding ground for tax avoidance.
Elsewhere, the terms of reference for the Tax Working Group demonstrate how little has really changed as far as options for taxing wealth rather than income since the last such independent review, under National in 2009.
However you look at it, taxing wealth has to involve taxing capital, whether or not it’s called a capital gains tax or something less scary-sounding.
For example, while it may be possible to move to a ‘‘deemed dividend’’ tax on, say, shares held in New Zealand companies, it’s difficult to see how that approach would assist the Government’s wider concern to improve the allocation of capital to productive assets and curb the national preference for investment in housing.
Yet imposing a capital gains tax that captures residential housing – even if it specifically excludes the family home – remains a political death zone. Whatever the working group recommends will exclude taxes on the family home.
But whether that will be enough to allow the Government to campaign in 2020 on a coherent wealth tax platform remains to be seen. So far, reason has been the missing element in the political debate about capital taxes. It will take political skill for that to change. –BusinessDesk
Differential company tax rates would inevitably complicate the imputation credits system.