Tax, tax and infrastructure

HIGHLIGHTS THE DANGERS OF ALWAYS CALLING FOR LOWER TAXES.

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).