Parker raises wealth tax dilemma
Revenue Minister wants to explore how top earners can pay more
Revenue Minister David Parker reckons the wealthiest New Zealanders are not paying their fair share of tax, and he would like to start a debate on whether that is fair.
Whether that debate would result in Labour implementing new taxes on the wealthy after the next election remains to be seen.
Parker was clear that Labour was committed to last election’s tax policy of passing no new taxes not stated in its 2020 manifesto this term, and leader Jacinda Ardern remained committed to there being no capital gains tax while she was Labour leader.
But Parker was coy about what kind of tax policy Labour would run on at the 2023 election, acknowledging that people who do not earn their income from ordinary salaries and wages appear to be lightly taxed.
“The most interesting question for me is whether we have a progressive tax income or whether middle income people pay higher rates of tax than better-off people,” Parker said.
Parker’s remarks came in a speech to Victoria University where he launched the Tax Principles bill, which would force governments to set out the principles of the tax system they oversee.
Parker was not sure what principles the Government would put in the legislation but they’re likely to look at things like fairness and effectiveness.
He said previous tax working groups had sketched out some principles already. These included “fairness” in the form of “horizontal… and vertical equity”, which means people in the same economic position pay the same amount of tax, regardless of how they earn it, and people pay proportionately more tax if they earn more money.
The other two principles are ensuring the tax system is administratively efficient, and does not create distortions.
He said the principles could work similarly to the way the Public Finance Act and the Child Poverty Reduction Act force the Government to report on their borrowing strategy and the number of children in poverty.
“Our proposal is to require officials to report to ministers and the Government about the operation of the Government using the principles as the basis of their reporting,” Parker said.
He said he hoped the principles would be ones all New Zealanders could see the merit in, but which avoided “predetermining outcomes that would be political”.
However, officials might be required, for instance, to report on whether the tax system was operating in a progressive way or not.
Parker later said he would write to the Opposition to seek their support, but he acknowledged that tax was a politically charged topic.
Act quickly put out a release criticising the proposed legislation, saying it was laying the groundwork for a tax grab.
The Greens called on the Government to “urgently take action” to increase the fairness of the tax system.
Parker said he wanted the legislation in place before the next election.
The principles will be backed up with data, which the Government is collecting, on the amount of tax paid by the very wealthy. This will mean New Zealand will have some idea of the amount of tax paid by people in different income brackets. Currently, the Government has good data on how much tax is paid by people on low and middle incomes, but poor data on the amount of tax paid by the very wealthy.
Parker’s enthusiasm for this research has led to some, including the opposition, to conclude that the Government is plotting to draft tax policy.
Parker said this was “illinformed speculation on the Government’s motives”.
“The Government is not secretly working on new taxes,” Parker said.
However, Parker acknowledged that whatever data was gathered would likely feed into Labour policy for the 2023 election.
This means that while the research would not directly be used to draft new tax policy, it would likely indirectly inform whatever Labour chooses to campaign on.
Why don’t we know how much tax wealthy people pay?
Last year, after receiving reports from IRD that existing data on how much tax was paid by the very wealthy was incredibly patchy, Parker secured $5 million in the budget for officials to collect data from wealthy New Zealanders to work out how much tax they were paying.
The problem with New Zealand’s data on how much tax wealthy people pay is that wealthy people earn a large amount of their income in areas that are either taxed lightly or not taxed at all. This makes the very wealthy different from most New Zealanders who earn most of their income from ordinary wages and salaries, which are heavily taxed.
Because this group of people is relatively small, they are often missed in large surveys like Stats NZ’s Household Economic Survey, which the Government uses to design tax and economic policy.
Briefings from IRD show officials suspect that even when high income people are contacted by these surveys, they often under-report their income, leading to inaccurate results.
Parker said the Household Economic Survey was “close to useless at disclosing the wealth or income of the top few per cent”.
He said this survey tended to cap out at people who spent tens of millions of dollars, and missed people who were worth more, despite it being known that some New Zealanders are worth hundreds of millions of dollars.
“At the top end there is a propensity to understate when making a disclosure to a Government agency,” Parker said.
“When I delved into our survey measure, we proved that the highest net worth ever surveyed in the Household Economic Survey was $20 million — the NBR Rich List is a better data set than official statistics,” Parker said.
Parker implied that this led to poor policy, because the data used to make policy focused on ordinary salary and wage earners, and ignored the super wealthy.
“How come, in a country with billionaires, our dataset used for policy purposes effectively ignored the wealthiest. It’s not out by a factor of ten, that would be huge in itself, but that maximum is out by a factor of hundreds,” Parker said.
Parker said he had also instructed officials to research how much GST is paid by different income groups.
About 30 per cent of the total tax take comes from GST. Parker acknowledged the tax was “regressive”, meaning poorer people paid a greater portion of their income in GST than wealthier people.
He said the research would help the Government work out just how much GST was paid by people across different income cohorts.
One of the IRD papers that kicked off Parker’s research estimated that the wealthiest New Zealander paid 12 per cent of total income in tax on average, meaning they pay tax at a lower rate than average income earners.
The same research found 42 per cent of that group paid lower tax than a salary earner.