It’s ‘time to tax’ big companies

The Government should introduce a one-off ‘‘Covid-19 windfall tax’’ to recoup millions of dollars in wage subsidies claimed by large, profitable companies, a business professor says.

Since late March just over

750,000 businesses have claimed

$14 billion worth of Covid-19 wage subsidies, of which about $440 million has been paid back in refunds by roughly 15,000 companies.

Finance Minister Grant Robertson said the Government made the subsidy widely available to all businesses with a

30 per cent revenue drop due to

Covid-19, and 40 per cent for the wage subsidy extension, because New Zealand was facing a one-in100-year economic shock from the pandemic.

The scheme’s primary purpose was to support jobs and incomes by providing an immediate cash injection to businesses affected by Covid-19 in the form of a lump sum payment.

Since its inception the ‘‘high trust’’ scheme has been widely criticised for being too broad in its scope and easily abused by businesses who did not need a government handout because they were well financed or were doing reasonably well despite

Covid-19.

Early on in the scheme law firms, accounting practices, supermarkets and billionaires’ businesses were criticised for taking the money. In some cases it was paid back.

Now, with a financial reporting season coming to an end, some large stock exchangelisted companies that took millions in wage subsidies have announced healthy profits and declared dividends for shareholders.

In a recent LinkedIn post, Zuru toy company founder, entrepreneur of the year and Rich Lister Nick Mowbray said large companies with strong balance sheets that could easily financially sustain themselves had exploited and abused the wage subsidy to benefit shareholders.

‘‘They are happy to privatise profits in good times but are very quick to socialise any potential losses,’’ Mowbray said. ‘‘When large corporate companies exploit the wage subsidy and then report huge profits it makes me sick.’’

Some pointed out an irony in Mowbray’s comments considering his business Zuru Inc was registered in a tax haven (the British Virgin Islands), and manufactured plastic toys in a low wage economy (China).

But University of Auckland business school professor Robert MacCulloch said politicians and policymakers, not businesses, were to blame for the ‘‘botched’’ scheme.

Directors of private companies had a legal objective to shareholders to maximise profits, he said. Therefore, if free Government money was on offer and a revenue drop was expected, business had an obligation to take the money.

‘‘In my opinion the scheme was flawed in how it was set up,’’ MacCulloch said.

He said it should never have been extended to big, publicly listed companies, which already had access to large amounts of capital via credit loans and share issues.

The scheme originally had a wage subsidy cap of $150,000 for businesses affected by the coronavirus.

The cap was heavily criticised by former National Party leader Simon Bridges, who said National would have better supported businesses with greater subsidies for more large and medium-sized companies.

As New Zealand moved into lockdown the Government removed the cap, increasing the expected cost of the initial scheme from $5.1b to $9.3b.

MacCulloch thinks the decision to broaden the scheme was a politically motivated one, initiated by National and picked up by Labour.

‘‘My impression was the parties were competing for the business vote.’’

Labour did not want to look like it was not supporting business, he said.

‘‘I thought the economics of it was pretty weak, to grant such a windfall to these big companies.’’

He said too often New Zealand policy was developed by following overseas examples.

‘‘Copying what other countries do can get you into big trouble.’’

Wage subsidies for large companies should have been granted on a case-by-case basis, and the scheme should have had a ‘‘claw back’’ clause, he said.

‘‘They should have added a clause in the scheme which said something like ‘if your revenues are not lower over the year ended

March 31, 2021 compared to the previous financial year then the Government reserves the right to claw back these funds’.

‘‘That would have been a simple clause to have put in the initial contract that should your business be booming in a year we’ll claw the money back.

‘‘As any good business person will tell you, you don’t just write someone a blank cheque.’’

Ministry of Social Development (MSD) figures from May show 25 per cent of all wage subsidy payouts were to firms with at least 100 employees. Of the

$14b paid out through the scheme – that’s around $3.5b to large firms.

And 12 per cent of funds, or

$1.7b, went to firms with more than 500 employees.

MacCulloch said the Government was now in the ‘‘awkward position’’ of deciding whether it should try to claw back the money from companies retrospectively.

It could do that by introducing a one-off Covid-19 windfall tax targeted at large companies that took the wage subsidy but came through the pandemic well-off, he said.

Oil companies were subject to a similar windfall tax in the United Kingdom in the late 1990s, which produced an estimated one-off income of £5b (NZ$10b).

On September 15, the Office of the Auditor General said it would look at how effectively MSD, the Ministry for Business, Innovation and Employment, and the Inland Revenue Department managed the wage subsidy scheme. It will look at the applications made by public organisations that received the wage subsidy and the supporting evidence for those applications.

It would also look at whether the Government had spent public money in line with the authority it had from Parliament.

It will not look at private company applications.

MacCulloch said he was not a fan of such audits because it could be seen as an attempt to try to undo mistakes.

‘‘They made a mistake, and they can’t undo it.

‘‘They botched the initial implementation of the scheme, and they allowed big corporations to legally claim the funds.’’

Robertson said the Government stood by its decisions to support businesses and protect jobs and incomes by getting the wage subsidy in place quickly.

‘‘We adapted the scheme in real time to ensure employers and employees had certainty and breathing space in a very difficult time,’’ Robertson said.

‘‘No-one is able to say what the counterfactual would have been if this support had not been put in place at a time when businesses were having to make hurried decisions in the face of a global pandemic.’’

The policy had made a real difference as seen by data, such as unemployment which was 4 per cent during the June quarter, he said.

Robertson said some believed the Government should support businesses less, and others thought it should support businesses more.

‘‘I think we have got the balance about right, and we can see that with New Zealand’s unemployment rate predicted to peak lower than in other countries.’’

Head of Massey University’s School of Economics and Finance professor Martin Berka said businesses were supposed to take on risk during bad times, not the Government.

‘‘Businesses are getting the rewards in the good times . . . and are supposed to take on the risks in the bad times,’’ Berka said.

‘‘The taxpayer should not be covering that risk.’’

He worried that there was not enough capability built into Treasury to advise and make sound decisions at speed.

This resulted in large sums of money being allocated unwisely, he said.

‘‘It’s the allocation that should be scrutinised.

‘‘You see fast decisions being made on very large amounts, possibly, and it’s prone to error.’’

Younger generations of New Zealanders were going to inherit a huge debt burden because of government borrowing, such as that needed to fund the wage subsidy scheme, he said.

‘‘It’s not going to be the 40, 50,

60 year olds who pay it off. It’s going to be the 20 year olds and 30 year olds.’’

The Government needed to consider who was going to repay the debt.

‘‘This money is coming from somewhere and it’s coming from future taxes of the future generations.’’

Companies which paid dividends not long after taking the wage subsidy were directly distributing taxpayer money to shareholders, he said.

MSD spokesman George van Ooyen said as part of the wage subsidy application process it carried out pre-payment checks, including with Inland Revenue, and it had extra checks in place for large employer applications

(80-plus employees).

MSD had an audit process based on a risk analysis conducted with Inland Revenue to identify cases that may require further investigation, he said.

Random audits were being undertaken, as well as targeted audits based on data mining, he said.

As at September 11 there had been nearly 10,000 random and targeted audits carried out.

Employers made a formal declaration when they applied for the subsidy and were told they might be subject to civil proceedings for the recovery of any amount received that they’re not entitled to, he said.

They could face prosecution for offences under the Crimes Act if they provided false or misleading information; failed to meet any of the obligations about how to use the subsidy; or received any subsidy or part of a subsidy they were not entitled to.

As at September 11, MSD had received nearly 4000 complaints but it did not track the number of complaints that had become investigations, he said.

As at September 4 it had received 14,470 refunds, of which

450 resulted from audits, allegations and investigations.

There were currently 770 cases referred for investigation, with

324 of those under way, he said. No charges had been laid to date.

‘‘I thought the economics of it was pretty weak, to grant such a windfall to these big companies.’’

Robert MacCulloch

University of Auckland business school professor