Higher GST and tax cuts?

22 Apr

Question 23: Among the solutions to the economic problems we have today are those tried last time – higher GST and cuts to  the top marginal tax rate. What will be the effect today?

The effect of these changes will be the same as last time – increased taxation on working people, less tax on the rich, and a growth in inequality and poverty.

We are being told that reducing the top tax rates and increasing GST will again be beneficial to “the economy”. If it didn’t work last time why should we expect it to this time?

Working people pay their taxes from their wages before they see it. They also pay GST, petrol taxes, user charges and the various “sin” taxes for liking alcohol or tobacco. All these taxes (whatever the alleged benefits on our health or the environment) are grossly unfair as they take a much larger proportion of our incomes than the rich. We never have a choice.

The bosses however treat taxation as some sort of voluntary activity. They look on the government as some charity to which they may donate if they feel motivated. They don’t like taxes and as often as not avoid paying them.

Only about half of a sample of 100 of the wealthiest people in New Zealand pay the top marginal tax rate on their income, according to The Tax Working Group report in January 2010. “These taxpayers are not necessarily doing anything wrong but are merely taking advantage of the opportunities offered by the current system to shelter income from higher rates,” the group’s report said. “This calls into question the integrity and fairness of the system,” the report said. According to Mark Weldon from the New Zealand Stock Exchange Association who sat on the Tax Working Group, these wealthy tax avoiders include “some on the government’s own Tax Working Group.” Rather than calling for stricter policies and making people pay the tax they should, the Tax Working Group proposed to reduce the top marginal rate and so legitimise their avoidance.

All the main banks in 2010 had to agree to pay billions of dollars in back taxes for years of avoidance. According to their own internal emails they simply chose how much they paid using complex financial arrangements according to what they thought they could get away with politically. Shareholders of companies don’t have to pay full taxes on dividend income. If the company pays company tax on their profits, then for New Zealand shareholders this is treated as them paying tax on their income. So if the company pays a 30% tax on their profit, and if the wealthy individual pays the current top marginal rate of 38%, then they only have to pay 8% on their dividends. This little trick for the wealthy is only allowed in Australia and New Zealand.

Despite the cuts to top personal and company tax rates an IRD survey in the mid 1990s of 500 publicly listed companies found 35% paid no tax. The same study found tax avoidance had increased by 40% in the previous decade. It seems rather than reducing avoidance the big cuts to the top marginal tax rates only increased the appetite for the rich to avoid taxes.

There is also an almost complete absence of capital gains taxes in New Zealand. Capital gains are a major part of the income of the wealthiest people. A recent report from the Inland Revenue Service in the United States for example found that the 400 best-off taxpayers paid an average tax rate of 16.6%, lower than in any year since the IRS began making the reports in 1992. To make the top 400, a taxpayer had to have income of more than $138.8 million. As a group, the top 400 reported $137.9 billion in income, and paid $22.9 billion in federal income taxes. About 81.3% of the income of the top 400 households came in the form of capital gains, dividends or interest, the IRS data show. Only 6.5% came in the form of salaries and wages.

There are no proposals for any wealth taxes to get the super rich to pay a fairer share of the tax burden. The only proposals are to increase that burden on working people. The graphs below from the Tax Working Group report were used by financial consultant Bernard Hickey as part of a presentation he did early in 2010. The first shows that the number of people who declared an income of a million dollars or more increased by around 37 percent in the five years 1994 to 1999. The increase dropped to almost zero for the nine years to 2008 after the top marginal tax rate was increased to 38 cents after Labour was elected in 1999. His headline summed it up “Rich avoiding tax.” (See Graph 11)

Graph 11

The second graph headed “The Trustee Boom” shows how there was an explosion in the use of trusts which have a 33 cent tax rate to avoid higher marginal income tax rates. Trustee income increased fivefold from around $2 billion to $10 billion while the beneficiary income stayed static. The Treasurer Bill English used a so-called family trust to own his Wellington home and then rent it to him with the government picking up to cost. The Tax Working Group estimated that the ‘ability to shelter income in trusts cost the government roughly $300 million in tax revenue in 2007”. (See Graphs 11 + 12)

Even one of New Zealand’s richest men agrees it is unfair that he effectively pays no tax. Sam Morgan, who created online auction website Trade Me in 1999 and sold it in 2006 for more than $700 million, has criticised the tax system as unfair to “working people”.

Flush with tax-free cash from the sale of Trade Me, he said the system meant he effectively dodged the tax man. “I was lucky enough to sell my company in a country with no capital gains, so I paid no tax on the sale. Now I’ve got no income effectively, because I don’t have a proper job, so the tax that I pay is minimal. The tax I do pay, I throw money into my charitable foundation. I can’t touch that money, it is for charitable purposes. I pay basically no tax. And that’s not right, but what am I supposed to do?” Mr Morgan said the idea of a 25 per cent flat tax rate promoted by his father, economist Gareth Morgan, was part of a “quite hardcore” manifesto. “The amount of tax people pay in different areas is not fair. The people that pay the most tax are working people.”

Graph 12

The government claims no one will be worse off after the GST and tax rate changes. But a reduction in the top marginal rate for incomes over $70,000 will give 90 percent of any tax cut benefit to the top 10 percent of income earners who earn above that threshold. As Gordon Campbell commented in his Scoop column: “the government has used a peculiar notion of ‘balance’ within this tax debate. The tax cuts will make a small elite much, much better off – while, at best, the various compensation packages will leave the rest of us no worse off. That’s not balance – that is a transfer of wealth, and it is a mechanism for increased income inequality.”

New Zealand’s highest paid CEO is Paul Reynolds of Telecom. His salary is $7 million a year. Since his appointment he has presided over the XT network debacle and a halving in the company’s share price – a loss of $4.5 billion in value. For all his hard work he will got about $4800 a week in tax cuts in this year’s budget after paying the invreased GST.

It may be time to lift the threshold for the 38 cent rate to kick in at say $100,000 as proposed by Labour Party leader Phil Goff – but there should be another higher marginal rate of 45 cents at incomes of three times the average wage (about $150,000) with still higher marginal rates at $250,000 and $500,000.

It may also be time to look at a universal basic income (UBI) as an alternative to the targeted regime like Working for Families. In 2008 WFF went to 384,000 families with an average annual amount of $6,500. A family with three children under thirteen would continue to receive some benefit until their combined income reached $106,000. It is a consequence of a system of low wages and no universal child benefits. The tax system has become the way to subsidise wages. But because it is targeted these families end up with additional income being hit by their normal tax and the abatement of the benefit creating an effective tax rate of over 50 percent for most.

A UBI could combine a tax free allowance for all adults from age 18 of say $200 a week with a universal child allowance of say $100 weekly for each child. This could be paid for by higher marginal rates especially at the top end and serious wealth taxes (including capital gains and death duties) for those with accumulated wealth from generations of profiting from the labour of the rest of society. This would remove the stigma associated with being on a benefit as everyone would get a universal entitlement to the wealth created by society. There would be no limits on any extra income earned which would simply be taxed at the relevant rate. A minimum marginal tax rate on earned income of 25 percent would mean essentially all income up to $40,000 would be tax free. Higher marginal rates would kick in at steps above that that would in effect claw back the universal entitlement from those who don’t need it. An idea similar to this (but without higher marginal rates for higher earners and leaving out the question of universal child allowances) was put forward by economist Gareth Morgan after sitting on the Taxation Review Group. He described it as “the Big Kahuna” – a way of thinking outside the square on the existing benefit / tax regime. He believed it possible with various wealth taxes being introduced. It is certainly an idea worth serious discussion.

(Part of a series of extracts from “Exposing Right Wing Lies” by Mike Treen, Unite National Director)

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