Peak tax

So much for 'peak oil' — now it's 'peak tax’ pic.twitter.com/lmtreptWwO

— Taxpayers' Union (@TaxpayersUnion) June 24, 2018

Last time I bought petrol it was nearly $2.30 a litre – ho much of that was tax?

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Public servants paid too well?

The Taxpayers’ Union has some facts to dampen public sector wage claims:

Over the last 25 years, public sector incomes have grown much faster than the private sector, while public sector employees also enjoy a higher rate of sick leave costing taxpayers $173 million, according to Public Sector Wage Gap: The taxpayer-funded premium for working for the government, a new report we’ve released today.

If you work for the Government, you earn a third more on average, with taxpayers footing the bill.

This report seriously undermines the public sector unions’ claim for 9-15 percent pay hikes for their members. It blows to bits claims the last Government did not pay bureaucrats enough.

The public sector pay gap nearly doubled since the 1990s. If anything, a wage freeze, not hikes, would be fairer.

Left wing activists and unions would have the public believe that the public sector has undergone nine years of neoliberal hell. But this shows that to be a lie.

Public servants generally have better job security than those in the private sector.

They are also supposed to have a commitment to public service.

Both these factors ought to be reflected in lower pay rates than in the private sector.

Key findings of the report:

• The gap in weekly earnings between the public and private sectors has grown since 1990, from 18.9% of private sector earnings to 34.6% in 2017. The gap peaked in 2010 at 38.4%. The premium is even higher for hourly earnings (as public sector employees, on average, work fewer hours).
• If the Government had retained a public sector earnings premium of 20%, taxpayers would save $2.5 billion per year, or $1,445 per household in lower taxes or reduced Government debt.
• The public sector took an average of 8.6 and 8.4 days of sick leave in 2016 and 2017, compared to the private sector average of 4.7 days per year.
• If the public sector reduced its rates of sick leave to private sector levels, the taxpayers would save $173 million per year, or approximately $100 per household per year in lower taxes, or reduced Government debt.

Is there something in the public sector that causes more sickness, are public servants less healthy than those in the private sector or is there another explanation?

Here's what the public sector unions don't want you to know. Full report: https://t.co/Bho16qR5e3 pic.twitter.com/NKOXyrb5NF

— Taxpayers' Union (@TaxpayersUnion) June 19, 2018

The Taxpayers’ Union recommends:

• The Government should set a goal of returning to a 20% public sector earnings premium by placing constraints on public sector wage growth and focusing on growing productivity.
• If private sectors stagnate or decline (such as in a recession) the Government should be willing to cut public sector wages to match.

The public service is in competition for staff with the private sector.

If it wants high calibre staff it needs to pay them well but this report suggests it’s paying too well.

11.5c + 3-4c = more poverty

Petrol was $2.22 a litre when I filled up my car yesterday.

That’s expensive and it’s going to get worse:

Aucklanders will be hit with a 11.5c a litre rise as soon the regional fuel tax comes into effect on July 1, with petrol companies saying they will be passing the full increase on.

And there will be more pain when prices rise by as much as 4c a litre again on October 1 if the first round of three national fuel excise increases is implemented following a policy statement announcement at the end of June.

The Government has indicated the increase will be 3-4c every year for three years. . . 

A tax of 11.5 cents now and 3-4 cents in a few weeks will add up to more poverty.

Aucklanders might face the highest price increase but it will affect all of us one way or another because at least some of the price rise will spread throughout the country.

Every trip everyone makes in a petrol-fueled vehicle will cost more and so too will every trip everything everyone buys, and everything that goes into everything everyone buys.

The price rise might encourage some to forgo private transport for public, but public transport doesn’t serve everyone in cities and there are no passenger trains and local buses outside cities and you can’t put goods and services on trains and buses.

The price rises will fuel inflation which will put pressure on interest rates which will put more pressure on prices which will further fuel inflation . . .

And who will be hardest hit by that?

It’s always the poorest.

Auckland needs better roads but had mayor Phil Goff kept to his promise of finding 3-6 percent efficiencies across the Council budget, this tax would not be needed.

For the sake of us all, Aucklanders must come up with a viable alternative who could beat the incumbent at next year’s election to save us from another three years of tax and spend.

Simple taxes better

Federated Farmers is urging the Tax Working Group to keep taxes simple:

New Zealand enjoys a relatively neutral, non-distortionary tax system, with low compliance costs by international standards. Any changes should retain these hallmarks, Federated Farmers says.

I’ve said it many times but it needs to be repeated: simple taxes are better taxes.

Making it relatively easy to comply reduces the burden on both the Inland Revenue Department and taxpayers.

Simple taxes also reduce loop holes.

The Federation’s submission to the Tax Working Group, which was guided by 1,400 responses to a survey of its members, also argues money raised by any new taxes should be offset by reductions in other taxes.

Survey respondents strongly rejected some of the tax options that have been mooted: 81% opposed a capital gains tax (CGT) excluding the family home; 91% rejected a land tax and 82% opposed any form of environmental taxation.

Feds Economics and Commerce spokesperson Andrew Hoggard says it seems many proponents of a CGT hope it will crack down on property speculators.

A CGT hasn’t stopped runaway property price inflation in other countries.

“But that could be substantially achieved by an extension of the ‘bright-line test’ on sales to five years, making the need for a CGT largely redundant.

“The Federation didn’t oppose the two-year ‘bright-line’ when it was introduced, and our tax survey last month showed 47% supported this measure, with five years the most favoured period,” Andrew says.

A CGT would also have complications in terms of portfolio investment (PIE) rules, Livestock Herd Scheme gains and losses, farmhouse use changes and indexing the asset cost base so the inflation component is not taxed.

“There’s a lot to be said for the KISS (keep it simple…) principle and a CGT tramples all over that.”

A land tax would be “punitive and inequitable” on farmers, given the size of their properties. If it was introduced, highly geared enterprises could become equity negative, with potential flow-on effects to banks and financiers, Andrew says.

“What’s more developing businesses, or those with fluctuations in income typical of many farms, may not have sufficient cash flow in any one year to pay a land tax. Gross revenue can vary hugely for farmers due to the vagaries of international markets, exchange and interest rates, and the weather.”

It’s not just farmers who would be adversely affected by a land tax. It would add to costs for every business.

That includes service providers like doctors and other health professionals.

At least some of the extra cost would be passed on to consumers, fueling inflation and making life even more difficult for the poor.

As for environmental taxes, Federated Farmers believes there are more appropriate levers, such as regulation and industry-led initiatives, to spur gains.

“Those other levers are more efficient and more easily targeted.

“Taxpayers might decide it is cheaper to simply pay a new tax, particularly if they have limited ability to change/respond, and thus you don’t get the environmental gains we’re all looking for,” Andrew says.

Adding a tax would take away money that could be used for environmental improvements and wouldn’t discriminate between those whose environmental footprint is small and those whose isn’t.

The Federation’s survey showed 66% of farmers believed the current company tax rate of 28% is ‘about right’. There was limited appetite for a 26% rate for small to medium enterprise (SMEs) companies because savings would be relatively insignificant, because not all SMEs are companies, because it would significantly complicate the imputation regime and widening the gap between an SME company tax and the top marginal individual’s tax rate would likely cause even more inappropriate tax planning and avoidance.

Any reduction in tax rate should apply to all businesses.

How would you define a SME – by the number of employees, by income, by profit?

Discriminating by size would complicate the tax system and give some companies an advantage not available to their competitors.

It could also provide a perverse incentive for a business to stay small.

Any tax which incentivises businesses  to spend more time on working out how to organise themselves to minimise the tax they pay than on running their businesses  is a bad tax.

While on the topic of discrimination, I support the Taxpayers’ Union which is advocating for treating Maori Authorities and charitable companies the same as other businesses:

Keeping tax simple should be a major priority for the TWG.

It should aim to make any changes revenue neutral so that any increases in one area are offset by decreases in another too.

It should also take the opportunity to end fiscal drag, or bracket creep, which offsets gains from pay rises by subjecting them to a higher tax rate, by indexing tax threshold adjustments to inflation.

The government has restricted what the TWG can do by telling it what it can’t do.

But it still has the opportunity to make the tax system better by ensuring it’s simple.

Let’s not need bread deciders

Eric Crampton writes on why clean GST is better:

. . . Just imagine the conversations the bread deciders might have at cocktail parties.

“Oh, what do you do for a living?”
“Well, I’m a bread decider.”
“A what?”
“A bread decider. I decide whether or not things are bread.”
“But doesn’t everybody know what’s bread and what isn’t?”
“Ah, but think about a mini ciabatta, which is an interesting borderline case.”
“But why would anybody care?”
“Well, taxes …”
“And you’ve not shot yourself yet?”
“Well, I also have a side-gig as a pizza decider …”

We do not know how lucky we are in New Zealand. We have no need of bread-deciders. So far. . .

Anyone who thinks complicating New Zealand’s GST is a good idea should think again.

New Zealand’s GST is uniquely, and admirably, clean. It applies broadly. Every producer has an incentive to report honestly because they also report the GST they paid to their suppliers on every item when claiming GST on their inputs.

That’s a very important point, keeping the system simple incentivises honesty.

Were New Zealand to exempt healthy foods from GST, we would well be on the slippery slope. It is one of those things that sounds really easy, but would be an utter disaster in practice.

What counts as healthy? Not only does the medical evidence keep changing, but there would also be a string of boundary cases needing adjudication. If beans are healthy, what about frozen beans? Beans in a can? Beans in a can with pork fat and sauce? How much pork fat and sauce before it is taxable? What if we use Jamie Oliver’s recipe and fly him in to say it’s good?

Even worse, think through the consequences of tax exemption.

Under the current beautiful broad-base, low-rate system, companies gather all their receipts for everything they purchased when making things and claim the GST on them. They then charge GST on the full value of their final product. Their net GST is on the value they added to their inputs along the way, since they netted out the GST from the inputs. Nice, clean and easy.

If some goods were exempt from GST, we would have problems. Imagine you were a food manufacturer making two products. One attracts GST and one does not. It is possible to charge GST on one product and not the other, but all the point-of-sale terminals would need to be reprogrammed – feasible but expensive. But how do you start thinking about claiming the GST on your inputs if you are selling an exempt product. You will need to justify how you apportion all your plant’s shared costs across the different product lines. And Internal Revenue would worry you were loading costs onto the taxable line to claim GST where you shouldn’t. The auditors would be kept busy.

And an industry would quickly emerge to make everything seem easier – and to prevent it all from ever really being easier. The political case for exemptions is dangerously tantalising. And when you’ve granted one, it is almost impossible to resist granting others. . . 

A little exemption is like a little bit pregnant, it doesn’t stop there. You become more pregnant then you have a baby and the baby grows  . . .

Any exemptions to taxes add complications which add compliance costs and incentives for avoidance all of which is a handbrake on productivity.

Let’s not get on the slippery slope to bread deciders and beyond.

Simple taxes are better taxes.

New Zealand GST is simple and it should stay that way.

Simple taxes better taxes

Former Finance Minister Sir Michael Cullen will chair the working group which is taxed with finding a fairier tax system:

Finance Minister Grant Robertson and Revenue Minister Stuart Nash announced the terms of reference for the group, which will come up with a series of recommendations by February 2019 which the government will then use to inform its policy direction at the next general election. Robertson said he isn’t making a grab for cash. Reforms could be fiscally neutral and he had an open mind on whether a capital gains tax would be necessary.

“The main goal here is to create a better, balanced and fairer tax system for New Zealand,” Robertson said. “Our belief at the moment is that we do not have that.”

The group has been told to consider the economic environment over the next five-to-10 years and how that’s affecting changing business models, demographics and business practices; whether some form of housing, land or capital gains tax would improve the system; whether a progressive company tax with lower rates for small businesses would improve the system and business environment; and what role tax can play in delivering environment benefits. . . 

The group has been told not to look at increasing income tax rates or the rate of GST, inheritance tax, a tax on the family home, or the adequacy of the personal tax system and its interaction with the transfer system. It has been directed to look at technical matters already under review such as international tax reform targeting multinational profit shifting, and the tax department’s business transformation programme.

While the issue of applying GST to goods and services bought online from overseas could be dealt with separately and was not part of the working group’s brief, Robertson said the group could examine exemptions from GST for particular categories of goods. Labour’s coalition partner in government, NZ First, has campaigned for years to remove GST from fruit and vegetables.

Robertson said the group will be able to look at the tax treatment on savings and investment, which has cropped up in previous reviews as an area in need of reform.

The best taxes are simple taxes.

Taking GST off fruit and vegetables sounds simple but it isn’t. If it’s all fruit and vegetables it will include processed ones which might have lots of sugar and salt added. But if it’s only fresh fruit and vegetables luxury imports like pomegranate will be exempt while frozen vegetables won’t.

Our GST is lauded around the world for its simplicity. Once you introduce exemptions it gets complicated, inconsistent and more expensive to administer.

National’s Finance spokesman Steven Joyce says the working group is underwhelming:

“Its Terms of Reference is written so that it will propose one significant thing at the end of it, a Capital Gains Tax,” Mr Joyce says.

“Yet Mr Robertson’s assertion on the current taxation of capital gains in the property market remains incorrect. People who buy and sell houses for a profit have those profits treated as income for tax purposes under the law today.

“So people can only assume once again that his unspoken desire is to introduce a Capital Gains Tax on farms and small businesses.” . . .

“Nothing will come out of this group that Grant Robertson doesn’t want. And all he wants is a recommendation for a Capital Gains Tax.

“Mr Robertson would be better to dispense with the expense to taxpayers and write out his tax policy for the next election when the time comes in the normal manner.”

I’m not opposed to a CGT per se, if it was fiscally neutral through reductions elsewhere. But as with GST, a simple CGT would be a better one.

Once there are exemptions there are loopholes which will be very good for lawyers and accountants but much less so for the aim of balance and fairness.

 

Water tax by the numbers

When policy is based on politics rather than logic it’s difficult to work out the cost, but IrrigtionNZ has done the numbers for the water tax:

Recent attempts to estimate the cost of Labour’s proposed water tax to farmers have demonstrated a basic lack of understanding of how irrigation works, says nonprofit membership body IrrigationNZ.

This issue, which is compounded by a lack of detail from Labour about how the tax would be applied, has resulted in some widely varying estimates. Radio New Zealand’s ‘Fact or Fiction’ series calculated the cost for irrigated farms at $13,800 a year, whereas figures from DairyNZ have estimated a figure of $45,000 a year.

On top of this, yesterday Jacinda Ardern told TVNZ there are 12,000 farms in New Zealand and 2,000 of them have irrigation. In fact according to Statistics NZ and the 2012 Agricultural Census there are 58,071 farms in NZ and 10,500 have consent for irrigation. Irrigation NZ estimates the number of irrigated farms is now at around 11,000.

‘The public will rightly be confused by these very different figures,’ says IrrigationNZ Chief Executive Andrew Curtis. ‘But the lack of detail on how Labour would apply a water tax compounded with the sheer number of variables between farms – for example their size, what they produce, and how dry the region is, makes it hard to estimate with accuracy. While recent coverage has focused on the impact on dairy farms – just over half of our irrigated farms are not used for dairy – but for sheep or beef, arable farming, horticulture or vineyards. These farmers and growers will also pay the tax.”

IrrigationNZ has spent the last decade developing a comprehensive suite of standards, codes of practice, guidelines and knowledge resources on irrigation, and now run over 50 training courses a year nationally. IrrigationNZ’s main focus is providing knowledge and training to help irrigators achieve ‘excellence in irrigation.

‘Our figures, based on the average irrigated farm in Canterbury of 220 hectares, show an actual average cost of $24,000 to $29,000 a year (at 2 cents per 1000 litres). We’ve used Canterbury figures because there is no national average figure available for the size of an irrigated farm – but there is for Canterbury, where 60 per cent of irrigated land is.’

‘When this additional cost is put in context of the profit generated by a family farming business – it will create a significant impact, particularly for sheep and beef, arable and vegetable farmers who have reasonably tight operating margins.”

Mr Curtis adds that there will be larger farms and those farmers operating in drier climates who will be facing significantly higher bills of $40,000 to $50,000 or more.

Will non-irrigated farms pay?

While both Radio New Zealand and DairyNZ calculated water tax costs for non-irrigated farms, it remains unclear whether these farms would be paying the tax as it is unclear whether they would qualify as ‘large commercial users of water’. The only users mentioned by Labour are water bottlers and irrigators.

6% of New Zealand farms are irrigated (around 11,000 farms). Regardless of whether other farms may pay some of the tax costs, the majority of the tax will fall on a small subset of farmers.

Calculating a water tax on irrigated farms – key variables:

Type of farming – from dairy, to sheep, arable, or horticulture (DairyNZ’s figures were for dairy farms)
Size of farm
Amount of rainfall
Actual water use vs consented take
Number of days irrigation water is applied
The cost of the tax.
IrrigationNZ has been surprised by the growing number of irrigation experts in NZ.

‘Academics, economists and organisations that wouldn’t have the knowledge to turn on an irrigator are all offering their expert opinions on the cost of a water tax. Anyone talking about the potential cost of a water tax must have some basic understanding of water use by irrigators and not everyone offering an opinion currently seems to have that,” says Andrew Curtis.

‘We’d be happy to run a special course for the growing list of water tax experts – to help people to brush-up on their irrigation knowledge and assumptions.’

Calculating irrigation water use – the backbround

Before entering into the ‘how much will irrigators pay’ debate some basic knowledge of water use by irrigators is required.

‘The key piece of information is 1 mm of rainfall (noting rainfall is measured in millimetres not millilitres) falling over 1 hectare is equivalent to 10m3 which is equivalent to 10,000 litres). This provides some context around the sensationalist numbers being used by some parties around irrigation water use,’ says Andrew Curtis.

“For example over the Canterbury region (4.5 million hectares) an annual rainfall of just under 1,650mm or 74 trillion litres falls. However, we all know this isn’t distributed evenly and that’s why we need to irrigate – to provide additional rain for a crop to grow during dry periods. Under 500 mm falls at the coast, rising to 1,000 mm in the foothills and well over 2,000 mm in the mountains.”

For the 500,000 ha of irrigation in Canterbury (based on a seasonal allocation of 550 mm which is explained below) this means the maximum use for irrigation is 4.5 trillion litres or 6% of the annual rainfall.

“It is important to realise irrigators must hold a consent to take water for irrigation, and this contains a seasonal allocation expressed as a volume in m3. This volume is the maximum amount of water an irrigator is allowed to take and based on 80% application efficiency (the agreed industry standard) and 90% supply reliability,” says Mr Curtis.

Councils use a water allocation tool, such as Irricalc (http://irrigationnz.co.nz/practical-resources/irrigation-development/water-allocation-calculator/) to calculate a farms seasonal irrigation allocation requirements. These tools are based on a daily time step water balance model that uses the local climate and the farms soil water holding properties.

“However, when we case study an individual farm we always base it on the seasonal volume written on their consent – as this is the most likely method through which a water tax charge will be calculated,” says Mr Curtis.

David Clark gives the impact the tax will have on his cropping farm: