What’s fair?

14/02/2019

The government and many of the groups supporting it put a lot of emphasis on fairness, but what’s fair?

National policy is to adjust tax brackets to take account of inflation which Professor Norman Gemmell, chair in public finance at Victoria University, says is only fair:

 Tax economists have long advocated that keeping income tax thresholds constant in real terms (by adjusting them upwards as prices rise) should be the norm. But this indexation is much less important for tax on wages than it is for tax on capital gains – a crucial point in the current climate. . . 

Capital income, such as capital gains from house sales or interest payments on bank accounts, are much more vulnerable to this “indexation problem”.

Consider a simple capital gain example. If house prices rise by 5 per cent but “general” inflation is 2 per cent, the real capital gain for homeowners is 3 per cent, not 5 per cent. Now suppose that a 33 per cent tax rate payer buys a bach for $100,000 and sells it one year later for $105,000. The CGT liability on the sale is $660, due to the general inflation of 2 per cent, plus $990 for the additional house price increase (the “real” gain).

So the extra tax levied on the inflation component is a whopping two-thirds as big as the “real” tax liability (or 40 per cent of the total). In other words, with a CGT, failing to allow for general inflation means a huge additional tax bill.

What does this all mean for the TWG advice and a Government concerned with “fairness”? First, adopting National’s indexing of income tax thresholds would be a good idea, and not just for transparency reasons. It is the fair thing to do for taxpayers right across the income scale, who otherwise pay more tax simply because prices have risen.

Also, if the Government decides to go ahead with a CGT, designing out the “inflation problem” is much more important, due to the size of the tax distortion it creates. It is also important for fairness.

Otherwise, what superficially looks like the same tax rate being applied to all income actually means that the effective tax rate on capital gains (and interest income) is much higher than the same rate on income earned as wages. 

Surely that’s not fair?

Even if a CGT is inflation indexed, would it be fair?

Only if you’re a socialist who think that people who work hard, pay the costs and take the risks,  forgo personal spending, to save and invest, and pay taxes on earnings from that work, savings and investment should then be taxed again.

A CTG is a classic envy tax, aiming to bring middle and upper income people down down rather than helping the poor up.

Is it fair that the government is looking at raising more tax rather than letting people keep more of their own money?

Leighton Smith shows a better way:

 . . . the Swiss government must get approval from its voters by virtue of referendum to give themselves a pay rise or change tax rates. In 1975, the voters declined a government request for a tax increase. A prominent Swiss citizen, responding to a question of what happens next, replied “the government will have to live on what it has, like the rest of us.” But it doesn’t stop there. The Swiss have a separation of powers between taxing and spending, in the belief that temptation to overspend is omnipresent. Unfortunately, we in New Zealand could be returning to the ideology of the politics of envy. The introduction of any tax policy that enriches the accounting industry is bad policy. . . 

A government that keeps telling us its a good economic manager should not need more tax, in fact the reverse is true.

Healthy surpluses are a clear sign it’s already taking too much for us. There is no need for new taxes, and certainly not one that would benefit tax accountants and lawyers most.

Better taxes are simpler taxes. A CTG would be complicated and in spite of the aim of fairness which is behind the motivation for its introduction, would not be fair.

 

 


If you thought balancing the books was easy . . .

16/07/2013

If you thought balancing the country’s books was easy, you can try your hand at doing it.

An online calculator that allows people to have a go at addressing the Government’s long-term financial challenges is being launched today by Victoria University’s Chair of Public Finance, Professor Norman Gemmell.

The long-term fiscal calculator, developed in conjunction with Treasury, is one of the first tools available on a new website, (www.nzpublicfinance.com) also launched today by Professor Gemmell, which provides a hub for public finance research and policy debate.

The calculator shows how a range of different choices in spending and taxation can help to address the challenges facing the Government’s financial position over the next 40 years. These challenges result from factors such as population ageing and increasing demand for services.

“The pressures facing the fiscal position over the long-term mean that some adjustments are going to be required,” says Professor Gemmell. “This calculator lets people choose which options they think are best.

“For example, you can choose to spend more on health or education but, at the same time, the calculator forces you to think about the trade-offs involved with this.

“It gives people more information about the range of options we have, and allows them to say ‘How, if I was going to balance the books, would I do it?’” says Professor Gemmell.

People will be able to submit their choices online and those submissions will contribute to a picture of preferred options for closing the gap between spending and income.

Professor Gemmell says the long-term fiscal calculator is the first of a number of web tools that will be available on his new public finance website.

“The website will bring together research and data that will be useful for academics, analysts and policy makers. But it’s also aimed at the general public and at stimulating debate and discussion on a whole range of public finance questions around public spending, tax rates and saving schemes like Kiwisaver.”

Professor Gemmell says engaging with policy makers and other organisations on public finance issues is an important part of his role. He is talking with economists and other universities about including a variety of research from around New Zealand, and from around the world, on www.nzpublicfinance.com.

The calculator is here.

It’s a very blunt instrument with limited options but does give an idea of the complexities involved in balancing a Budget.


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