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Fair Tax for Savers Campaign

21 August 2014

Op-Ed Response

Michael Littlewood’s once again wrong assumptions lead to wrong conclusions

Peter Neilson

Convenor

Fair Tax for Savers Campaign

CEO, Financial Services Council (FSC)

Michael Littlewood has suggested that the Fair Tax for Savers Campaign proposals are unfair for everyone except the savings industry (Click here to view - Michael Littlewood: Fair tax for savers? Unfair for everyone else). This is based on several assumptions:

•That the campaign is seeking concessional special tax treatment for KiwiSaver investment and term deposits.

•That these tax concessions would be at his cost.

•It is too complicated to exempt the inflation component across the whole tax system.

He concludes by recommending:

•We should discuss lifting access restrictions so that savers could withdraw their savings if they need to.

The proposed tax changes are not a concession, they remove excessive taxation

Rather than introducing a concession for KiwiSaver and term deposits we are proposing to remove the excessive taxation on their investment income. Over recent years the Treasury, the IRD and the Savings Working Group set up by the Government in 2010, have raised the over-taxation of compound interest products as an issue to be addressed as a barrier particularly affecting the savings of New Zealanders who are on lower incomes or who are more risk averse.

With respect to the taxation of only the real component of interest, last year the Retirement Commissioner also recommended to the Government that only the real part of interest (above inflation) be taxed. It has been recognised for almost a hundred years that taxing the part of interest income that compensates for inflation is in effect taxing a return of capital.

Similarly, it is generally agreed that interest earning investments in KiwiSaver funds are also overtaxed relative to other income when after tax earnings are reinvested each year for many years.

The fiscal cost of the proposed changes

The FSC asked Robin Oliver, the former Deputy Commissioner of IRD for Policy, to tell us the likely fiscal cost of our proposal to tax only the interest income above the rate of inflation in term deposits and also only allow the tax deduction for the real part of interest.

He concluded that the change proposed would provide around a $500m net gain to Government revenue. The fiscal impact of the reduction in the KiwiSaver fund tax rates so that they reduced savers’ retirement earnings by the same proportion as the marginal tax rates on their other income, was separately estimated at less than $200m.

So overall the Fair Tax for Savers proposals would initially more than pay for themselves. Eventually the stock of KiwiSaver funds and income would grow to the point where this was not the case but it doesn’t seem a good argument not to do so. If we taxed blue eyed people twice as much a brown eyed people it would still be right to tax both equally even if it did increase the tax paid by the brown eyed people.

Is it too complicated?

If Israel and Mexico have been able to make interest indexation work in the past then it cannot sensibly be argued that we would be unable to do so in New Zealand.

The reason we suggested that term deposits be a starting point is that with the consumers’ price index result being issued quarterly it would be possible to tax term deposits with a duration of 90 days to 5 years quite easily if the interest was paid quarterly and the income tax was only applied to the real component. Our estimate is that this would boost household after tax incomes by around $400m a year and also remove a major tax subsidy for the debt borrowed by business and rental property investors.

Michael Littlewood’ s alternative remedy for KiwiSaver would be to allow anyone to withdraw their savings at will so they did not have to earn compound returns which incur effective tax rates higher than the marginal tax rate on their other income. This is just another campaign to abolish KiwiSaver. It is as if your surgeon tells you he can “cure” your brain tumour by cutting off your head, it’s just that you will be dead.

Michael has been campaigning against KiwiSaver for more than 7 years. However, the score now is 2.3 million New Zealanders having voluntarily joined and Michael Littlewood still opposed.

Michael needs to say why he wants KiwiSavers and term deposit holders to continue paying unfair levels of tax because they are invested in compounding interest products whereas if they were invested in debt financed rental property they would be heavily tax subsidised.

ENDS

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