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Keith Rankin: Fiscal Awards

Congratulations to Peter Jackson and his crew for both the critical and commercial success of The Lord of the Rings: The Fellowship of the Ring.

Should The Lord of the Rings have received a tax break from the New Zealand government? And should future movie projects receive similar fiscal assistance?

The first thing to note is that a tax break is really a subsidy. If the normal rule is that a business pays 33% company tax on its profits, but a particular company only pays 13%, then that company receives a subsidy equal to 20% of profits. If a global IT company in Ireland pays 10% company tax while other firms pay 28%, then the IT firm receives a subsidy equal to 18% of its profits.

(Ireland, which the local low tax 'Rogergnomes' want us to emulate, is not a low tax economy; it's a high subsidy economy. The irony is that one of the major goals of the Rogernomic 'reforms' of the 1980s was to root out subsidies.)

The second thing to note is that venture subsidies do not represent a loss of revenue to the government. If the venture is conditional on the subsidy, then no taxes would have been paid had the subsidy not been granted. The subsidy is really a public investment in a future public income stream.

We think of taxes as existing for the purpose of raising public revenue. But, on many matters fiscal, revenue is incidental. Taxes are imposed (and subsidies granted) to modify our behaviour. For example, taxes on smoking exist to discourage smoking rather than to raise money. Taxes on petrol, on the other hand, exist to raise revenue. Where taxes discourage, subsidies encourage.

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This fiscal trade-off between revenue and behaviour can be problematic. Green Party activists want us to tax "bads" (eg pollution) instead of taxing incomes (which they see as a tax on labour). The problem is that if they are relying on pollution taxes for revenues, they must encourage rather than discourage pollution. By taxing gambling, our governments must encourage rather than discourage gambling.

(A similar dilemma was faced by the Liberals in the 1890s; they introduced graduated land taxes to both break up the great estates and to raise revenue from the great estates. Sensibly, given that the land tax could never achieve both objects simultaneously, they introduced income tax as well as the land tax.)

Subsidies on public transport exist to encourage people to use public transport. Subsidies to movie companies exist to encourage the making of movies that would otherwise not be made. The criteria is the expectation of a "positive externality" - ie a social benefit - equal at least to the amount of the subsidy. Nobody doubts the benefits to New Zealand arising from the Lord of the Rings.

Subsidies should be granted with care.

Should a subsidy be paid as a bribe to encourage a film to be made in our country rather than in some other country? If so, governments all over the world could be paying subsidies to transnational companies expert at playing governments off against each other.

Should a subsidy be made to a movie that will bid skilled film-makers away from some other movie that would have been made had the subsidised movie not been made? The answer is generally "no". But if the subsidised movie could only be made in our country, and there are substantial social benefits arising from the subsidised project which would not have accrued from the alternative project, then the answer is a clear "yes". This of course is the position of The Lord of the Rings. The film would not have been made at all without the subsidy. (Maybe some other film would have been made instead? Who knows?) Further, some other adaptation of Tolkien, by some other director in some other country, would have been an entirely different film. For the world to get Peter Jackson's Lord of the Rings - a quite unique set of movies - New Zealand had to be the location.

The world's most successful national economies are those countries in which clusters of creative and technically sophisticated workers practice their crafts. New Zealand should not just be a place that globally itinerant film-makers come to every now and again, and then leave.

New Zealand needs a sustainable film industry with critical mass; an industry that both tells our stories and makes commercially successful international movies that embody distinctive New Zealand qualities - geography, culture, creativity. Thus the subsidies made need to be coordinated in such a way that our movie industry (i) has enough happening at any point in time so that people don't need to leave to get work, yet (ii) does not have so much happening that it outreaches itself.

Now is the critical time. What projects in New Zealand are becoming available to the Lord of the Rings crew as their work on that great project comes to a close? It would be a tragedy if our movie industry, having come so far, lapses for the want of a commitment by government to pay appropriate subsidies. The New Zealand film industry must be allowed to build on the success of The Lord of the Rings.

© 2002 Keith Rankin

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