The Nation: Tax Working Group Chair Michael Cullen
On Newshub Nation: Simon Shepherd interviews Tax
Working Group Chair Michael Cullen
• Sir Michael Cullen says there's currently under-taxation at the top end of the income and wealth scale, and under his working group's recommendations "people who have substantial capital assets in one form or another" would end up paying more.
• Sir Michael disputes the effect Labour's capital gains tax policy had on the party's 2011 and 2014 election losses: "There was no real sign, actually, that that had any great impact in shifting votes around."
• He says some charities getting tax breaks might not be using their income for charitable purposes: "Some of those charities - at least on first examination - appear to not be passing on much of their income out to the supposed intended beneficiaries."
• Sir Michael says proposed environmental taxes on things like waste dumping would be aimed at changing behaviour, not increasing revenue: "Hopefully behaviour changes, so that the amount of money that you collect at the end of the day may not be much more... there's just a lot less waste going to landfill."
• He says tax cuts for lower income earners would be an effective way to offset increased user-pays charges: "Actually reducing the bottom tax rate, or having even a tax-free area at the bottom, is more effective in compensation."
Lisa Owen: A working group set up to review New Zealand's tax system has released its initial recommendations including two options for a capital gains tax. The Government wants any changes to be tax neutral - meaning they won't increase overall revenue. Instead, the plan is to improve income equality. Simon Shepherd asked group chair Sir Michael Cullen who would end up paying more under these recommendations.
Michael Cullen: Well, basically, people who have substantial income via capital assets in one form or another. You’ve got investment signals which tend to favour going into non-owner occupied housing – so you’ve got this pressure into the housing market of excessive investment. You’ve got, effectively, under taxation of those at the top end of the income and wealth scale, because there’s under taxation there.So we have a tax system which is, by international developed country standards, a low level of redistribution via the tax system.
Simon Shepherd: So this is about being Robin Hood – taking from the rich, giving it to the poorer people in society.
Well, not quite like Robin Hood but somewhere close.
Not so brutal as Robin Hood?
But it’s also like making sure that if Robin Hood and the Sheriff of Nottingham got the same income, they pay the same tax.
So, probably in the original version Robin Hood would have been paying more tax than the Sheriff.
How are you going to do that? If you’re going to create more tax models – like capital gains tax, more taxes – are you actually going to compensate? Are you going to cut taxes elsewhere?
Well, that’s certainly one obvious option, and we’ve got to look at a number of parts of what we are dealing with at the present time. I mean, primarily, you’ve got on the table not just capital income taxation – there’s also potential for environmental taxes. There’s the impact for capital income taxation on savings schemes like KiwiSaver – a whole range of things of that order. You want to make sure, say, with respect to KiwiSaver, that at least for the vast bulk of KiwiSavers not just very low incomes but up in the middle incomes – they are not disadvantaged by these changes.
Well, that’s right. So, a capital income tax, or a capital gains tax, would target those shares. Why would that disincentivise us when we are so bad at saving?
Well, that’s why you want to make sure that you offset that.
How would you do that?
Well, you might look at the way in which some of the current taxation on KiwiSaver occurs. The previous National party government introduced the application of what’s called employer contribution, superannuation contribution tax, on KiwiSaver contributions by the employer. That dramatically reduced the net return, or net investment into KiwiSaver funds. It reduced, basically, a third–
And you’re proposing getting rid of that, aren’t you?
Well, what we’re saying is – you might want to look at some partial reduction in that tax which would not have flow-on effects elsewhere but that would offset any impact of the imposition of capital income taxation. Because you could say, ‘Well, let’s just exempt KiwiSaver’, but then what about other schemes which are similar in character and other forms of savings and so on and so on. And that then becomes– We’ve kind of tilted the playing field again in a very strange way, and we’re trying to even up the playing field.
This whole debate about capital gains tax – I mean, Labour’s been down this path twice before, you’re proposing a different model, but why now? What’s different now? It’s been political suicide in the past.
Well, I’d like to claim that that was the only thing that lost Labour the 2011 and 2014 elections, but I would have to say, I think historians would find it a very strange judgement to arrive at.
But it hasn’t been politically acceptable.
There was no real sign, actually, that that had any great impact in shifting votes around in 2014.
So, do you think coming up it would shift votes around?
I think it could shift some votes around. You can’t be sure what the net movement of those votes would be. I think it depends on the details. At the moment, because we haven’t got all the details out there, because we’ve yet to make a number of decisions about even whether we’re going to recommend a capital income tax. We haven’t done that yet. It’s easy for people to fill in the holes with misinformation. Once we’ve done further work I think it will be much harder for people to do that. I’ve said to the officials, ‘What we will need in the final report is worked examples of how – You know, ‘You are a person on the average wage on KiwiSaver. How does this affect you?’
That’s how people actually understand what the implications are. Can I talk about a couple of other things that you’ve outlined – recommendations. One is charities. So, your report says that charities could be getting some tax breaks but not really using their income for charitable purposes. Is there a concern there?
Yes, I mean, they get favourable treatment by the fact that charities aren’t taxed on their income.
So, should they be?
And that’s a concession which is made because of the charitable purposes. This is a way the government, in effect, is subsidising the activity of those charities.
But some of those charities are not being charitable.
Some of those charities are– at least on first examination– appear not to be passing on much of their income out to the supposed intended beneficiaries. So, if you look at what was done in the United Kingdom they don’t have the initial tax concession. What they do is – they tax, but then the tax is rebated in full on the pay-out to the purposes that the charity was set up for.
So there’s some room there to look at.
There’s room to think about that, but it complicates it a bit more.
Well, let’s look at a couple of other issues around the environment. The report says New Zealand doesn’t have much environment taxation. Other environment taxes you’re talking are about, perhaps, to change behaviour. And these are like, paying more to dump waste and drive our roads. It’s all about changing behaviour.
Indeed it is. I mean, in the UK this has been extremely successful in reducing the amount of waste going to landfill. You know, we have a huge amount of our waste go to landfills. It’s becoming more and more of a difficulty. People increasingly don’t find this acceptable behaviour. If you’re looking at it from a perspective of Maori, where you’ve got leaching coming out of these landfills in streams and so on. All of those sorts of things, that’s sort of unacceptable. This is something we could do something about. The idea, just the end of the day – why you’d put a tax on – it’s not necessarily to raise huge amounts of money, because hopefully behaviour changes, so that the amount of money that you collect at the end of the day may not be much more than we collect at the moment. There’s just a lot less waste going to landfill.
One last question – these taxes, this tax reform is about being fair and equal, but if you’re going to put those user-pays taxes on in the environment area in the congestion charges, they target people or have more impact on the lower socioeconomic people, so it’s not fair.
It’s a question of, ‘What else do you do?’ That’s where you come back to–
And so what else will you do to offset that?
When you come back to revenue neutrality, what are the best offsets? Now, the first look is, well, since many of these things are being put on the cost of living in some way. I mean, obviously waste levies may feed back into the cost of living in some way. Certainly some of the other taxes will. Think, well, maybe you should reduce GST? We’ve actually done quite a bit of work with the assistance of the officials, and it looks reasonably conclusive, although GST is regressive because it bears more heavily on those at the bottom ends in terms of income, that actually reducing the bottom tax rate, or having even a tax-free area at the bottom, is more effective in compensation.So if you put that in place with some more taxation on capital income, it’s possible to come out with a package which is actually better for lower to middle income earners.
So we could be looking for tax cuts there?
We could be looking at tax cuts, particularly targeted towards the lower-middle income area. You could do that in a way which only a small amount flows-on, in effect, to those like me on higher incomes.
Sir Michael Cullen, thank you very much for your time.
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