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Tax Working Group should not venture into retirement policy

The Retirement Policy and Research Centre (RPRC) cautions against tinkering with retirement savings policies to solve problems of introducing a comprehensive capital gains tax (CGT).
“Retirement incomes policies are complex and should be reviewed holistically. We already have the process to do that in the Retirement Commissioner’s three yearly review,” says Susan St John, director of the RPRC.

The tax working group (TWG) has acknowledged that the introduction of a capital gains tax on shares will have a negative effect on the savings of low income people in KiwiSaver. “This has led the TWG to require complicated policy changes to provide compensation. This is one of the many reasons to doubt the wisdom of a CGT that includes shares” says St John.

The TWG has proposed that low income KiwiSavers should be compensated with one or more of four options:

1: “Refunding the employer’s superannuation contribution tax (ESCT) for KiwiSaver members earning up to $48,000 per annum. This refund would be clawed back for KiwiSaver members earning more than $48,000 per annum, such that members earning over $70,000 would receive no benefit.”

It is hard to see how this could be workable as one employer may not know about other wage income their employee has. It has been suggested that the IRD provides a refund after the end of the year when gross income is known. But what if some income is from self-employment or capital sources? How could an abatement possibly work? Even if it could, how much does this complicate an already high effective marginal tax rate for those on over $48,000 of wage income, who may be also hit with the abatement of working for families, accommodation supplement and student loan repayments.

The second suggestion introduces another whole raft of inequities:

2. “Ensuring that a KiwiSaver member on parental leave would receive the maximum member tax credit regardless of their level of contributions.”

Does this mean that there is little point in a household topping up the mother’s KiwiSaver when she is on paid parental leave as she gets the maximum credit anyway? What about the other large group of mothers of newborns who do not qualify for paid parental leave? Why is the work of caregiving of one group of mothers more worthy than others?

The third suggestion is the kind of policy that should be assessed in the context of the holistic aims of retirement policy including for its distributional consequences:

3. “Increasing the member tax credit from $0.50 per $1 of contribution to $0.75 per $1 of contribution. The contribution cap should remain unchanged.”

The final suggestion is the most problematic of all:

4. “Reducing the lower portfolio investment entity (PIE) rates for KiwiSaver funds (10.5% and 17.5%) by five percentage points each.”

It would be a great pity to introduce these selective tax incentives with no analysis as to their impact or effect. One obvious problem is that to constrain the lower PIE rates to KiwiSaver alone would mean that people would potentially have two PIE rates. There would be inevitable pressure to extend the favourable treatment to all PIE schemes which would be very expensive and compound the inequity between PIE and non-PIE saving.

“None of these suggestions has been analysed for its distributional or gender effects. Retirement income policy should be left to the experts in retirement income policy,” says Dr Claire Dale, research fellow in the RPRC.

To highlight the key issues in the forthcoming 2019 Retirement Incomes Policy Review, the RPRC is holding a one-day summit at the University of Auckland Business School, on 26 April.

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