Time for a wealth tax to address inequality?
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Time for a wealth tax to address inequality?

A free-ranging discussion with journalist, academic and author Max Rashbrooke about taxing wealth, especially on those who have it and who are ‘not in the system’, and who ‘pay very little tax now’.

Podcast Transcript

This week, I’m joined by Max Rashbrooke, academic, journalist, and author of two books, Inequality: A New Zealand Crisis, and Government for the Public Good: The Surprising Science of Large-Scale Collective Action. Kia Ora Max, welcome to the podcast.

Max Rashbrooke:
Kia Ora Terry, very pleased to be joining you.

Terry Baucher:
Just to begin with, what’s your reaction to the Tax Working Group’s report?

Max Rashbrooke:
Well, I think we’ve learned a couple of things from the Tax Working Group process, and the first is about what you do and don’t need a Working Group for. Because I think if you’ve got a genuinely complex issue where the government doesn’t know what it wants done, and it wants a really deep look that is maybe beyond the present capacities of the civil service, then absolutely; you set up a Working Group. That makes complete sense. If you know what you want, and it’s just a question of designing what you want, you don’t need a Working Group; you just send the Treasury away to work on it.

Terry Baucher:
And I think we rarely see that, because, and I’ve got huge respect for a lot of the people on the Tax Working Group. What they went away and did is spent a very long time working just on effectively on how do you design a capital gains tax? And then because the government was then unable to defend its own ideas for over a year, of course, and it had lost the public argument on the issue before the Working Group had even reported, and so we’re left with no capital gains tax, although as you say, there’s reasons to think that mightn’t have been the best solution anyway. And we haven’t got the deep examination of the tax system that we would’ve got from a genuine Working Group.

Max Rashbrooke:
And of course ideally, we would’ve had a deep examination of the tax system and the welfare system together, that being the holy grail of these things. So, I think we’ve learned a lot about things that you don’t ask a Working Group to do. But I think we also have more optimistically maybe come to realise that the failure of the capital gains tax proposal has opened up the space to discuss other options for the taxation of wealth, and other things in New Zealand, and some of those other options may, in the long run, actually prove to be superior to a capital gains tax.

Terry Baucher:
Were you surprised by the strength of the reaction to the process? As you say, the space was occupied; there was an awful lot of noise in opposition on this, and some of it was coming from people with huge vested interests. But others, there were some genuine concerns about the impact for small businesses on the compliance issues around capital gains tax. But overall did the noise and the pushback surprise you, or was that no, you thought that would happen?

Max Rashbrooke:
Well, because I’m not a politician, I hadn’t thought very hard in advance about what the reaction would be like, so I can’t say that I anticipated it, as such. But I certainly don’t think it’s surprising. It is a reality of life that in New Zealand, proposals for new taxes are not generally that popular, there are lots of vested interests who will mobilise against them. And I think in particular, and this is something that’s come up in my talks with Lisa Marriott, we do have an economy that is very reliant on people selling assets without paying capital gains tax.

Despite all the talk about diversification of the economy, and doing value-added, despite the fact that at least since the time of Bill Sutch in the ’50s people have been talking about the need to shift up the value chain, and despite our sort of image of ourselves as these incredibly innovative number eight fencing wire Kiwis, we actually don’t do very well at, overall, at generating innovative high-value business ideas.

We’ve an economy that’s still hugely reliant on farming, and as is well canvassed, a lot of farmers aren’t actually making a lot of income in the day-to-day. Their business model relies on selling for a massive untaxed capital gain when they want to retire. And we have very large numbers of people massively invested in property, in part because our share market is so badly regulated that a number of people are quite reasonably wary of it, and they’ve been very burnt by our under-regulated finance companies. So, there’s just a very large number of people with a stake in capital gains not being taxed, and that creates an enormous weight of opposition against it.

Terry Baucher:
Indeed. And this presumably was the starting point for your discussions with Lisa, around, well, what do we do? What are the alternatives? And more to the point, why do we need a wealth tax?

Max Rashbrooke:
I think that’s a really good question. I mean there’s a set of basic reasons about why do we have tax at all? And I think that’s because, and this is a well-worn argument, but if you’ve done well in New Zealand, that’s partly down to your own individual ability and effort, of course, but it’s also because you’ve relied on collectively-provided infrastructure; you’ve drawn out of a common pool of resources, like public health and education systems, public roads, government infrastructure like telecommunications infrastructure, ultra-fast broadband, all these kinds of things.

And so you need to put back into that common pool of resources; we need to keep having those collectively-provided services. We also need to compensate the effects of luck. Our success in life depends partly on whether we’re lucky or unlucky, and in a fair society the lucky compensate the unlucky.

And we also know from the evidence, and this is my specialist field, that economic inequality at a high level has very negative consequences; it leads to diminished trust, and sort of greater division and dysfunction. It leads to high levels of health and social problems, because a lot of people feel hopeless about their lives, or societies become very punitive. And so it’s very important to redistribute through the tax system to ensure that inequalities are only at the level that’s fair, where they don’t pose a threat to the social fabric.

So, there’s all those reasons for taxing, in general. And that applies with particular force to wealth taxation, because although we tax income very thoroughly in New Zealand, I pay tax on literally every cent of my income, we don’t tax wealth in any systematic way really at all, certainly not at the national level.

Obviously, rates are a tax on wealth to some extent, but we’re a real international outlier. And again, this is pretty well-worn, not having either one or more of the capital gains tax, inheritance taxes, some kind of land tax, or just a direct wealth tax. So, it’s this huge gaping hole, and I think if you’re looking to fund the health service and the education service in the way it needs, you could have a higher income tax rate, and there’s certainly an argument for that, but as Andrea Black is always pointing out, that just brings in a little bit more revenue from people who are already in the tax system. And the thing about a wealth tax is there are lots of people who are paying very little tax or none at all; they’re not in the system at all. And the big gains are to be made by bringing those people into the system.

Terry Baucher:
Yeah, so you’ve mentioned Andrea Black who was on the Tax Working Group as well. Now the Tax Working Group did discuss these issues as part of its rationale for a capital gains tax. What was your view of the analysis they made in that area? Was there anything there that came out from what they were saying that surprised you, or, no, I was expecting to see that?

Max Rashbrooke:
Well, their treatment of other options for taxing wealth was pretty cursory. It was very brief, and fairly dismissive. Now I don’t say that in criticism of the Tax Working Group particularly, because they weren’t being set up to do a really thorough review of the options. They were pretty clearly set up to deliver a proposal for a capital gains tax. And that’s, as I said, was a large part of the problem with that whole enterprise. So, I don’t think that they really gave those other options, a land tax, a wealth tax, inheritance taxes, well, inheritance taxes were explicitly ruled out. But they didn’t give the other options very thorough consideration. And in fact, I think even their description of the OECD view about those options was probably not even accurate. So, I wasn’t surprised, but I don’t think they gave a particularly good account of the other options.

Terry Baucher:
So, just on the question of why we should, there’s something else that’s happening as well, which the Tax Working Group touched on, but not in great detail, and that is that the rising cost of New Zealand’s superannuation, and the associated health costs for the aging population, means that they were projecting by around 2030 that we’d be starting to run into deficits, based on current settings. So, that got drowned out amongst all the noise and the backlash. But given that, do you see a wealth tax as being sufficient to fill a two percentage point in GDP gap? Or is much more needed?

Max Rashbrooke:
I think some of those cost pressures can be overstated. I mean Bill Rosenberg, who of course was on the Tax Working Group, has done analysis that suggests that sort of the alarming figures about how much New Zealand’s super is going to cost us don’t take tax into account, in fact. And if you take into account that tax is paid on superannuation, and tax is paid by the New Zealand Super Fund, even if we keep the retirement age where it is, the long-run cost of New Zealand’s super only goes from, I think something like 4.9% to 6% of GDP. Which is still an increase, but it’s not a catastrophic one. But yeah, I mean the healthcare costs of greater longevity certainly are significant.

Terry Baucher:
I was just going to say, and you mentioned earlier that one of the things about inequality is rising social pressure, and that seems to feed through in lower health expectation. So, in other words, the pressure on the system builds for healthcare, because people are in poorer health. Would I be right in saying that’s your observation?

Max Rashbrooke:
Absolutely. And we have a, kind of a crazily-designed healthcare system, where the way of treating health issues that’s cheapest, i.e. going to see your GP up front, before things get really severe, is very expensive, so there’s a huge disincentive against that, and the kind of healthcare that’s much more expensive and much less efficient, going to A&E when things get really desperate, is free. So, there’s huge incentive to use that kind.

So, I think we could probably address at least a substantial amount of the cost pressures in health, by designing a more intelligent system. And just, over time, shifting much more to preventative healthcare. Yeah, and reducing inequality, it’s really stressful, particularly for people at the bottom, it’s very stigmatizing, very shameful, very stressful to be at the bottom of a really large hierarchy.

Inequality is directly linked to higher rates of stress-related conditions, like heart disease. And just generally, yeah, as you say, people struggling to afford the treatment they need. So absolutely, I mean reducing inequality in itself would be a good thing. And yeah, look I mean a wealth tax, I mean bearing in mind that the capital gains tax, it was hard to know exactly what it was projected to bring in, maybe $3B a year, a wealth tax even at a pretty low rate, 1% annually on wealth over $1M, back-of-an-envelope calculations suggest that could bring in about $6B a year. Now that probably is about 2% of GDP isn’t it? Because GDP is getting on for $300B a year.

Terry Baucher:
So getting down to some of the nitty gritty, in the wealth tax that you think could be the step, you mentioned there a figure of $1 million. Do you want to just outline what sort of is your outline thinking on this? How would you see a wealth tax applying, the levels, and why the level of 1% of wealth? So, what would be included in the wealth tax? This is the crunch question I suppose, for people.

Max Rashbrooke:
There are wealth taxes like the one that The Opportunity Party proposes, which are based on assuming that there’s an income that you generate from wealth, and that that’s the important thing, and that you should tax that. I take the view that wealth brings all sorts of benefits beyond just the income that you may or may not generate from it. Wealth gives you stability, wealth generates opportunities. A lot of people borrow against the house that they own in order to start their business, in New Zealand.

Wealth gives you stability, it allows you to plan for the future; something you know that you can liquidate, if you need to ride out tough times. So, I think wealth brings you benefits every second that you own it. Certainly, every year that you own it. We should recognize the benefit people get from it, and that they owe that benefit to those collectively provided resources I talked about earlier. And so, we should tax it on an annual basis, and just directly tax wealth.

So, I mean I don’t have a fixed view yet, and I’m going to be spending a bit of time in future sort of exploring the options, but just one option would be an annual levy of 1% of the value of your net worth over $1M. And the reason that you would choose over $1M is, philosophically, I think people in the wealthiest fifth of the country have benefited the most from our collective infrastructure, and $1 million is pretty much the cut-off point, for being in the wealthiest fifth of New Zealand. And also, just practically, I think what sank the capital gains tax was the perception of Middle New Zealand, that they would be hit hard by it. So, if you propose a new tax, it has to be very clear that it will only affect the upper end of the wealth distribution.

As to the technical points, look, I would include all forms of wealth, essentially, over that threshold. I’m not convinced by the proposals for a land tax, for instance, because I don’t think it makes sense to only tax one kind of wealth. I think… Yes, some exemptions, so people don’t have to value absolutely everything they own every single year, because they don’t have to value all the rats and mice things that are worth $500 or whatever; you have some things to ensure that compliance isn’t too onerous. But I think you need to take a broad view of the wealth that people hold, all of which they’ve ultimately generated in part because of these taxpayer-funded services, and they need to pay tax on that I think, to recognize that benefit that they’ve derived.

Terry Baucher:
You mentioned there that sort of wealth in itself doesn’t necessarily produce income; there are indirect benefits. And stability was one of the things you mentioned. But also, people use houses for financing businesses. I saw there was a report from the equivalent of the national Reserve Bank in the Netherlands, which has sort of come to the conclusion that mortgage finance, that’s actually driving inequality.

And it actually picked out New Zealand as one of the countries, where the debt-to-GDP ratio is above 73% and inequality really was quite negative. Would that tie in with your observations? Because you’ve looked at this whole issue for some time.

Max Rashbrooke:
Yeah, look I mean I think that’s absolutely right. And in terms of sort of things like housing unaffordability, and the house price bubble, and that sort of massive increase of wealth at one end, people are focused a lot on the role of housing supply, and that’s absolutely understandable; we obviously have huge problems with housing supply in New Zealand, but there hasn’t been enough attention to the fact that of course one of the things that drives up the price of houses is if there’s a whole lot more money that’s chasing that number of houses. And so, I think mortgage lending absolutely has played a part in that.

I guess my only caveat, bringing us back to the wider issues around wealth, is that there’s a lot of the talk around the capital gains tax, and generally in this field, focuses on the issues around housing, and unaffordable housing, and the need to change the incentives there, but that’s not really, it’s certainly not the only issue in wealth inequality. And in fact, property, although it’s the biggest asset class, is still probably only 35-40% of household wealth. And it’s relatively evenly distributed. There’s housing wealth all the way up and down the wealth spectrum, albeit there’s more at the upper end, obviously.

Conversely, things like direct ownership of businesses, and ownership of shares, is really exclusively the preserve of the wealthiest fifth of New Zealanders, and within that substantially the wealthiest tenth. So, I think sort of the focus sometimes on housing and trying to tax housing is a bit mistaken, because it’s not actually the principal driver of wealth inequality in New Zealand. And so, I think taxing just property would be a mistake.

Terry Baucher:
Do you want to elaborate more? And that would probably come as some comfort to a lot of people, because the obvious response will be pushback to your proposals. How would you see how this could be, what sweeteners do you think should be done as encouraging the introduction of a tax? Which, people tend to forget by the way, that the Tax Working Group did suggest a recycling of the revenues from the capital gains tax into various measures, but of course that just simply got drowned out by the noise. So, do you see a need to recycle some of this extra tax, in a different configuration of the tax system?

Max Rashbrooke:
It wouldn’t be a huge priority, for me, if I’m honest.

Terry Baucher:
Right. Because of the level’s so high, at $1M net wealth.  One benefit I was just going to say, this would apply to everyone in New Zealand, because one of the things about a land tax that I thought was a strength, is it taxes the physical presence of the land, which means it taxes non-residents. And non-residents can be here, and basically not contributing a great deal to the tax system, because under various treaties they their income is not taxed here. But a land tax could pull them into the net. Have you any thoughts on that? What are your thoughts on that?

Max Rashbrooke:
Well I mean, firstly coming back on the previous question, I think when you look at the levels of the health and social problems that New Zealand has, the problems in the education system, I think we just need, the government needs more revenue to tackle those issues. The government spends 30% of GDP per year, at the moment. A comparable European country would easily be spending about 40% of GDP, if not more. And what they get in return for that is better public services, and generally lower levels of those health and social problems. I just don’t think we can collectively tackle the issues we face with as small a government as we have now. I think that’s just the reality. So, I think the revenue that’s generated from a wealth tax, you would just need that pure and simple. I don’t think you should be making it a cost-neutral exercise, by cutting income tax to compensate. I mean you could do some, I mean we are unusual in sort of how thoroughly we tax every cent of income right from the start. You could have some minor offsets, to make life easier for people at the bottom; I won’t object to that. But I don’t see that as having a huge role.

I would emphasize more, if you’re trying to convey the benefits of a wealth tax, I would talk more about what you would do with the money it raises. Because there’s reasonable evidence to suggest that that’s the kind of thing that makes people more sympathetic to taxes, is talking about the uses of them. So, I’d talk about things like setting up a kids’ KiwiSaver account for every poor child, for instance.

Terry Baucher:
Or free doctors’ visits for everybody.

Max Rashbrooke:
Yeah. Absolutely. Absolutely. And because you look at the National Health Service in the UK, I used that for many years when I lived there, on international surveys it routinely rates as one of the best health systems in the world. And because it’s free at the point of charge it’s very efficient; people get their problems dealt with up front, you’ve got very joined up care. So yeah, absolutely. That’s the kind of thing you could do, that you could do with a wealth tax.

I mean there are, and to pick up your other question, every tax has its strengths and weaknesses. And I would never pretend that a wealth tax was perfect. And you’re right that a land tax does have the advantage of, it’s probably better at obviously taxing the property assets of non-resident New Zealanders. I just think that a land tax has too many other drawbacks. It scores highly on simplicity, but not very highly on other things.

So, like I said, land is the most egalitarian kind of wealth; it’s the kind of wealth that ordinary New Zealanders are most likely to hold. So, you’d be choosing to tax that kind of wealth, the kind of wealth that lots of people hold, and not tax the wealth that only a very small number of New Zealanders hold; share investments, direct ownership of businesses, those kinds of things. You’d be starting with a much smaller asset base, so to generate high levels of revenue, you’d have to have a very high annual rate, which I think is a problem.

I don’t personally think we should discriminate. Why tax people who decide to hold their wealth as land, and not, other people? It’s not like owning land is a bad thing. I mean someone has to own the land. And then lastly, I think you just have a massive massive political issue around Maori land, which I think for reasons of justice, given that Maori had 98% of their land appropriated, you would have to leave out of a land tax.

Terry Baucher:
That was what the Tax Working Group essentially [concluded] and why they backed away from it; because of the issue of Maori redress, and that in fact they have poor quality land, and very little; what they have is a fraction of what they held. And what they have is also in many cases of poorer quality. That was what the report pointed out.

Max Rashbrooke:
Yeah, and I think they were absolutely right on that.

Terry Baucher:
So basically, I mean, another way of looking at this wealth tax, is to say that it’s consistent with our tax policy settings of broad base, low rate. Be broad on the base which we’re taxing at, the things that we tax; and that enables a lower rate of taxation.

So, this is perhaps a little technical, but if you say, “Right, we’re going to [include] shares.” So, would you see the wealth tax supplanting the existing tax regimes?  I mean for example, dividends from New Zealand companies are taxed, and then investments overseas are subject to the foreign investment fund regime. Are you saying that the wealth tax would basically supplant that? So instead of those regimes, there would be an all-in wealth tax. Or would they be sitting beside each other? It’s a bit of a design feature question here, but I’m just talking, thinking here is, is there going to be a trade-off, which could be something that makes it more attractive to those affected.

Max Rashbrooke:
Yeah, it’s an interesting question, and as we learned from the Tax Working Group protest around the capital gains tax, these technical design issues certainly matter, not least because people can use them to make hay. I don’t have a fixed view on that, and one of the things that I’m doing in the next few months is starting to look at some of these issues in a bit more detail. So, I can only give you my top-of-the-head sort of view. My instinct is that the wealth tax would sit there separately. So, that if you had wealth that was generating an income, and you were paying tax on that; so you pay tax on dividends, the annual wealth levy would be in addition to that, rather than offsetting it. And I simply think that because as I said I think you’re taxing a different thing with the wealth tax; you’re taxing those benefits: the stability, the security, the opportunity that wealth gets you. And that’s separate from taxing the direct benefit in the form of income, that is already dealt with through the income tax system.

I’m open to the idea that you could have one as an offset of the other. Obviously the comprehensive capital income tax that The Opportunities Party talks about is designed to be offset in that way; it sort of integrates in a very beautiful, conceptually elegant, seamless way with the income tax system. I can see the arguments for that. I’m not persuaded of those at the moment, because I think they’re different things. I also think that just generally, the very wealthy in New Zealand are extremely undertaxed, but I don’t have a fixed view on those design issues at the moment.

Just to one final question. We’ve talked about wealth tax, and I think what you’re saying is that eventually the wealth tax and annual tax is for the government; it’s got a recurring revenue, which is important when you’ve got all these strains. And that was one of the disadvantages of a capital gains tax, is that income can be very lumpy. I know for a fact that in California and New York State, when the global financial crisis happened, the state tax revenue slumped dramatically, because there were no longer capital gains to be taxed, so they immediately hit a budget crisis.

Terry Baucher:
What about an inheritance tax? What’s your thoughts on that? They are all around, America’s still got the estate tax, Britain has an inheritance tax and Japan, as has quite a lot of jurisdictions, Germany, France; they all have estate taxes or death duties. What’s your thoughts on that, as a perhaps an alternative to an annual wealth tax?

Max Rashbrooke:
Yeah, I think that’s a really good question, and you’re right. I mean, well the capital gains tax would’ve had a number of problems as you say, so it wouldn’t really be counter-cyclical. And also, it wouldn’t have really, because it would only have taxed future capital gains, it wouldn’t have addressed those huge effectively unearned gains in the housing market of the last two decades, which is a legitimate source of concern, even though I’ve sort of tried to downplay that earlier. Yeah, I mean I think inheritance taxes have a lot going for them, because inheritances are obviously unearned, and it’s unjust that some people get inheritances when they haven’t worked for them, and other people don’t.

I’m quite attracted to the lifetime gifts tax, that the late Sir Anthony Atkinson proposed, where he basically said, “Don’t tax the person who’s giving the money, because that doesn’t really make any sense; that’s not the problem. Tax the person who’s receiving the gifts or the inheritances. And tax them over their lifetime, so that again, you have a threshold; you can receive up to $100,000, say, over your lifetime in inheritances without paying tax. But over that threshold, you pay tax at whatever rate on all the other gifts and inheritances you receive during your lifetime.”

And I quite like that, because it balances the desire to give some, transfer money within families, small amounts, without being taxed. But it also, so it balances the demands of liberty, on the one hand, and family, but it also, through taxing the people who are lucky, and compensating those who are unlucky enough not to get inheritances, it also satisfies the demands of equality. So I think there’s a lot to be said for that, and you know, if people put that forward, I would certainly think that it’s something worth looking at. I’ve just [been talking about a wealth tax at the moment, because I think it’s also an interesting option.

But look, there are always plenty of options, and there are advantages that inheritance tax has specifically. So I think it should definitely be in the mix.

Terry Baucher:
That Sir Anthony Atkinson proposal has also a redistributional effect to it, because if, say, you’ve got a lifetime allowance of $200,000, or $100,000, whatever, it encourages the giver to spread it around, which is not the worst thing in the world, if we’re talking about addressing inequality.

Max Rashbrooke:
No, absolutely. And more generally, we know from the UK, where they’ve got really good data, that unsurprisingly, inheritances are very unevenly distributed; it’s very much the already-fortunate who get them. And yeah, a nice side effect would be encouraging the wide distribution of inheritances, absolutely.

Terry Baucher:
Interestingly, on inheritance tax in the UK, is, and I know that the tax take in inheritance tax over the last eight years, I think it is, has doubled. So, as the baby boomers are dying off, and distributing their wealth, government’s now starting to collect tax on that. It’s still a relatively insignificant part of the pile, but it’s now £5B a year, and growth in inheritance tax outstrips that of income tax and VAT, or value-added tax/GST. So, they can work; they’re often said to be inefficient.

Well, I think we might leave it there, Max. We could talk all day about this, and I hope we can pick up this conversation at a later date. Thank you so much for joining us today. I really appreciate your input, and I look forward to resuming our discussions in person, next time I’m in Wellington. Thank you.

Max Rashbrooke:
Thanks very much Terry.

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