How to reform our hump-shaped tax system

Opinion: "Only the little people pay taxes!” That was the view of Leona Helmsley, the billionaire New York City hotelier, who was charged with tax evasion in the late 1980s and served 21 months in jail.

Helmsley would have felt at home in New Zealand. Our little people – in which category she would surely include anyone earning less than $200,000 a year, do, in general, pay their taxes at rates ranging up to 39 cents in the dollar. And that’s about 98 percent of the population.

But our quite-rich and super-rich – the top two percent – pay, on average, at a much lower rate of about 12 percent. And in New Zealand, they don’t have to risk imprisonment to do so. With professional help, they can take advantage of our unusually permissive system of family trusts and our unusual reluctance to tax capital gains, gifts, and bequests to slash their reported taxable incomes and, thus, their taxes paid.

Here’s an example I happen to be aware of: a wealthy Auckland family was able to tuck away so much of their income in trusts that when their private school-educated daughter went off to university in Christchurch, she was able to claim the allowance intended for children from low-income households. As a matriculation present, her parents bought her a new Volkswagen.

We need to reform the system that permits these rorts. So, what should we be aiming for?

The great economist Adam Smith said it first and best: “The subjects of every state ought to contribute towards the support of the government in proportion to the revenue which they respectively enjoy under the protection of the state.”

Amen! And we could add that it is not just the state that protects wealth creation but civil society itself, created by all of us, and without which, the rewards of effort and initiative would be insecure.

Take the most arrogant, egotistical ‘self-made man’ – it’s usually a man – and maroon him on a desert island, please! Let’s see how much wealth he creates all by himself.

In truth, just about all successful economic activity is inherently social, depending on many others – including, of course, the people who buy the product and the people who actually make it.

I don’t think Adam Smith wanted what is now called a ‘progressive’ income tax – with percentage tax rates increasing with income – just proportional. Progressive taxation worked quite well in simpler times but is probably unrealistic now when our system is actually hump-shaped: lower for the poor and the rich, higher for the middle classes.

So, my proposal is two-fold:

1. The income tax rate levied on the top 2 percent of the income distribution should be increased to a flat rate of 25 percent, assessed on what people actually receive as income, not what their advisers whittle it down to through trusts, etc.

2. The income tax rate levied on most of the other 98 percent should be reduced to a flat rate of, say, 25 percent.

To achieve this result administratively, we could even consider a major refocus of assessment: from taxing income to taxing consumption – the expenditures that people actually ‘enjoy’ from their revenues.

Indeed, if we brought in capital gains etc., and doubled the GST from 15 percent to 30 percent, we could just about reach the 25 percent target and do away with income tax completely! The GST is actually a brilliantly effective consumption tax, because even the spending of Leona Helmsley types is caught by it.

Universal basic income

Just a thought: and note that we would (as we should anyway), in this case, need to also bring in a ‘universal basic income’ as a supplement to the wages and salaries that not everyone can access.

A universal basic income (UBI) has two key characteristics: first, universality, meaning everyone gets it, with no targeting or administrative fuss. It is also ‘basic’ and not in itself enough to live comfortably on, but it provides insurance against sudden misfortune.

However we do it, we should be unapologetic about getting upper-income New Zealanders to pay their share, same as the rest of us. It is what’s fair.

Over the past week, since the Inland Revenue Department released its report, it has been disappointing to hear a few of the wealthy and some of their friends in Parliament, and the media whine about ‘soaking the rich’ and ‘the politics of envy’, and even ‘killing the goose that lays the golden egg’.

New Zealand has become something of a haven for the Leona Helmsleys of the world: it’s high time that we, the little people, insisted on something better.