BLOG: Jonathan Barrett on ACT's tax policy

ACT: From Doctrine to Pragmatism

David Seymour has led a remarkable resurgence for ACT. For many elections, the party’s parliamentary presence was ensured by National’s Paul Goldsmith being restrained from competing in the Epsom electorate.

But ACT today is a far cry from 2014 when Jamie Whyte’s Oxbridge tutorial-style discussion of incest invited ridicule if not outrage. Since 2017, ACT has proved itself to be a plausible opposition to the Labour-led government, when National was often left floundering and in-fighting.

Whether ACT will usurp National as the natural party of the Right remains to be seen but it seems likely to have a significant representation in Parliament after the October election.

In terms of tax policy, ACT would reverse Labour’s denial of tax deductibility of interest for rental properties and scrap the bright-line test which was introduced by National.

These proposals are predictable for a party that largely represents investors but also results from Labour’s timidity regarding a comprehensive capital gains tax (CGT). Once a CGT is implemented, and its administrative infrastructure established, future governments may tinker at the edges but are unlikely to abolish it.

The bright-line test and deductions are easily amended.

In contrast to its 2017 flat tax proposal, which would have seen everyone earning less than $55,000 paying more tax and everybody earning above that amount paying less tax, ACT is now proposing to achieve three tax bands by 2026/27.

This proposal includes retaining the top 39% rate until 2025/26. ACT’s Alternative Budget: End the waste, fix the economy does not provide details of the Low and Middle Income Tax Credit but this is expected to compensate taxpayers affected by the eventually flattening of rates.

Since reducing government reach is the principal libertarian aim, constraining taxation is a means to attaining that goal. And so, if ACT expects to shave billions of dollars from government expenditure, its income tax proposals can be expected to raise significantly less revenue that the current set up.

Generally, the income tax system would become more regressive if tax rates are flattened.

No general changes are proposed for GST. This is not surprising since libertarians tend to prefer a comprehensive consumption tax because it is a neutral tax that leaves people’s consumption choices intact.

GST is of course regressive and favours the wealthy who consume a greater proportion of their income outside the country.

An innovative proposal is a Carbon Tax Refund (CTR). This would take each year’s revenue from ETS auctions and distribute it on a per-person basis.

As a flat payment, the CTR would not consider taxpayers’ different circumstances. It is might also present significant and costly administration challenges.

A universal payment is also at odds with ACT’s plans to end ‘middle-class welfare spending’.

ACT previously described its tax plan as “A simple, competitive income tax system”.

After Prefu, it now describes it as “A more competitive income tax system”.

Dropping the headline simplicity claim was well-advised. Firstly, for most taxpayers, the income tax system already is simple. They receive their wages or salaries net of PAYE and their KiwiSaver investments are taxed at average PIE rates.

Simplicity in a tax system does not come from reducing the number of income tax bands – that is just a way of reducing the tax paid by the wealthy.

The income tax system is complicated for the wealthy because the ways they structure their incomes are often complex.

They may invest in foreign investment funds, financial instruments and may channel earnings through trusts and closely held companies. Reducing the number of tax bands does nothing to change that complexity.

Secondly, while multi-national corporations may shop around for lower tax rates, it is implausible to claim that individuals make life decisions based on a ‘competitive’ income tax system.

Despite Australia having a CGT and a top marginal income tax rate of 45%, many New Zealanders migrate there because of perceptions of a better lifestyle, including significantly higher minimum wages.

From a tax justice perspective, it was inevitable that ACT’s proposals would be the least appealing of the parties currently in Parliament.

It is the unashamed party of small government and low taxes.

Neither of these goals is compatible with the basic tax principle of ability to pay or raising sufficient revenue to meet the welfare challenges faced in Aotearoa New Zealand.

Nevertheless, ACT’s embrace of pragmatism, rather than pressing ahead with doctrinaire tax slashing is to be welcomed.

Jonathan Barrett is Associate Professor in Taxation at Te Herenga Waka—Victoria University of Wellington School of Accounting and Commercial Law.