Associate Professor Jonathan Barrett from Victoria University shares his reflections on the future of tax reform post-election.

Back to basics: A contribution towards a progressive manifesto for tax justice

The failure of the Sixth Labour government (2017-2023) to make bold moves in the field of tax justice, as much as it may be lamented by contemporary tax progressives, will no doubt be seen by future historians as a remarkable failure to act, particularly during the period of an absolute parliamentary majority. 

Whether the National-led government will be driven by the anti-tax dogma of its libertarian partner ACT or by necessity to make the tax system more regressive, for example, increasing the rate of GST, remains to be seen. 

The income tax changes on which National campaigned are small issues. Leaving tax bands (except the top rate) unchanged for so long intuitively suggested unfairness. The bright line test, whether it is set at two or 20 years is a fudge for not having a comprehensive capital gains tax. Purchasing property with an intention to sell makes proceeds taxable income – it’s just more difficult for IRD to prove. Reinstating deductibility of interest for landlords is also a technical matter that raises few concerns for broad tax justice. Some landlords are clearly in business and so should be able to deduct business expenses. Others aren’t in business but it’s not a significant matter of tax justice that we need to be exercised about. As a point of comparison, as researcher, who does much of my work from home, I can’t deduct expenses but that’s a relatively petty concern. If National does no more than they promised, we will simply continue with a structurally unfair tax system. 

So, what do those of us who are committed to tax justice do in the unpredictable duration of this government? We need to get back to basics. This blog floats ideas for the purposes of debate about how we might do that.                        

Equal opportunities, equitable outcomes for everyone

New Zealand is a human rights state that has promised other countries that it will guarantee its citizens a broad range of civil, cultural, economic, political, and social rights. We can sum up these promises as equal opportunities and equitable outcomes for everyone. 

In addition to the promises made under Te Tiriti o Waitangi to iwi, New Zealand has ratified the UN Declaration on the Rights of Indigenous Peoples. A UN declaration does not have the legally binding effect of an international treaty but, at the very least, signals a solemn commitment. And so, firstly, government must meet its international promises. That means full compliance with the Treaty. Raising and allocating tax revenue is a critical way of delivering those obligations but must be done with Māori.      

We need optimal government

Debates about the staffing levels of government are diversionary. We need a government and a public sector that optimally serves the people, and that structure must be properly funded through taxation.

Arguments that the person in the street can spend a few dollars more wisely than government are implausible. Only collective pooling of funds through the medium of government can provide hospitals, roads, schools, and the countless other institutions that government – national and local provide.      

We are not envious of wealth

I was subject to an ad hominem attack by Sir Robert Jones for my comments on distributive tax policies but, ironically, I have deep respect for Jones as someone who, from modest beginnings, has led the creation of a major property portfolio. I also have no envy of his amassing far more wealth than I have or could ever want. But let’s not pretend that personal wealth is not socially created, or, in the specific case, Jones was not the beneficiary of post-war social democracy for his family housing and education. He is an exemplar of equal opportunities leading to outstanding outcomes. And so, while we should celebrate enterprise and success, we should also recognise the role of good fortune and the contribution of greater society. It is reasonable to expect everyone to contribute to the country that enables them to flourish in accordance with their ability to pay. Equal opportunity and equitable outcomes benefit the most fortunate and least fortunate in Aotearoa New Zealand.   

Market distributions are preliminary 

Centralised state distributions may be most effective in times of crisis, such as wartime, but people in developed economies generally support a ‘free’ market. Yet markets are not ‘free’. In all so-called free market economies, the state intervenes to prevent monopolies or abuse of insider information, and to protect employees and consumers. The reality is that markets are highly regulated. And so, claims that a free market sets the ‘right’ reward for labour or enterprise is not plausible. The market sets the first level of reward. 

As part of its regulation of market distributions, government can, of course, through taxes, establish the second level of reward. In Aotearoa New Zealand, we don’t have to grapple with the equity issues of, say, the astronomical earnings of hedge fund managers or English Premier League football players, but we do have huge income differences between, for example, bank CEOs and the people who clean their offices. And so, we need to assert the right and obligation of government to recalibrate market reward.                    

A dollar is a dollar

Throughout modern history, governments have sought to design taxes around people’s ability to contribute to the needs of government. The Canadian Carter Commission coined the phrase ‘a buck is a buck’. I don’t know of a better way to sum up the need to tax income (active and passive) and capital gains and capital receipts in a broadly similar way. The principle of ability to pay requires every dollar to be counted.

The Way Forward

Calls for a capital gains tax and a tax on capital transfers are not the ravings of ‘reds under the bed’, they are consistent with the tax policies of almost every OECD country, other than New Zealand. Some OECD members also have wealth taxes.  

Those of us who are committed to tax justice need to constantly reiterate how the wealthy disproportionately benefit from this country’s tax system, and how the least wealthy suffer.         

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