Greens' wealth tax would bring 'a dose of poverty to all'

Dr David Law
The Dominion Post
13 July, 2020

The Green Party’s “Poverty Action Plan” is all about tackling poverty, although the outcomes may differ from what the party expects.

While it is meant to help struggling Kiwis, the plan will instead provoke emigration, disincentivise work and saving and stifle investment in education and skills, capital, enterprise and innovation.

Projected net government debt is already expected to balloon out to 54 per cent of GDP by 2024, remaining high for decades. 

Never mind this, say the Greens. The party’s plan will march ahead with permanent welfare spending increases and introduce a “guaranteed minimum income” of at least $325 a week – along with further boosts to the minimum wage.

The welfare proposal will cost the taxpayer an additional $6.6 billion in the scheme’s first year, jumping to $12.6b in 2023. For reference, the entire New Zealand Superannuation bill was $14.5b in 2019 and all other government transfers and subsidies to households combined totalled $13.5b.

To pay for its Poverty Plan the Green Party would introduce a wealth tax. It hopes to raise $7.b in the first year, with an ongoing 1 per cent tax on net assets over $1 million and a 2 per cent tax on net assets over $2m. The party would also lift income tax, with higher tax rates on all income over $100,000 topping out at 42 per cent.

It’s worth keeping in mind that unemployment could peak at 10per cent or more during this recession so creating new jobs, helping people transition to those jobs and ensuring their skills are up to par will be critical for a recovery.

Instead, the Greens’ plan to increase benefits will reduce incentives for low-skilled workers to return to work, while an irresponsibly timed and short-sighted minimum wage increase set during lockdown, together with the planned increases, will ensure fewer jobs are created.

It is also well recognised that high relative minimum wage rates (New Zealand’s is already amongst the highest in the OECD) disproportionately hurt the job prospects of the young and vulnerable. Multiple minimum wage rates can alleviate the potential harm to this group and are common in places with relatively high rates. Instead the Greens’ plan is to scrap the starting out rate altogether.

Equally worrying, both higher relative minimum wages and income taxes will reduce the value of continuing education. A less educated and skilled workforce would help secure New Zealand’s status as a low-wage economy for decades to come.

Kiwis will also have less capital to work with and can expect to lose more of the country’s best and brightest as wealth taxes discourage saving, investment, innovation and lead to capital flight.

For example, imagine a young woman who, after 10-years hard slog earning a PhD in science, comes up with a brilliant innovation to convert greenhouse gas emissions into puppies. By the time she hits 40, she has a business worth $10m.

If the Greens’ plan were implemented, by the time she reaches retirement age at 65, a total of $3,370,550 of her original asset of $10m would have been taxed away (remember the wealth tax is calculated annually). For her, the wealth tax is the equivalent of a 33 per cent expropriation on top of the income tax she already pays. If she lives to 90, the Greens’ wealth tax would take half her original asset.

But since she is so smart, the talented Kiwi scientist would probably have left for Australia far before this point, taking her great idea with her.

New Zealand would be left with more pollution, fewer puppies and in need of some costly carbon credits.

On top of these terrible consequences, wealth taxes are generally costly to administer and don’t collect much revenue. Many countries have already abolished annual wealth taxes and New Zealand’s recent Tax Working Group recommended against them for precisely these reasons.

And yet the Greens expect their new wealth tax would raise 2.5 per cent of GDP in its first year and affect only 6 per cent of the population. It’s difficult to put too much faith in these numbers because the necessary data on wealth and how it is distributed is not readily available.

However, if the numbers stack up then the wealth tax would absorb, on average, an extra $26,000 of tax per person per year and would be one of the most stringent in the world. European countries with similar taxes raise only about 10 per cent of what the Greens propose.

The claim that only 6 per cent of people would pay the wealth tax is also somewhat misleading. Wealth is quite different from income – it takes much longer to build up. Most 25-year olds will have little wealth, but most 65-year olds will have some sort of nest egg built up before they retire.

In other words, even if only 6 per cent of people are subject to the wealth tax at any one point in time, many would be hit by the tax at some point during their lives - most likely when they retire and are least able to afford it.

The Greens propose what few countries would dare to do in a recession. Incentives still matter – even during recessions. For this reason, expect the Poverty Plan to deliver a dose of poverty to all.

 

 

 

Stay in the loop: Subscribe to updates