Election 2020 Tax Commentary 2: The Opportunities Party

Well this second commentary on political party tax policies is considerably more complex to write than last week’s edition.  The Opportunities Party (or “TOP”) has released a considerable amount of tax and economic policy, much of it quite different to the orthodox policies being proposed by the major parties.  Each key policy plank is probably worthy of its own write-up, but I have done my best to summarise it in the following paragraphs.  Apologies that this has meant a longer commentary than usual!

Overview

TOP’s economic and tax policies are distilled down to four key proposals.

• The introduction of an annual Universal Basic Income (UBI) of $13,000;
• The introduction of an annual universal $2,080 child basic income (CBI);
• A flat tax rate of 33% on all income, regardless of the source of the income and the nature of the entity that has derived it (i.e. individual, company, trust etc); and
• A risk-free rate of return (RFRM) taxation system on property.

The combination of these four policies is projected by TOP to be overall tax neutral and they are interconnected in terms of revenue losses and gains and the policy outcomes they are seeking to drive.  However, it is still necessary to consider each component.

The UBI and CBI

The UBI would be paid to all citizen and permanent residents over the age of 18.  It would replace all benefits of a lower amount currently in force.  The CBI would be paid to the parents of all children under the age of 18 and would replace Working For Families benefits of a lesser amount.

These benefits would be paid regardless of the income earned by the recipient.  This means someone earning $200,000 a year would receive the $13,000 UBI tax free, in the same way that someone earning no other source of income would.  At first this may seem very unfair, but on second glance there are merits in the idea.  The UBI (and CBI) is proposed by TOP on the basis that it will remove the disincentive to work for those solely relying on a benefit for income.  This is because if someone earning only a UBI begins earning income, their benefit will not be reduced, unlike the current benefit system which inherently results in high marginal tax rates for beneficiaries moving into paid work.  It will also be significantly easier and cheaper to administer, simply because it is paid to all adults in the country at the same rate.  It is also argued that it provides a base level of financial security for everyone in times of crisis (like the one we are currently in).

Paying a UBI is of course incredibly expensive.  TOP has costed the combined UBI and CBI at a whopping $36 billion.  TOP states that its proposals are “broadly” tax neutral.  So the extra revenue has to come from somewhere – and that somewhere is the introduction of a high flat tax rate, from asset owners and from companies and saving vehicles.

Flat 33% tax rate

The idea of the 33% flat tax rate is to simplify the tax system, so that all income earned (except capital gains) is taxed at the same rate, regardless of whether it is earned by an individual, a partnership, a trust or a company.  

For individuals, the introduction of a flat tax rate of 33% will cause all amounts earned less than $70,000 be to subject to higher amounts of tax than today.  However the party has (correctly) calculated that even on incomes of $100,000 and above the increased income tax bill will be more than offset by the receipt of the tax-free UBI.  So from a traditional income tax perspective salary and wage earners will be no worse off.  The table below demonstrates this.

However the flat tax will only raise a further $18 billion in revenues, so where is the additional $18 billion going to come from?  Firstly, company taxes.  The New Zealand company rate is currently 28%.  Already high by global standards.  Further, the taxation of savings under the PIE regime is limited to 28% rather than the top marginal tax rate of 33%, as a conscious means of encouraging New Zealanders to save.  The increased taxes raised by applying a 33% rate to these entities is forecast to be $1.6 billion from companies and $400 million from PIE entities.  But even all of this is only an extra $2 billion.  So what about the rest?

RFRM taxation

Anyone concerned about the imposition of a CGT in New Zealand will go cold at the first thought of RFRM taxation.  In short, it would apply to deem taxable income to arise equal to 3% to the value of equity owned in property (i.e. the value of property less any debt associated with it).  The deemed income would be subject to the 33% flat tax rate, resulting in an annual tax charge roughly equal to 1% of your equity in property.  TOP proposes this would be regularly charged in the same way that rates are.  The RFRM would be a minimum tax, meaning that if returns from owned property exceed 3%, the additional amount would also be taxable.

It is forecast that RFRM taxation would raise $8 billion in taxes.  The remaining $8 billion needed to balance their budget would come from a range of cost reduction measures, including the elimination of benefits including Working For Families, student allowances, paid parental leave, interest-free student loans, fee-free first year tertiary stud and other benefits ($4.6 billion) all made redundant by the UBI, elimination of Government Kiwisaver contributions ($0.9 billion), reductions in Government expenditure due to the simplified UBI system and a forecast $2 billion increase in GST receipts due to increased spending by some UBI recipients. 

Thoughts

The UBI concept is certainly attractive.  It would simplify our benefit system and during times of crisis like COVID it could eliminate the need for unexpected Government expenditure on things like wage subsidies.  But it is incredibly expensive, and while offset in part through the introduction of a flat 33% tax, a key feature of funding it is the introduction of RFRM taxation, which bears many of the features of a capital gains tax or a wealth tax, but is even more effective in raising revenue as it does not require an asset to be sold for it to apply and there are no de minimis thresholds proposed by TOP before RFRM taxation applies.  The most controversial feature of RFRM taxation is that it imputes a deemed rental return even on owner-occupied housing.  There is no doubt that RFRM taxation would impose a higher burden on property owners and distribute wealth out to the population at large through the UBI.  TOP is well aware of this, with its stated goal to cool the property market and encourage investment in more productive asset classes, noting New Zealand’s very poor record in economic productivity.

RFRM taxation has been considered previously in New Zealand.  Both in the McLeod Tax Review in 2001 and in the interim and final reports of the recent Tax Working Group (“TWG”).  Neither report recommended the introduction of RFRM taxation.  I still remember well the howls of protest in the press in 2000 and 2001 at simply the idea of RFRM taxation being considered, which made it clear that the idea would never see the light of day.  In its reports the TWG noted the technical difficulties in ascertaining accurate market values but also pointed out the challenges that RFRM taxation faces with public acceptability and the cashflow pressures it would create for asset owners (although TOP’s proposals allow cash strapped asset owners to defer RFRM tax payments).  This led, in the TWG’s final report, to a conclusion that while RFRM taxation would lead to substantial additional revenues, its preferred option was a more orthodox capital gains tax.  No clear reason was given for this, but there can be little doubt that the lack of public acceptability for the idea would have played a role.

So overall there are some very interesting concepts in TOP’s tax policies.  None of them are totally new though. UBI’s have been given a reasonable amount of consideration by economists around the world both pre and post COVID-19, and RFRM taxation has been at least on the radar in New Zealand for at least the past couple of decades.  There is an initial appeal to the idea of a UBI and a flat tax rate – the simplicity and resulting Government cost savings are compelling.  The concern is simply the sheer cost and the need to increase taxes on companies and savings vehicles to help pay for it all, particularly when we already have one of the highest corporate tax rates in the developed world and a very poor savings record.

As we emerge from the COVID-19 crisis however and face a world where Governments have built up mountains of debt, new ways of raising Government revenues are going to need to be considered.  In New Zealand we will also be facing tens of thousands of newly unemployed people, for whom a UBI could provide a safety net while retraining, securing part-time work or staring a business.  There may be some who would take the UBI and hang out at the beach all day, but I would like to think that for most New Zealanders this would not be the case.

So while there are concerns with aspects of TOP’s tax and economic policies, I applaud them on the non-conventional thinking to Government tax and spending policies (and this is said as someone who would pay more tax under their proposals).  Based on current polling as at the time of writing it seems unlikely that TOP will be in our next Parliament.  I think this is a shame as we are going to need some non-conventional thinking for our economy as we emerge from the pandemic and regardless of where you sit on the political spectrum, I would commend to you a read of TOP’s policies to help provoke some thought.

Bruce Bernacchi

31 August 2020