Why an inheritance tax could be a good idea
Opinion: Coalition politics might work to Labour’s advantage when it comes to tax tactics, writes Tom Pullar-Strecker.
Finance Minister Grant Robertson forecast on Budget day that there would be a significant debate about New Zealand’s tax system during the election campaign.
But don’t hold your breath. The smart money has always been on Labour avoiding getting bogged down in a long election debate about new or increased taxes.
That will be especially true now that the fresh outbreak of Covid-19 has taken the gloss off its management record, and it is facing a more savvy adversary in National Party leader Judith Collins.
More generally, Labour needs to avoid discussion of anything radical if it hopes to throw off the shackles of its reliance on NZ First, which last year flexed its muscles by shooting down a comprehensive capital gains tax.
Labour must suffer in silence until it is rid of its ally.
Nor does it make sense for Labour to raise taxes significantly while it may need to plan a fresh fiscal stimulus to soften the impact of the return of Covid-19 on households and businesses.
There is little point paddling forwards and backwards on fiscal policy at the same time.
But there will come a time in the next few years when the Government of whatever hue will probably need to consider raising more revenue to speed up the repayment of the country’s growing Crown debt.
If Labour does win a second term, the best opportunity here could come in the early days of a second administration when the political pressure is lowest.
So what could Labour do and how far could it go on tax in a second term without first seeking a mandate at the election?
Janine Hayward, a professor of politics at Otago University, points out that the notion of parties seeking and claiming election mandates for specific policies is in some ways a bit of nonsense.
A voter might agree with everything a party wants to do except one thing, she says.
The public would expect any major tax change to be clearly signalled, although that might not stop any political party from taking ‘‘a bit of a gamble’’.
Labour might not feel any obligation to secure a specific mandate to introduce a new top rate of income tax at a threshold somewhere north of $100,000 – especially if it elected to hand back that extra revenue to middle-income earners by increasing the $48,000 and $70,000 tax thresholds.
Tinkering with income rates and bands was once the bread and butter of Budgets and that seems a simple choice for Labour given that a growing number of its larger supporter base will now be hovering around or are already over the current top tax threshold.
Prime Minister Jacinda Ardern has ruled out a comprehensive capital gains tax.
But a few tweaks here and there to tighten up the ‘‘technical’’ rules surrounding the taxation of property and share gains could deliver a lot of the benefits of a comprehensive CGT with a fraction of the fuss.
The alternative of introducing a whole new tax such as wealth tax without an election mandate would be more risky.
But it is conceivable coalition politics could help.
A narrow majority of OECD countries have some form of wealth tax – usually in the form of a tax on inheritances and gifts rather than an annual tax on wealth as has been proposed by the Greens.
The big snag with inheritance taxes is that, being associated with death, they may seem a bit sneaky and ghoulish. Get over that, and the benefits are many.
They are collected only once, rather than every year, so they are cheaper and easier to administer.
Assets are usually converted into cash during inheritance anyway, so it is far less likely they will drive people into forced sales of assets than an annual wealth tax.
The revenue they generate is more stable than capital gains taxes which raises more tax in ‘‘good times’’ when it’s less needed than in hard times.
They are fairer than annual wealth taxes or capital gains taxes, because they tax the sum of the ‘‘snakes and ladders’’ in life, rather than only the ‘‘ladder’’ years.
The Greens’ proposed wealth tax is already a bit of a hybrid with an inheritance tax.
That is because it would allow wealthy people on low incomes, such as the retired, to defer paying it until they sold assets.
Labour could choose to get an inheritance tax on to the statute books with a very high threshold, say $5 million, with a commitment not to change that before a third term.
That is where coalition politics could perhaps help, in the event of a Labour/Green majority.
If the Greens claimed they had a mandate to make tax change a ‘‘bottom line’’ in coalition negotiations, that could perhaps let Labour ‘‘outsource’’ a tax mandate to its junior partner without a pre-election debate.
‘‘In some ways voters slightly lose control of the process once they have elected Parliament,’’ Hayward notes.
But of course, whoever is in power from September may now reckon they will have their hands full enough for a while without any grand plans.
Inheritance taxes, being associated with death, may seem a bit sneaky and ghoulish. But the benefits are many.