Labour’s Economic Reform - Dead on Arrival

The first 100 days of the Labour-NZ First coalition is up at the end of January and I have to say that so far, while there is still hope for real progress on environmental-related issues, on the issues of lifting productivity and building prosperity upon a foundation of fairness – which of course is The Opportunities Party’s (TOP’s) mantra – Labour has failed to give itself a chance.

So far it’s image and PR stuff – aka fluff for the light-headed, where the government’s done best. There is plenty of evidence out there of voters swooning in exaltation simply at the change, although the polls don’t indicate the normal thrust of adoration for a new government.

Environmental responsibilities understandably have been grabbed by the Green Party, which provides the coalition with the confidence and supply it needs to govern. And the Greens of course are vocal on matters environmental, so given their position in these Ministries we have to hope real progress will be made. We wish them the best of luck.

But the economic and social areas are primarily Labour’s domain and policy announcements have, as promised, come thick and fast and we’ll assess some of those in the New Year. The most important area here is to raise productivity so that we continue to get a bigger cake and one that is not dependent simply on the massive migrant inflows that was National’s recipe. For us at TOP, that path leads directly to tax reform and ensuring we kick into gear capital that is either idle or not working to its potential. Central to that is ensuring capital is not deployed or allocated for tax reasons but is deployed or allocated to maximise economic benefit. It’s on this extremely important issue where Labour has dropped the ball – actually it hasn’t dropped it, it has just refused to pick it up.

The worst aspect of the allocation of capital in New Zealand is over-investment in property and subsequent under-investment in wealth-creating businesses. We all know why – it is the tax break afforded investors in some types of capital, primarily but not exclusively, property. Within that property sector, by far the worst instance is over-investment in housing by the owner-occupier sector. It’s drag on national productivity dwarfs any impact from investment in rentals.

The issue is very simple and yet the bulk of the population and certainly the establishment party politicians are in denial – or at least not in denial privately, but simply say confronting it is politically impossible. This is the reality of New Zealand’s most significant economic and social impediment and I challenge anyone to provide an objective, non-partisan rebuttal of the following;

If I have $500k saved from tax paid earnings and I buy a bank deposit I’m taxed on the annual benefit (interest). If instead I purchase a business I am again taxed on the annual benefit (the profit). If instead I purchase foreign shares I am taxed on the deemed benefit (5% of value of those shares each and every year whether or not I received any cash dividend). However, if I buy and occupy a house I am not taxed on the annual benefit (the market rental is the value of the benefit from having such a roof over my head). Therein is the distortion in our income tax regime – where only certain forms of income to capital are subject to income tax.

If you read Thomas Piketty’s book Capital in the 21st Century or even more pointedly the critique of it by Matthew Rognlie of MIT, then you will see that more and more of the global wealth is accruing to a smaller and smaller share of the world’s population (latest data suggests 10% own 88% of the wealth, 1% own 53%, the poorest 50% own just 2.7% of the wealth, and 0.1% own as much as 90% of the world's population do). Further as Rognlie demonstrates, that is occurring primarily as a result of concentration of wealth in the property sector. And increasingly, this means the millennials’ chances of accumulating wealth are fading fast. As the authors of the Wealth Report cited above say, the millennials might have higher education than previous generations but higher unemployment, higher property prices, greater income inequality, lower labour mobility, and less access to pensions, which will collectively lead to significant numbers of them ending up far poorer than their parents.

We have a system that enables wealth to accrue year-in, year-out simply because it is there already – rather than through hard work, or entrepreneurship. It’s happening simply because money begets money – especially when it’s invested in a “tax efficient” way. The fact my tax rate only gets as high as 10% in a bad year, indicates precisely what is driving this concentration of wealth, and shows why fixing the tax system, insofar as the loophole around income to capital is concerned, matters. Property is at the centre of that tax loophole, specifically owner-occupied property and so long as governments kowtow to the property-owning elite, inequality will get worse.

This is why Labour’s tax working group (TWG) project is so disappointing, nothing more than kicking the can down the road. In essence this government has said right at the start of its term (before the election actually), “we don’t give a stuff about raising productivity, getting our capital back to creating wealth, we simply will not level the playing field when it comes to owner-occupied property because so many of our constituents – including ourselves of course – are riding that gravy train”. This conceit has mesmerised middle class liberals in New Zealand. We’re so self-centred, we no longer care about those wallowing behind, nor even our children’s generation.

The solution lies in removing the tax loophole surrounding owner-occupied property. This is precisely the discussion I had with Michael Cullen way back in the late 1990’s before the Clark government was formed when he was Minister of Finance in-waiting. At that time he agreed with the notion that there was a tax loophole on owner-occupied housing, but his words were “it would be political suicide” to deal to it. Well the rise in inequality and poor productivity that has resulted from political expediency is there for all to see. Sir Michael is to head a working group that again explicitly excludes looking at the problem. Note that this is despite the Treasury telling this new government just 2 months ago that it needs to look at the treatment of all income to capital.

This political bias is driven by the self-interest of their middle class, liberal voter base. If this 3rd TWG was to be truly independent and not subject to either a political chair or such a biased terms of reference from government, then it would come to the same conclusion as the independent TWGs of 2001 and 2010 did, and call for closing of this loophole on owner-occupied property.

It won’t, which makes the Cullen-led exercise a mere political pantomime, a farce that will lessen the reputation of anyone who serves on it. It is a sham from the start and its members will trot out the excuse that they were just doing as the government directed.

As I said before the election, it matters not whether it’s a Labour-led or a National-led government, so long as the voters refuse to challenge the status quo that protects the property-owning elite and their heirs, we will see more and more people left behind and we will see New Zealand’s ability to create wealth struggle in the face of meagre productivity. I would have thought businesspeople would be screaming for this progress – but then perhaps they are too conflicted between enjoying the tax-free spoils that their personal wealth begets as opposed to creating more wealth via productivity during their day job.

By cementing its position as champion of the new overclass – those who own or are poised to inherit owner-occupied property – Labour confirms it cares little about those who don’t own property, and never will. Its solution is to help as many voters as they can get on the property-ownership ladder, even though properties are now 10 times the average wage, not 3 (which is considered ‘affordable’). It is a fool’s errand but one that clearly attracts the ‘me-too’ brigade. Meanwhile wealth creation – because of the associated loss in productivity – is of only distant significance to such an elite.

Closing the tax loophole, giving a 30% income tax cut so that 80% of people were immediately better off, and in so doing kickstarting a productivity revival – clearly was too much like embarking on a trip to Mars for this same-old, same-old government.

 


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