Increasing tax on high earners - effective policy or electioneering?

September 11, 2020

 

This week Finance Minister Grant Robertson made headlines with the announcement of the Labour Party’s 2020 Election tax policy. The key point in this policy is the reintroduction of a 39% top personal tax rate. This will apply from 1 April 2021 to those earning over $180,000 per year. We ask what this proposal is likely to achieve if (when) it is implemented. 

If we look back to the 2017 election, the key string in Labour’s tax bow was to set up the Tax Working Group (TWG). After much submitting, considering, and reporting, the final recommendation of that group was strongly in favour of a broad Capital Gains Tax, a recommendation that was then swiftly rejected by the coalition government as it was too politically unpopular.

That TWG report started with the idea that NZ’s tax system has three key purposes: collecting revenue, redistributing wealth, and influencing behaviour. When we apply these purposes to the current proposal it doesn’t really stack up.

Collecting revenue - According to the Minister, the new tax bracket is expected to bring in about $550 million a year, or less than 1% of NZ’s total annual tax take. Compared to the billions of additional government spending triggered by the COVID-19 crisis, the additional amount collected is less than a “drop in the bucket”.

Redistributing wealth – While the Labour Party has firmly ruled out the Green’s proposal of a wealth tax, this new tax bracket is targeted at those who would fit the idea of wealthy for many. By setting the threshold high, the actual redistributive effect is minimal if any, but the idea of additional taxes for the “wealthy” does make for good campaign headlines.

Influencing behaviour – The main effect of this change will be more attempts by higher net worth individuals to use tax efficient structures to minimise total tax payable. The greater the difference in tax rates that apply to different commercial structures, the greater the incentive to manipulate those structures for tax advantages. People will inevitably seek to have income taxed in a company (28%) or trust (33%) structure, rather than at the new 39% rate. This is far easier to achieve with income from businesses or investments, as opposed to income from services.

We are also likely to see a resurgence in IRD challenging the appropriate allocation of income from personal services. The anti-avoidance principles established in cases like Penny v Hooper will once again be at the forefront. Given New Zealand has been focused on maintaining a broad base, low rate tax system, this seems like a move in the wrong direction.

In summary, the new 39% tax bracket targeted at wealthy individuals might make for good headlines in a campaign, but the actual economic effects of this change are questionable. We envisage that many individuals and businesses will be taking stock of their current structures and the impact that the proposed top tax rate will bring.

 

If you would like further assistance in determining what impact the proposed tax changes will have on your position, please do not hesitate to get in touch with our tax specialists. 

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