Budget 2023

Budget 2023: Can the Government walk the tax tightrope without wobbling?

Murray Brewer
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With enormous and inexorable spending commitments barrelling toward us, collecting revenue to cover those costs is a priority for the 2023 Budget. But with an election impending, this year's announcement needs to keep voters sweet, giving them a sugar hit of positive spending, without any unwelcome tax changes.

More revenue must be gathered, but where will that burden fall? 

The wealthiest Kiwis are in the crosshairs

The obvious target for revenue gathering right now is the wealthy. When general voters feel disenfranchised, the rich seem like a natural target. 

There have been two recent reports about how wealthy New Zealanders are taxed, and these have been presented in the media as though our richest citizens are tax avoiders. 

However, when you really start thinking about how all types of wealth could be taxed, it starts to fall apart. Say you own a huge number of shares. You don’t realise any gains on that investment until you sell them, so in a year when the value of the shares rises by 50%, how do you pay tax on that gain? And if the value drops, is that offset against other income? Over the past few years, property values have dropped by around 20%; offset that loss and some homeowners would have an ‘income’ well below zero. 

Wealthy families who feel targeted by this rhetoric will start to be inclined to invest their money elsewhere. You can see this on a larger scale in Norway, where the wealth taxes have led to the super-rich leaving the country at record rates in 2022. The Government will be well aware of how easy it is for wealthy individuals to move countries, so the Finance Minister will be cautious about adding a wealth tax. 

Add a capital gains tax and streamline income taxes

The OECD has long recommended we need a capital gains tax (CGT) to balance the equation.

It has been a political hot potato for years, but a CGT could be simple and effective. Taking the most straightforward parts of Australia’s system could work, including exemptions for pre-CGT assets and the family home, and rollover relief for inheritances and intergenerational assets, and a 50% discount for assets held for more than 12 months to address the impact of inflation.

With a CGT in place, we could get rid of some of the complexity in our land rules and our foreign investment fund tax treatment, which would help cut admin costs and simplify the system. 

Perhaps it’s also time to streamline the way we tax workers. Our current system taxes the lowest income brackets and then pays out a huge amount back in benefits to many of the same taxpayers.

It’s a vast transfer system with immense administrative costs and almost unique among comparable countries. The Government is employing thousands of people at Inland Revenue and WINZ to pay, process, and investigate taxpayers and beneficiaries. 

Instead, let’s set a tax-free lower bracket, similar to what we see in Australia where the first AU$18,200 is untaxed. Establishing a zero-tax band would leave more money in people’s pockets and a chunk of Kiwis would no longer be beneficiaries. Set the tax-free bracket accurately and it would be net neutral; it would also provide a greater sense of autonomy and independence for some individuals.  If that is not plateable, then perhaps a different tax code for ‘working for families’ could be introduced to eliminate the same circularity. 

An inflation catch-22

How can Grant Robertson rein in spending without upsetting voters? Estimates have attributed a third of today’s inflation to a combination of Government spending and inaction on immigration.

Robertson knows he needs to take heat out of the economy, but rising unemployment and recessions are highly unpopular with voters. Turkeys don’t vote for Christmas, and households will be understandably resistant to vote in favour of spending less and taxing more.  

High interest rates are making it more difficult for homeowners to pay their mortgages – only rapidly-rising salaries are keeping the treadmill rolling. It’s no wonder people are looking at Australia, where they can buy a nice house for under $1 million in some States, enjoy higher wages and greater job opportunities, and their kids can get a superior tertiary education. Those kids then have a better ability to raise their own children, like the New Zealand we had 20 or 30 years ago, before house prices shot up. 

For those remaining here, it won’t take much to unbalance the average household’s finances. Increasing the top income tax bracket certainly wouldn’t help. 

Super can’t last as it is, so let’s make KiwiSaver more appealing 

The writing is on the wall for universal superannuation because it’s simply unaffordable. By making it more appealing to contribute to KiwiSaver, we could help more people grow their retirement funds. The current incentives to put money into KiwiSaver are woefully meagre. Contributions are after-tax, and the Government’s $521 payments are merely a sprinkling of hundreds and thousands: eye-catching but trivial.    

Once again, Australia is doing this well; before-tax contributions are generally taxed at just 15% up to AU$27,500 a year. Our PIE rate of 28% is a good start, but that could be lower as well. 

An impossible balancing act 

A Budget that cuts spending without enraging voters; one that increases revenue without new taxes for lower earners; that reins in inflation without making people feel further disenfranchised; that sets Labour up with its best chance at the election and also sets New Zealand up for a better economic future?

It’s not possible for Robertson to balance all these contradictory forces. He can only try to walk the tightrope. But hopefully the decisions he makes will help create a more equitable and streamlined tax system, so we’ll be watching with interest.