"We won, you lost, eat that!"

20 May 2008

Launching Paul Goldsmith's history of taxation in New Zealand in the Auckland Town Hall

 

Ladies and gentlemen,

I'm privileged to be asked to launch this truly remarkable book, describing the history of tax in New Zealand since 1840.

I confess I faced the task of reading this book with some real trepidation - how could a book on the history of tax in New Zealand be entertaining!  I need not have worried: it's a genuinely fascinating account of the political forces which have driven tax policy in New Zealand over the last 168 years.

But I also found it a rather depressing book because its main theme is that New Zealand's move to one man/one vote, and shortly afterwards to one person/one vote of course, has gradually driven us towards our present situation where central government absorbs a substantial fraction of the economy's total production, where the cost of central government is paid for by a small fraction of the total population (with most people being net recipients of central government largesse), where as a result considerable time and effort is devoted to avoiding or evading tax, and where many of our most entrepreneurial citizens decide that they are no longer willing to share that burden and high-tail it to friendlier environments.

As Paul says in the Introduction, "Ultimately, whoever has the power, either through the gun, or later through majority support at the ballot box, sets the rules."

Prior to the introduction of one man/one vote, there was very little support within the Parliament for any form of progressive taxation.   On the contrary, proportional taxes were strongly supported.  Paul quotes a Parliamentary speech by William Gisborne to the effect that "No principle is more fully established in civil society than that which imposes on all the subjects of a state the duty to contribute to the support of the government as nearly as possible in proportion to their respective abilities: that is, in proportion to the revenues which they respectively enjoy under the protection of the state".

But in the first election giving every man a vote, in 1890, the Liberal Party promised tax cuts for most people and the introduction of a new, progressive tax that would extract more money from a small wealthy minority.  The Liberal Party message on tax was powerful and successful, and laid the foundation for massive social and economic change for decades to come.

Initially, in 1892, the top tax rate was just 5%, and of course most people didn't have to pay it at all.  Even by 1914, the top rate was still only 6.65%.  During the First World War, the top rate rose to 37.5% and by the early 1920s it was 43.75%.

But the great majority of the population were not subject to the tax, and it's salutary to recall that in 1920 the total of all central government revenue - personal income tax, company tax, and customs duties - amounted to less than 11% of GDP.

Since that time, there's been only one serious attempt to move the New Zealand tax structure in the direction of proportionality, and that was made of course by the Lange/Douglas Labour Government of the 1980s.  

The introduction of GST, which I was privileged to be involved in, was an attempt not only to shift the balance somewhat more towards tax on expenditure and away from tax on income but also to put in place a tax which would be levied on all spending by everybody (and of course it took extraordinary political courage to insist that all consumer spending with the exception of residential rents should be subject to that tax). 

Similarly, that Government sharply reduced both personal income tax rates and the company tax rate, though that was offset by the virtually total elimination of a whole raft of the tax avoidance opportunities which high income earners had routinely used.  

But let nobody under-estimate the huge political difficulties involved in moving towards a tax system which distributes the burden more fairly - by which I mean in proportion to ability to pay. 

Roger Douglas was finally unable to introduce his proposed flat income tax, even with the promise to provide a substantial exemption for low income earners.

When I first became Leader of the National Party, I was asked about what I felt should be done with the income tax system.  I replied that our company tax rate should be reduced as soon as possible to a rate no higher than the company tax in Australia (then 30%), and that the top personal tax rate should then be reduced to the company rate to minimise artificial incentives to incorporate business activities and encourage economic growth.  This was immediately translated by the Dominion-Post newspaper as implying a very small tax reduction for the average wage earner and a very large tax reduction for me and other senior politicians.

I have no doubt at all that John Key understands the economic arguments in favour of reducing the top income tax rate.  He probably also understands the strong arguments in favour of restricting the amount of income tax paid by any individual in a single tax year to $1 million, as recommended by the McLeod Tax Review Committee in 2001, but the political difficulties in his making either move are very real indeed.

Paul's book contains some fascinating tit-bits.

He notes that the Liberal Government's income tax Act in 1892 was just 23 pages long, and notes that a century later the Income Tax Act of 1994 was 1,475 pages long.  I was the hapless Finance spokesman for the National Party in 2003 when the plain English version of the Income Tax Act came before the House - it was a fraction over 2000 pages long!

He quotes John Prebble observing that, because income was taxable but capital gains were not, some people spent a lot of time and effort organising their affairs to ensure that money reached them as a capital gain rather than as income - and that was more than a century ago when the top tax rate was just 5%!

Paul quotes the 1922 Tax Committee as noting that "the railways had produced an operating profit of only 210,000 pounds in 1922.  Somehow that 210,000 pounds was meant to cover the interest on the 41 million pounds of capital invested in the railways over the decades. Rail had no chance of repaying the investment made in it so far, yet the government kept shoveling more in" - a comment with a singularly modern ring, though written of course before the latest Government move to "shovel more" money into rail.

For me, some of the most depressing parts of the book describe how even political parties which professed to believe in a less steeply progressive tax system were carried along by what Paul calls "the mathematical logic of democracy - that the many could vote in favour of parties that promised to pass some of their tax burden on to a minority" of the wealthy. 

He notes how in 1920, Massey, leader of the Reform Party, the so-called rich man's party, increased the top income tax rate from 37.5% to 43.75%.  Massey, he notes, "roared against socialism and grizzled about the 'clamour in one voice for increased expenditure and a reduction in taxation', telling people that they could not have both.  But he tried to give it to them all the same."

He notes how Holyoake learnt from his own political defeat in 1938 the importance of "clinging to the centre" when it came to tax matters - in other words, not making any significant changes in the tax system, despite all the promises National had made about individual freedom and reduced taxation.

He notes Muldoon's "temporary" increase in the top tax rate to 66%.

And he quotes from Fraser Nelson, a columnist for the British weekly the Spectator, who in 2006 wrote:

"The secret to everlasting left-wing government was discovered in Sweden decades ago.  First raise tax and employ as much of the electorate as possible.  Next, offer generous welfare and bribe the middle class with childcare.  Soon, a critical mass of voters becomes part of the government project, and votes for its expansion.  Higher private sector earners may squeal at the tax rates, but are easily outnumbered.  Eventually the right-wing opposition grows tired of losing elections, and starts pledging to outspend the government, if elected.  Then victory is complete."

Ladies and gentlemen, I strongly recommend this book - it is at one level depressing, but at another absolutely fascinating.

20 May 2008.
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