Why we should have a tax on wealth.
Taxation is a necessary evil for co-operative societies to fund government.
At present we tax consumption and income.
But we do not tax wealth.
The wealthier section of society has the greatest capacity to contribute to the common good, but often avoids paying their fair share of income tax by manipulating their assets into trusts and investing in assets which yield untaxed capital growth, with little or negative income. This may be legal, but it is not fair. They pay GST on their consumption, but proportionate to wealth, they pay much less than poorer taxpayers.
The increasing gulf between the wealthy and the poor is socially and politically divisive. A wealth tax would reduce the disparity and be seen as a step to a more equitable distribution of income and wealth.
I propose consideration of the introduction of an annual wealth tax on all residents and trusts at a low rate, such as 0.5%. That would be $5,000 per annum on every net $1 million assets.
A low rate means it is readily afforded with a low incentive for manipulations to avoid it, unlike income tax which is typically sixty times higher at 30%.
Tax would be assessed on net wealth (assets less liabilities) owned by the taxpayer, including assets overseas. For administrative simplicity there could be a threshold or initial exemption of $X million, applicable to individuals, but not to trusts.
If trusts had an initial exemption like real persons, that would allow avoidance of the tax by dissipation of wealth into trusts.
Trusts not having the same exemption or threshold as individuals would mean all trusts would be liable for tax on their net worth. This would, unfortunately, extend the reach of the tax to affect many non-wealthy beneficiaries of family trusts. This is likely to be the greatest source of opposition to this proposal.
But given the low rate of 0.5% this would be affordable to many trusts. And should this prove an intolerable burden, the trust could be dissolved and the assets distributed to the beneficiaries, who would only pay wealth tax if they exceeded the threshold.
Ideally, charitable trusts should also be taxed to discourage pseudo charitable trusts being established to avoid the wealth tax. Charities pay GST at present but no income tax. This is likely to be highly contested and may not be politically acceptable.
The level of the personal threshold/exemption would determine how many taxpayers were liable for wealth tax. A higher level would affect a fewer number, which is easier administratively but yield less tax. I suggest a threshold of about $5 million would be appropriate.
The NZ government statistics show that as at 30 June 2015, the top 10 percent of New Zealand households accounted for around half of total net worth. The top 1 percent of New Zealand households had 18 percent of total net worth.
An argument against wealth tax is that it encourages capital flight. But given the low rate, is it likely that many residents would flee NZ to avoid a 0.5% tax on their wealth?
But capital flight into trusts domiciled overseas to benefit NZ residents is a problem which would need to be addressed.
Valuation of assets would be needed to assess the tax. Bank balances and cash are explicit. Share in quoted companies have daily valuations on the stock exchange. Property has rateable valuations. The problems are likely to be greatest in valuations of shares in private businesses, intangibles, collectibles and consumer durables, but this is not insuperable. When we had estate duties, valuations had to be assessed on all types of assets.
Possibly some NZ domiciled assets held by non-residents could be included in certain circumstances, such as land, without any offset of liabilities to prevent avoidance by borrowing against the asset.
Wealth tax on non-productive assets (such as un-utilised land) held by taxpayers without ability to pay could be accumulated as a debt secured against that asset, similarly to unpaid rates. At 0.5% it would take 200 years to erode the asset to nil value.
A well-constructed wealth tax would be:
- universal (like our GST and Superannuation)
- at a low rate which minimises incentives to avoid and evade
- targeted at the wealthy who have the ability to contribute more to our tax pool but who often pay little tax.
Capital gains taxes, gift duties, stamp duties on property transfers, land tax and death duties are all crude, arbitrary and distortive compared to a tax on significant wealth.
Why not consider a wealth tax? Add a UBI (universal basic income) and we would be a more equitable, prosperous and harmonious society.
- by William Vernon
