Congratulations to Peter Jackson and his crew for both the critical and commercial success of The Lord of the Rings: The Fellowship of the Ring.
Should The Lord of the Rings have received a tax break from the New Zealand government? And should future movie projects receive similar fiscal
assistance?
The first thing to note is that a tax break is really a subsidy. If the normal rule is that a business pays 33% company
tax on its profits, but a particular company only pays 13%, then that company receives a subsidy equal to 20% of
profits. If a global IT company in Ireland pays 10% company tax while other firms pay 28%, then the IT firm receives a
subsidy equal to 18% of its profits.
(Ireland, which the local low tax 'Rogergnomes' want us to emulate, is not a low tax economy; it's a high subsidy
economy. The irony is that one of the major goals of the Rogernomic 'reforms' of the 1980s was to root out subsidies.)
The second thing to note is that venture subsidies do not represent a loss of revenue to the government. If the venture
is conditional on the subsidy, then no taxes would have been paid had the subsidy not been granted. The subsidy is
really a public investment in a future public income stream.
We think of taxes as existing for the purpose of raising public revenue. But, on many matters fiscal, revenue is
incidental. Taxes are imposed (and subsidies granted) to modify our behaviour. For example, taxes on smoking exist to
discourage smoking rather than to raise money. Taxes on petrol, on the other hand, exist to raise revenue. Where taxes
discourage, subsidies encourage.
This fiscal trade-off between revenue and behaviour can be problematic. Green Party activists want us to tax "bads" (eg
pollution) instead of taxing incomes (which they see as a tax on labour). The problem is that if they are relying on
pollution taxes for revenues, they must encourage rather than discourage pollution. By taxing gambling, our governments
must encourage rather than discourage gambling.
(A similar dilemma was faced by the Liberals in the 1890s; they introduced graduated land taxes to both break up the great estates and to raise revenue from the great estates. Sensibly, given that the land tax could never
achieve both objects simultaneously, they introduced income tax as well as the land tax.)
Subsidies on public transport exist to encourage people to use public transport. Subsidies to movie companies exist to
encourage the making of movies that would otherwise not be made. The criteria is the expectation of a "positive
externality" - ie a social benefit - equal at least to the amount of the subsidy. Nobody doubts the benefits to New
Zealand arising from the Lord of the Rings.
Subsidies should be granted with care.
Should a subsidy be paid as a bribe to encourage a film to be made in our country rather than in some other country? If
so, governments all over the world could be paying subsidies to transnational companies expert at playing governments
off against each other.
Should a subsidy be made to a movie that will bid skilled film-makers away from some other movie that would have been
made had the subsidised movie not been made? The answer is generally "no". But if the subsidised movie could only be
made in our country, and there are substantial social benefits arising from the subsidised project which would not have
accrued from the alternative project, then the answer is a clear "yes". This of course is the position of The Lord of the Rings. The film would not have been made at all without the subsidy. (Maybe some other film would have been made instead? Who
knows?) Further, some other adaptation of Tolkien, by some other director in some other country, would have been an
entirely different film. For the world to get Peter Jackson's Lord of the Rings - a quite unique set of movies - New Zealand had to be the location.
The world's most successful national economies are those countries in which clusters of creative and technically
sophisticated workers practice their crafts. New Zealand should not just be a place that globally itinerant film-makers
come to every now and again, and then leave.
New Zealand needs a sustainable film industry with critical mass; an industry that both tells our stories and makes
commercially successful international movies that embody distinctive New Zealand qualities - geography, culture,
creativity. Thus the subsidies made need to be coordinated in such a way that our movie industry (i) has enough
happening at any point in time so that people don't need to leave to get work, yet (ii) does not have so much happening
that it outreaches itself.
Now is the critical time. What projects in New Zealand are becoming available to the Lord of the Rings crew as their work on that great project comes to a close? It would be a tragedy if our movie industry, having come so
far, lapses for the want of a commitment by government to pay appropriate subsidies. The New Zealand film industry must
be allowed to build on the success of The Lord of the Rings.
© 2002 Keith Rankin
keithr@pl.net