Dr Gareth Morgan - Fresh Ideas for a Productive Economy

Fabians Seminar "Fresh Ideas for a Productive Economy"
July 2011 - Legislative Chamber, NZ Parliament

The Big Kahuna; Turning the NZ tax and benefit system on its head

Dr Gareth Morgan
Gareth Morgan Investments Ltd.

Gareth Morgan – Gareth Morgan Investments

Introduction

This book proposes two major changes to the tax and benefit regime that currently prevails in New Zealand – one is to the coverage of the tax regime, the other to the approach we take to welfare and redistribution. Our work looks at the tax and benefit regime in a holistic sense, recognises that the intervention of the State via tax and benefits is about redistributing resources from some in society to others.

Do we know what the rationale is for this redistribution? And if so, do we achieve our objectives? These are questions that can only be answered by examining the tax and benefit regime as a whole, an approach that has been eschewed by governments of recent times. Instead governments have chosen to establish taskforces to look at parts of the tax and benefit system only, confined by quite specific terms of reference that have precluded a “whole of system” assessment. For example the 2009 Tax Working Group was directed not to consider Working for Families and the 2010 Welfare Working Group was directed not to consider NZ Super in its assessment of welfare.

This piecemeal approach undermines so-called independent reviews of the tax and benefit system and has resulted in us losing sight in large part of why we tax in order to redistribute, what extent of redistribution we deem desirable and whether or not we know whether we achieve those, nowadays implicit, objectives.

The first reform we recommend covers an issue that successive tax studies have recommended be addressed by New Zealand governments in order to lift economic efficiency.

It is a comprehensive capital tax (CCT) that all owners of productive capital (land, buildings, structures, plant and equipment, intellectual property) are annually liable for, although it can be offset by those that produce a taxable income return in excess of the minimum required of New Zealand’s productive capital (which we set at 6% pa, a rate that reflects the return available risk free, being the average government bond rate over the past decade).

Hand in hand with the CCT proposal we alter the income tax regime to a single rate on every dollar of income. All income whether cash or in kind is captured for taxation purposes. This is what the CCT does.

The principle of redistribution which loosely accords with the principle of vertical equity (wherein the well-off give proportionally more while the poorest receive proportionally the most) has over recent decades been effected through the progressive income tax regime. But the greatest source of means of the well-off is not income, it is wealth, and that has typically remained beyond the reach of the redistributive machinery. Narrowing the tax base in this way results in progressive tax rates that rise more steeply than they should, and that brings with it all manner of incentives for taxpayers to avoid being subject to such high rates.

Over the last few decades the redistributive goals of our society have been reduced to assistance of last resort akin to an ambulance at the foot of the cliff which kicks into action only when a person’s lot has fallen so far below what society deems adequate, that humanity and sympathy emerge. This “hand up” approach to redistribution is grossly stigmatising of people so affected and quite at odds with the original principles of redistribution which formed the philosophical foundations of our mixed market/State economy. The thinking behind that model wherein individualism is championed but subject to the constraint of everybody getting a “fair go” was developed during the Age of Enlightenment kicked off by the early years of the Industrial Revolution and its enslavement of child labour and burgeoning disparity of distribution of benefits.

The result was an ethos that held that everyone has a right to participate in economic progress and for that to be a reality the distribution of wealth has to be such that all can participate, the some are not effectively locked out from birth. This view of the world has been marginalised over recent decades, in favour of redistribution on the basis of established need, rather than it being an entitlement for all in a civilised society. In this book we establish a tax and welfare regime that recognises everybody’s entitlement to live in dignity.

The second reform is directed at making quite explicit the redistribution objective of the State by paying every adult an unconditional basic income (UBI). Nobody misses out on this bottom line entitlement – it’s the right to a dignified existence that a modern productive economy can provide. This is quite a different approach to at present where the selective assistance from the is based on the notion that everybody who can, should be in a particular form of work – paying work. Aspiring to non-paying work is not recognised in our current welfare system as a legitimate basis for a dignified existence, people who engage in that need to find their own means of support. This, rather primitive perspective on the contributions people can make to their society, hasn’t moved much from the rules of a subsistence economy wherein if one doesn’t produce enough food for the table, one starves.

We can agree that each year our economy produces more than enough for us all to eat, be clothed and housed, each year the higher GDP per capita is a measure of the additional surplus generated. This is how far the NZ economy has come since subsistence times where food, shelter and clothing were the sum total of production.

The UBI provides that every adult receive enough to eat, clothe and house themselves – unconditionally, this being the universal entitlement to an adequate basic income. The State can underwrite that everybody has this entitlement as a human right. It can raise the required funds from taxes.

People then are free to choose to engage in paid or non-paid work knowing their basic living expenses are covered. Unlike today, they are not compelled to seek only paid work because if they don’t have it their mere existence is threatened. With a UBI they avoid the stigma of being unemployed if they can’t find paid work, or the loss of respect society associates with that situation. For example a person may well choose to care for children rather than stand behind a store counter day after day. Who is to say that society values the store job more? Currently the job of caring for children has to be self-funded. In a society that produces far more than required for the basic needs of food, clothing and shelter why shouldn’t a basic income be guaranteed? If nothing else it’s a signal that the society is sufficiently developed for all to live in dignity.

It is argued that such an income is already guaranteed, at least to those who cannot find paid work, in the form of the unemployment benefit; to those who can’t work in the form of disability or illness benefits. But what of the person who chooses unpaid rather than paid work? The economy comprises a raft of unpaid occupations – parenting, care of the elderly, volunteer organisations such as sports clubs, artists, creatives and so on. None of these can be done by anyone who doesn’t have independent means – an earning spouse, a benefit, or is paid out of their own wealth.

For a society that produces far more than is required to meet basic needs such a restriction on choice seems backward. That the result may be greater output of products and services from the non-commercial society and less from the commercial one, is not an outcome that we should be afraid of. Where is the logic in more and more commercially-based production anyway?

The argument that holds we already have this option, that people can opt to withdraw from commercial endeavour now – ignores the reality that such a choice is only open for those who have independent means – a subset only of the population, and a very restrictive one. One of the benefits of being a wealthy society surely must be entitlement of every person to some basic level of income, unconditionally.

An effect of this second reform is to deliver a more efficient and equitable approach to redistribution. In theory at least it should make no difference if the State has in place the apparatus to select and monitor those that require a Benefit, or whether the State simply pays everyone a Benefit and claws back from those not in need of it via taxation. Intuitively it would seem the first method would be easiest – and that is what we currently do. But this approach has problems – how do you decide who is deserving, how can you be sure that everyone who is eligible actually gets their dues, how many people do you employ to administer such a regime? The second method guarantees automatically everybody gets the UBI, it then comes down to whether the taxation regime is efficient and effective at clawing it back from those who don’t need it. The administrative overhead of monitoring is no longer required.

This book is about a revolution in our tax and benefit system, not the next step in an incrementalist journey of patching up the current regime. As such its ideas will both tread on toes and offer new opportunities – often simultaneously - to the reader.

Dr Gareth Morgan is CEO of Gareth Morgan Investments portfolio manager, and a director of economics consultancy Informetrics Ltd which he founded in 1982.
Gareth worked for the Reserve Bank of New Zealand in the early 1980s before founding Infometrics Limited, a private economic forecasting and consulting business, in 1983. The company has developed into one of New Zealand's leading independent economics businesses. In 2000, Gareth established Gareth Morgan Investments Limited, a personal portfolio investment business, which has grown to be one of the biggest private businesses of its type in New Zealand.
He is a director of Infometrics Limited; he was a director of Trade Me Limited until 2006; and he was a director of the listed company Property For Industry Limited from 1994 - 2008. Gareth has been involved with investment management since 1990 when he developed a portfolio management advisory service for Infometrics Limited's clients operating in the funds management industry. This service became the basis of GMI.
Infometrics is a well-known economics consultancy, which New Zealand's major corporate and investment houses retain for economic and strategic advice. It also has public sector clients including The Treasury, Reserve Bank, IRD and Ministry of Economic Development.
Dr Morgan is also a well-known columnist and for over a decade has contributed weekly columns to newspapers including the National Business Review, The New Zealand Herald, The Dominion, The Christchurch Press, Evening Post and Unlimited.

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