Tax policy in New Zealand seems to be a perpetual game of fiddle and tweak by the two major parties, with one unintended consequence after another as various forms of income are taxed at different rates (or not at all). As Gareth Morgan and Susan Guthrie pointed out in the Big Kahuna, many of the nation’s wealthiest people minimise their income tax and pay little to no tax on their financial assets, especially property. They are free to move their wealth from asset class to asset class as tax policy changes, aided and abetted by a cadre of lawyers and accountants. Meanwhile the middle class salary and wage earner is bound by paye that is difficult to avoid, hence the popularity of negative gearing on property and offsetting income against mortgages on properties subject to tax free capital growth. The 20th century is a story of increasing income and consumption taxes and decreasing property, inheritance and import taxes. This has been accompanied by a range of tax breaks, exemptions and deductions that change on a regular basis and often require an accountant to administer. Who gets these breaks is often determined by political influence and lobbying and creates further distortions.
The Automated Payment Transaction Tax (APT) offers the possibility of a broad based, nearly unavoidable form of revenue raising, with a low rate. It is progressive in as much as it affects the wealthy more than the poor despite its flat rate. In effect it is a turnover tax, levied against every credit and debit from a given bank account, collected by the computerised payments system of the banks in real time. All existing deductions, breaks and current personal income, corporate and consumption taxes would be dispensed with. No one need file a tax return again. No company would require an accountant for tax, only business planning. Other taxes to encourage or discourage particular behaviour like drinking, smoking, fuel consumption etc could still be levied but they would not be deductable expenses. A business either makes a profit, which its shareholders keep; or it makes a loss. No paper losses carried from one year to the next offsetting future profits. It would perform the role of stamp duty, capital gains tax, payroll tax, Financial Transaction Tax, inheritance tax, sales tax, import and export duty, Resident Withholding Tax…..The wealthy who move their money around a bewildering array of personal, company and trust accounts would have their money clipped at each step. Move it offshore – it gets clipped. Move it back – it gets clipped. Buy or sell shares – it gets clipped. Buy or sell property – it gets clipped. Inherit your parents estate – it gets clipped. Give your children some money – it gets clipped.
Its biggest threat is cash and barter. Barter can be discounted as inefficient and unpopular. Not to say it wouldn’t happen, just that it is unlikely to be significant. Cash would be more of an issue as it could circulate without being picked up electronically. However it does not do this indefinitely. It was estimated in the US that cash was used for payment 2.5 times before returning to a bank. A higher rate of tax could be applied to cash withdrawls and deposits to compensate and discourage the cash economy. Alternatively, New Zealand is particularly well placed to become a cashless society with its very high adoption of Eft-Pos and online banking services. This would make an APT completely unavoidable and capture the black market economy, which is significant, raising more revenue and reducing criminal laundering opportunities. Another possible threat would be alternative electronic currencies like Bit Coin or unofficial local currencies. Local currencies have the same inflexibility and acceptance issues of barter. Non official electronic currencies could be banned.
An APT also neatly gets around the issue governments and local retailers have with online sales. Unlike GST the tax would be payable on all online transactions creating a level playing field for foreign and local retailers. Credit card transactions would be taxed along with all other forms of payment. Indeed given the local retailer is no longer subject to income or company tax, they may well have a cost advantage over their foreign competitor, which they can pass on to their customer, use to improve profitabilty or reinvest. There would also be a significant reduction in time and money spent on tax compliance and collection, at an individual, business and bureaucratic level. Remember no tax returns.
The financial sector would hate an APT and predict Armageddon, as they are wont to do when their money making ability is threatened. Without a doubt many short term currency and share transactions would be unprofitable and liquidity, the number of transactions, would decrease, also reducing the APT’s potential take (the APT rate would reflect this). Perhaps it would increase price volatility as the traders claim. So what? Maybe the NZD would adjust to something more akin to its fundamental value based on trade and long term investment rather than its speculative value based on sentiment and momentum. Anyone who has seen the NZD crash because of a global panic can hardly say liquidity provides stability, especially when it’s most needed. In fact the opposite is true as all the hot money runs for the exit at once.
Banks and foreign investors would have to look for long term opportunities to build value rather than short term speculation. Remember they would have no corporate tax to worry about, a big plus to long term investors. The APT would clip their money coming in and leaving, regardless of whether they made a profit or loss and there would be no deductions to claim. This would create a level playing field between industries as well as within them.
Multi national companies that arrange their operations so that they pay little local tax would have their money flows taxed as they left the country, whether they made a paper profit or loss. Ditto foreign property owners. It is hard to say how an APT would affect the attractiveness of New Zealand to Foreign Direct Investment. Investors would have to make long term judgements weighing up the new unavoidable APT, payable win or lose, against the prospect of no personal or company taxes but with no tax deductions to be claimed. Speculators would probably look elsewhere for places to inject their hot money. Good.
As economics professor Edgar Feige put it;
The APT tax reform would create winners and losers – but along lines that most people would find desirable. The greatest beneficiaries will be those whose current level of taxes are considerably reduced, primarily wage and salary earners with modest assets. Those most likely to perceive themselves as losers are individuals and financial institutions that make markets for assets, along with those who sell advice on how to minimize taxes under the current opaque system.
If accompanied by banking and monetary reform, in particular a move to creating the nation’s money supply with Reserve Bank public credit rather than the current debt based system, and 100% reserve lending by the trading banks ie they can only lend what has already been spent into the economy by the Reserve Bank or government rather than loaned into circulation, it would be a truly radical way of funding economic activity and providing government services. Add a Universal Basic Income as a means of redistribution and you have an economic revolution.