The release of the Budget papers yesterday shows that from late last year, Treasury and two Cabinet Ministers spent six months working in secret on a wealth tax, all the time avoiding questions on what they were doing.
The papers show that Treasury estimated a tax on individuals with assets of over $5 million, not including their family home, would hit only 25,000 individuals or 0.5 per cent of the total population.
However, that group would have assets totalling $5 billion or 26% of all the assets held by individuals.
Nevertheless, it could raise $3.8 billion a year by 2025 and allow tax reductions for low income taxpayers.
But the Prime Minister,ruled it out in late April and even more emphatically yesterday.
However the papers are a vindication of National’s Finance Spokesperson, Nicola Willis, who doggedly pursued both Treasury officials and Finance Minister Grant Robertson trying to get them to concede the secret planning was going on.
Since polling earlier this year showed that most New Zealanders favoured a wealth tax, what went wrong?
Why did the Government abandon it?
Reading the papers, the answer seems to be that officials considered it would have been simply impractical to implement.
That was the advice both from Treasury and Inland Revenue on December 13 last year.
Nevertheless, work continued on the tax at both agenciesu ntil April this year, with the Government planning to use the revenue gained to make the first $10,000 earned by all wage and salary earners each year tax-free.
That would have been an effective blunting of Naitonal’s tax-cut promise.
The revelations in the papers throw more light on the campaign pursued earlier this year by Opposition Finance spokesperson, Nicola Willis, to try and get either Finance Minister Grant Robertson or Treasury Secretary Caralee McLeish to admit they had been working on a wealth tax.
Her quest began back in February at a meeting of Parliament’s Finance and Expenditure Committee.
Obviously, in hindsight, there must have been a leak out of either Treasury or Inland Revenue because Willis asked Treasury Secretary Caralee McLiesh at the Committee on February 22 whether, in providing advice on revenue to fund cyclone recovery had Treasury given advice on potential revenue raising tools.
McLiesh dodged the question.
“We are right in the midst of providing a wide range of advice to government on policy measures in response in the recovery and including in different types of funding arrangements for that response,” she said.
“Those conversations are ongoing.
“We’re also in the middle of a budget process right now, so consistent with long-standing convention, can’t talk about any specific elements of it, but we’re very actively providing advice on a range of different matters.”
Willis then asked whether Treasury had been told the “no new taxes” rule no longer applied.
“So again, we are providing advice on a wide range of issues,” said McLiesh.
Willis: “With respect to the specific question, could you answer, please?”
McLiesh: “Again, we’re in the process of advising for the budget and for the response, and I take that as a specific constraint to any specifics one way or the other about the content of that advice because it’s still under active consideration.”
Just two days before that exchange took place, Treasury had presented Budget Ministers, including Finance Minister Grant Robertson and Revenue Minister David Parker, with a series of slides outlining how a wealth tax could pay for tax cuts for low-income earners.
The slides also included a costing for how much revenue a windfall tax on what the Treasury called the “supernormal profits” of banks might produce.
This, along with the wealth tax and the raising of the trusts tax rate, would fund a number of different tax adjustments, including making the first $10,000 of earnings tax-free.
It is clear from the papers released yesterday that Treasury understood any wealth tax would be announced in the Budget and begin applying this year.
Indeed, the proposed rapid introduction of the tax was one of their reservations about the proposal.
On December 13 last year, Treasury advised that both it and Inland Revenue recommended against progressing a minimum tax as part of Budget 2023.
“If the minimum tax (a form of wealth tax) proceeds on this timeframe, it will be at a rate faster than any other international example for proposals of this complexity that we are aware of,” the Treasury paper said.
Nevertheless Treasury it could be possible to include revenue from the tax in the 2023-24 Budget year.
Inland Revenue was also concerned that it did not have the capacity to work on the design of the tax.
Robertson has long been non-committal on whether Labour would offer tax relief for wage and salary earners either in this year’s Budget or in the election manifesto.
He was grilled about it at a press conference at Labour’s annual conference in November last year.
He was asked whether New Zealanders could expect any form of tax relief from Labor.
“You’re at the event which begins the process for setting Labor’s tax policy,” he said.
“So it’s not set yet.
“And so it’s not that I’m avoiding a question; I literally can’t answer that question. “
Strictly speaking, he was correct. Labour had made no decisions on tax relief in November last year.
But five days after that press conference, Treasury went to Robertson with a series of questions to ensure they understood what he wanted them to advise him on with respect to a wealth tax and income tax relief.
It would seem highly likely that he had approached Treasury before the party conference and asked them to provide advice on a new tax and tax relief.
Treasury introduced their questions with a preamble which said: “We understand you are motivated by three main objectives.”
They were to raise revenue to fund personal tax cuts or other government expenditures; the additional tax would be paid by those with high wealth and, therefore, those with a high ability to pay and a desire to address how high-wealth individuals can have relatively light taxation (primarily due to the non-taxation of most capital gains).
The papers released yesterday include a series of technical papers addressing the issues a wealth tax would involve, but there was a strong undertone within them that both Treasury and Inland Revenue could see endless complexities in trying to introduce the tax and doubted it would achieve the revenue gains the Government hoped.
The last reference to a wealth tax in the papers is on April 4.
But it seemed to get a sniff of life, in public anyway, when on April 26, Revenue Minister David Parker released an Inland Revenue study of high-wealth individuals which begged the question as to whether it was a prelude to unveiling a wealth tax.
Parker didn’t quite close the door on the idea.
“I’m not here to announce any change in tax policy during a parliamentary term,” he said.
“That is for the Cabinet to decide, not for me.
“And in an election, that’s for political parties.
“Those announcements will be made in due course, if at all.”
But the next day, the Prime Minister responded very firmly, speaking to a business audience in Auckland.
“You will have seen that yesterday Minister Parker released work IRD have done on the tax that a small number of very high-wealth individuals pay in New Zealand,” he said.
“And while that work highlights gaps in the tax treatment of the income generated off their assets, I want to be crystal clear with you today: the Government will not introduce any major tax changes like a wealth tax or Capital Gains Tax in this Budget.”
And there, the matter might have rested had Willis not decided to attack the Government over its secrecy on the tax.
Two days later, after Hipkins’ statement, she told the National Party’s Northern Regional conference that Robertson was working on a new tax.
“Make no mistake: Labour has always wanted a capital gains tax, they still want one, and they are more determined than ever to impose one,” she said.
“I’m told detailed new tax ideas have already been discussed at Cabinet.
“New Zealanders deserve to know what’s been discussed and why the Government is being so secretive about their plans.”
She picked up the fight again in Parliament three days later.
Willis: “Have Government officials been asked to provide advice on possible new taxes, such as, for example, a wealth tax on unrealised capital gains?”
Robertson: “As the Prime Minister indicated yesterday and in his speech last week, we consider a range of issues around tax on an ongoing basis. Information about those will be released at an appropriate time.”
But when he said that, work had stopped on the wealth tax, and the Prime Minister had already ruled out “any major taxes like a wealth tax”.
This whole episode will raise questions about the Government’s credibility at the same time as it infuriates its left-wing base, who have long favoured a wealth tax.