When it comes to taxes, know your position before election night – Nick Stewart
Nick Stewart is a financial adviser and chief executive at Stewart Group
During Britain’s December 1918 election campaign, Sir Eric Geddes promised to squeeze Germany until you could hear the pips squeak.
Germany ultimately paid only a fraction of the reparations demanded. More than half a century later, British Labour politician Denis Healey borrowed the image. During the 1974 election campaign, the shadow chancellor promised to squeeze property speculators until the pips squeaked. The press made it the rich, and the line stuck.
Healey later spent five years as Chancellor trying to design a wealth tax, and in 1989 admitted he could not draft one worth the administrative cost and the political hassle.
Meanwhile, Britain ran out of money. On September 28, 1976, Healey was at Heathrow when sterling slid. He turned back, and Britain applied for a record $3.9 billion loan, signed in December with deep spending cuts attached. The squeezer had become the squeezed. It is a story worth remembering as New Zealand heads to the polls on November 7.
The idea is back. The Greens propose 2.5% a year on net assets above $10 million, with the family home exempt, plus a 33% tax on inheritances and gifts over $1m, paid by the recipient, with family homes and family farms exempt. Te Pāti Māori start lower, at 1.5% above $2m. Opportunity wants a land tax of 1.75% on urban land. Same instinct, different coat: tax what you hold rather than what you receive.
Here is the irony. Opportunity is the kingmaker in the latest 1News-Verian poll on 8%, so its plan is not idle talk. Yet its founder Gareth Morgan wrote on October 10 that “wealth taxes kill entrepreneurship” and called the plan regressive. The man who once campaigned to rid the country of cats now seems keen to see off his own creation.
A reality check, though. National, Act and New Zealand First oppose wealth, inheritance and comprehensive capital gains taxes. Labour has ruled out a wealth or inheritance tax and campaigns on a 28% tax on property gains instead.
Under MMP the Green package could only arrive as the price of a coalition.
There is a hard truth under all of this. A wealth tax is levied on a valuation. It is paid in cash.
Take an owner with $20m of net assets, most of it a business built over two generations. The first $10m is free. The second $10m attracts 2.5%. That is $250,000 a year, every year, due whether the business had a good year or a bad one.
Then someone has to value it. Listed shares are easy. A private trading company, a minority holding in a family business or a partnership interest is not. Every annual valuation is an argument with Inland Revenue waiting to happen.
As the old line goes, you may call a cat a fish, but it can’t swim. You may call a valuation wealth, but it can’t pay the bill. Even the Greens’ own costings assume 28.5% of the super-rich tax is never collected. When the designers concede a quarter leaks away before it starts, the rest of the brochure is a wish.
The scoreboard is telling. The OECD found 12 member countries had a net wealth tax in 1990 and only four by 2017. Capital has legs. Its owners have passports. This September the Dutch Cabinet proposed dropping a 36% annual tax on paper gains from shares and bonds in favour of a tax on sale. Tax the cash, not the valuation.
The counter-case deserves a fair hearing. New Zealand has no general capital gains tax and no inheritance tax, and the OECD accepts that where capital is lightly taxed a net wealth tax can play a substitute role. A salary earner pays tax on every dollar. That is a genuine gap. But a capital gains tax is levied when cash changes hands. A wealth tax is levied when it does not.
For families, the practical question is not who you vote for. It is whether your structure works under more than one government. Liquidity, succession, trusts and valuation. Do not restructure in a panic for a policy that may never pass. Do know your position before election night hands the file to a coalition room.
Healey learned the lesson over five years. The pips squeaked, but Britain’s finances ran out of juice. Position for your goals, not for a caucus vote.