Let’s talk about tax (and fairness).

Fairness (or equity) and her sister Efficiency are two of the touchstones for tax policy. There is also a younger sister Simplicity but she tends to get left at home the second anything gets contentious or revenue is at risk. For Jane Austen readers think Margaret in any Sense and Sensibility adaptations.

For years Fairness was only paid lip service to and Efficiency was the queen. But now with news of multinational non-tax paying and the fallout from the GFC, Fairness is getting profile. At this point having got in a Margaret reference I was  wanting to make a Kate and Pippa reference or even a Kim and Khloe one. But neither of them really work as an analogy so I won’t.

Now as pleased as my inner left leaning tax geek is about Fairness/Pippa/Khloe getting the attention now, unlike Efficiency, Fairness means different things to different people.

I am sure dear readers that a number of you have either raised children or are still in the trenches.  I am sure also dear readers that while you always try to be fair; quickly you find fair is a relative concept.

You spend more time with the child who finds reading difficult. Now that is fair to you because that child has difficulties your other children don’t have. Strangely the other children may not see it that way.

They may not see the learning difficulty. Even if they do their view may be that is just how the cookie has crumbled and as your child they have an equal right to your time. Anything other than equality is simply unprincipled favouritism.

With tax the equivalent arguments run like this:

To the left what is fair is those who have the most should pay the most. And the more you have the more you should proportionately pay. This is also known as vertical equity and is the basis of the personal progressive tax scale; lower incomes pay a lower proportion of their income in tax than higher incomes.

To the right what is fair is that everyone pays the same or at least everyone pays the same proportion of their income.

The former which was taught to me in ECON 101 – in the same year I voted for the NZ Party – is a flat or poll tax. It is the economically most efficient tax as it doesn’t distort decision making at all kinda like a negative universal basic income. It is also arguably very fair as every person pays exactly the same amount of tax. And what could be fairer than that?

It is however HIGHLY regressive meaning it hits the poor far worse than the rich as potentially it could take all their income. But it is the same as the child without the learning issues wanting the same amount of time from a parent as the one with the learning difficulties.

Your correspondent has memories of her farewell party  in 1990 before going to London. Actually lots of memories as her darling friend R was making her drinks. But on the telly there were riots in Trafalgar Square as Margaret Thatcher was bringing in a poll tax. And that was only to replace rates.

So perhaps for this reason or just genuine human decency I have never heard the right in New Zealand proposing taxation being the same amount per person. But if fairness is the touchstone a poll tax could be considered fair as well as highly efficient.

Normally the right advocates flat (or flatter) tax rates. They tend to invoke the other sister Efficiency when doing so but there are also fairness arguments to support their position.

The main one is that it is fair that everyone contributes the same proportion of their income to society. And the left doesn’t need to stress as those who earn more will by definition always pay more in absolute terms.

Right. So what is a future lefty government to do that wants more fairness of the tax system. [I know you’ll want to reach for raising the top tax rate because – sigh – that increases vertical equity. But tax rate alignment does matter and if you want to do this you’ll need to do a bunch of other tail chasing stuff too. A future post I feel. And yes I will talk about multi-nationals at some point.]

As a good former bureaucrat I am all about the solutions. The key to improving the tax system is a combination of an examination of the application of horizontal equity – is income of different sources taxed the same way – combined with some old fashioned integrity measures aka closing some loopholes. Most of which will involve refinements of income classification, deductions and timing. But there is no silver bullet. 

Should give you an opportunity to also throw around Andrew Little’s quote about the average Auckland house earning more than the average Auckland worker. I do enjoy that one. Whether you get re-elected is beyond my ken as every hole in the base has a highly motivated constituency for whom equality feels like oppression. Imputed rents anyone?

Will also need to watch out that you don’t give away the farm. Coz a tax base is built on asymmetries and nothing feels less fair than being on the wrong side of an asymmetry.

But if this talk of fairness is code for raising substantially more revenue then in that case you need higher rates across the board not just on high income earners; a different base or to stop adjusting thresholds for inflation. Treasury has already done that work in the 2013 Long Term Fiscal Forecast which is worth a read. None of that should be too hard to package as fair as even a riot inducing poll tax can be packaged as fair.

I am on a yoga course this  week so it seemed appropriate that the Friday post be on tax and yoga. But I will return to this topic when I have the energy. I will also think about who Labour should put on their working group.

Namaste.