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Why Labour won’t introduce a radical wealth tax

Dr Bryce Edwards: both left & right want to believe that Ardern’s Labour Govt are going to bring in radical wealth taxes. But it’s wishful thinking on everyone’s part – for very different reasons.
Dr Bryce Edwards
Contributing Writer, Democracy Project
May 4th, 2022

OPINION: Prime Minister Jacinda Ardern has been perceived as “softening her line on wealth taxes” – and therefore being open to the introduction of a new type of progressive taxation on the rich. This was the description published yesterday by leftwing wealth researcher Max Rashbrooke, who was reporting on the fact that Ardern would not rule out introducing a wealth tax when interviewed on breakfast TV.

His interpretation was shared by many on the political right, who also stated that Ardern and Labour were obviously considering a new tax on assets. This then led to a lot of excitement on all sides about an alleged U-turn or broken promise on Ardern’s stated disavow that she would ever introduce such a policy.

Wishful thinking by left and right

It seems that both left and right want to believe that Ardern’s Labour Government are going to bring in radical wealth taxes. But it’s wishful thinking on everyone’s part – for very different reasons.

The right wants to believe a new tax is coming because it will allow National and Act to run a popular campaign against an overtaxing administration. It’s point scoring. And it also reinforces the partisan views of those who want to believe they are opposing some sort of “socialist” government.

On the other hand, the left want to believe a wealth tax might be implemented since this Government has done so little that is genuinely leftwing, and has generally failed to be transformational as promised. The left know that a wealth tax would help fund many social goods desired by leftwing voters and would help enable redistribution at time when inequality of wealth is extraordinarily bad. After all, the Labour Government has overseen what financial journalist Bernard Hickey says is a $2 trillion transfer of wealth to the rich over the last few years.

Don’t expect to see a radical wealth tax implemented

In reality this Government is highly unlikely to implement any sort of radical wealth tax. Such a major economic shift is not in the character of Ardern’s Labour Government. They are more conservative than they are socialist. Grant Robertson is Labour’s most orthodox Minister of Finance in decades.

The public itself might be persuaded of the advantages of a radical wealth tax. We are living in especially radical and unsettled times. There is much heightened concern about inequality and fairness, and there’s an openness to new and unorthodox political ideas – whether in terms of money printing by the government or welfare benefit increases. A case could be made that a tax on wealth would be advantageous for the vast majority of taxpayers, especially if it involved a reduction of taxation on those on lower or middle incomes.

Yet, it would take a very significant campaign and organic societal debate to lay the groundwork for the acceptance of such a radical tax – which is why it’s unlikely to occur. Today’s political parties simply aren’t up to that task. The days of mass membership parties that are highly active and integrated with society are over. Hence politics is now reactive rather than persuasive.

In the past, parties and their leaders sought to change the views of society on issues like tax. In the twentieth century, party leaders and activists would be part of debate and discussion at every level of society. From the household and community meetings, through to the mass media, parties would be heavily trying to shape opinion rather than just reflect it. These days, it’s the other way around: focus groups and polling shape political parties instead.

Witness the 2018 debate when the Government’s working group released its capital gain tax proposals. Labour politicians and activists decided to stay out of the public debate, before a decision to cancel the tax change was announced with reference to the public being opposed. A 2023 wealth tax discussion is likely to face a similar lack of leadership.

The likelihood of a wealth tax is also significantly reduced by the fact that modern political parties only operate domestically in a highly globalised world. In the past, leftwing parties were more internationalist, and so the New Zealand Labour Party would pursue things like wealth taxes in concert with leftwing parties elsewhere. This meant that policies implemented here were in line with progressive policies in Australia, Britain, etc.

These days, with various nations in a race to the bottom to create a more welcoming policy environment for business and the wealthy, the introduction of such taxes makes less practical sense. “Capital flight” occurs – the wealthy shift their businesses or assets to other more hospitable climates. So, with New Zealand being in competition to attract and retain international wealth, taxes on wealth become something akin to cutting off your nose to spite your face. It’s not surprising therefore that many countries are currently getting rid of wealth taxes – whereas in 1990 there were 12 major countries with wealth taxes, by 2017 this had dropped to just 5.

A moderate wealth tax is more likely

In the unlikely event that Labour did actually propose a tax on the rich at the next election, it would surely be a very mild and relatively ineffective one – it would be highly targeted and low in yield. The Greens, in fact, have set the parameters for what they think is possible with their 2020 election proposal for a wealth tax.

Although wishful thinking by those on left and right painted it as radical, it was relatively mild. The Greens promised to give every New Zealander a $1m exemption to their wealth tax, and then only a 1% tax above this threshold. Given that it only applied to net wealth (assets minus liabilities) and allowed families to pool their wealth for the calculation (families of four had, say, a $4m exemption, before the tax applied), meant it was more symbolic than substantial. As Ardern herself said at the time, the tax wouldn’t raise much money due to “the fact that people would change the value of their assets in order to avoid tax, the fact that people will often move funds offshore”.

Has the Government done a U-turn on wealth taxes?

Much of the debate over the last day about the possibilities of a wealth tax have focused more on the politics of whether the Prime Minister is doing a U-turn, and what it means when politicians “rule out” particular policies.

It is true that Labour and Ardern have been ambiguous about ruling out a wealth tax. Back at the 2020 election Ardern did in fact specifically rule out a wealth tax (as well as a capital gains tax), saying: “I won’t allow it to happen as Prime Minister”. But then yesterday she was given multiple opportunities to rule one out in the future, and she refused.

Of course, wealth taxes are often confused with capital gains taxes – the latter is a subset of the former. Perhaps in her 2020 disavowal of a wealth tax, Ardern may simply have thought the conversation was only about capital gains. Regardless of what has happened in Ardern’s past statements, the main point is that voters would get a chance to vote for or against such a tax reform if Labour made such a proposal at the next election.

So, what is David Parker doing?

Much of the current debate about wealth taxes has arisen because the Minister of Inland Revenue, David Parker, gave a speech last week detailing the research that he has IRD doing to into wealth and the amount of tax that the rich pay. He also announced a proposed law, the Tax Principles Bill, that would include “principles” to assess future tax changes against.

All of this is very sensible, and to be expected – especially from a leftwing party in power. Parker should in fact be congratulated on his work to get more research and evidence of the actual wealth and tax situation. This issue will be one of ongoing debate and reform – and so it’s useful to have reliable information on this.

Yes, it is possible that such research might lead the Labour Party to come up with new tax proposals at the next election. This is a good thing. And the research might also help parties such as National do the same thing. This is desirable, as no party believes that the tax status quo is sufficient. There’s a widespread acknowledgement that the tax system has all sorts of dysfunctions and unfairness, and that some degree of reform is required.

The problem will be if such research is done for nothing, or just results in tinkering. It would be even worse if this research and the various speeches by Parker turned out to be just for show. Such activity could just be to mollify a disappointed leftwing constituency that wants to believe transformational change is still to come from this administration.

Given we’ve seen so many working groups established just so Labour can kick a contentious idea into touch, we should be sceptical about whether this is occurring again. Whatever Parker and Labour’s strategy and intentions prove to be, it seems likely that a radical wealth tax will continue to be wishful thinking for left and right for some time yet.

This article was originally published on Democracy Project on May 3. It is published here with permission.

Bryce Edwards is a senior associate at the Institute for Governance and Policy Studies and lecturer at Victoria University, Wellington, New Zealand.