Taxation (Annual Rates, Maori Organisations, Taxpayer Compliance and Miscellaneous Provisions) Bill

Just before I was interrupted on Thursday evening at 6 o’clock, I was talking about the bill confirming the annual income tax rates for 2002-03. I just wanted to touch briefly on the point that New Zealand First wants to think out of the box a little bit as far as taxation is concerned. We want a new tax rate on increased export net profit. We want to reduce the rate to 20 percent. For example, if company A has net income from exporting of $10 million this year, and if it achieves $12 million next year, then the tax rate on the additional $2 million would be 20 percent. New Zealand First, if it were in a position to do so, would put the appropriate machinery and legislation in place to ensure that the system was honest and was kept honest. Within 5 years we would plan to put all exports on the same footing of 20 percent. I just wanted to touch on that issue, considering that part of this bill includes the tax rates for 2002-03.

Another issue that is quite a hot topic, and quite controversial, is the reforming of the rules relating to the taxation of Māori organisations. I was a member of the Finance and Expenditure Committee, along with my leader, the Rt Hon Winston Peters, which heard the evidence, and along with the member opposite Mr Rodney Hide—

💬 Rodney Hide: I remember that member’s questions very well—very insightful.

That is good. He was on the committee with me, along with others. I remember hearing the evidence and deliberating on the bill. New Zealand First is concerned that one section of the New Zealand community is receiving an advantage over other groups. We expressed a minority view in the report back, because of our concern. It is our intention in the Committee stage to put an amendment that all sections of the New Zealand community that are able to take advantage of the proposal relating to basic rates of tax at 19.5 percent should be treated in the same way. In the meantime we cannot support the bill, because of its unfair and race-based system, and we will be abstaining from the vote on the second reading. I reiterate that New Zealand First wants to treat all New Zealanders equally, and we are preparing an amendment to give effect to this view.

I rise to support the second reading of the bill. I was pleased to hear at the beginning of the debate the Hon Dr Michael Cullen, in his role as Minister in charge of this bill, explain quite clearly the different rate that Māori organisations will be paying—namely, 19.5 percent—the rationale behind it, and why it is not a race-based policy, as claimed by other Opposition parties, but is actually quite sensible law. For that reason, I am pleased to support the second reading of the bill.

There is much in this Taxation (Annual Rates, Maori Organisations, Taxpayer Compliance and Miscellaneous Provisions) Bill that is plain common sense. There is a lot that is unexceptional, and we would have no problems with a great deal of it in content. But I have to say that for us there are two fundamental flaws in the bill, and for this reason we certainly will not be supporting it—indeed, we oppose it quite vigorously.

The first and most significant problem is that the bill confirms the existing income tax rates. I think that is a huge opportunity missed by this Government. It is running a large Budget surplus—larger than it expected; yet it still proposes to maintain the current income tax rates. Between 1988 and 2000 we had a top personal tax rate of 33 percent and a company tax rate of 33 percent, and within the limits of a progressive tax system that minimised the compliance costs of the taxation system. For reasons that had nothing to do with the need for revenue, but a great deal to do with political envy, this Government raised the top tax rate for people from 33 percent to 39 percent. It did not need to do that for revenue; that is very clear. It did so because it felt that would be popular with a great number of New Zealanders who were paying less tax than that. In fact, it was done in the mistaken view that the tax system in recent years has been rigged so that high-income taxpayers paid a lot less tax.

That is one of the great myths of the tax system in New Zealand. It is a myth, because what we saw in the 1980s was a reduction in the top tax rate from 66 to 33 percent, and people said it was clear the top taxpayers were paying less. What nobody really focused on was that that reduction in tax from 66 to 33 percent, which I must say was absolutely sensible in terms of good tax policy—

💬 Rodney Hide: That was a good Labour Government.

It was a good Labour Government, as Mr Hide points out. That was done in conjunction with the closure of all the tax rorts, tax loopholes, and tax shelters that had been prevalent prior to that time—the deer farms, the movies, the musicals; and, dare I say it, the kiwifruit orchards—which were owned for the purposes of reducing income tax.

Not many high-income New Zealanders actually paid 66c in the dollar. They were able to manipulate their affairs to pay a good deal less. This Government is going back on that sensible framework, and encouraging New Zealanders to try to find loopholes and shelters, and any way of dodging the tax, which at 39 percent means that people earning more than about US$30,000 a year, a modest level of income by international standards, are paying nearly half their additional income in tax. When we add the 39 percent income tax to 12.5 percent GST, that is about 46 or 47 percent tax on additional income above about US$30,000.

The other fallacy is that, because the actual rates do not go up very steeply in New Zealand, the tax system is not very progressive. That is the widespread belief. But let us look at the situation of someone earning $25,000 a year, with a non-earning spouse and two children under the age of 13—the kind of people many parties in Parliament, including United Future, want to help. That person is paying $27 in income tax per year, or a little under that, by the time we take into account the family tax credit and the other family tax allowances that have been in place for some years. The person who earns $100,000, by contrast, with a dependent spouse and two children under the age of 13—the same family conditions exactly—is paying, not four times as much income tax as the person on $25,000, not 40 times as much, not 100 times as much, but more than 1,000 times as much. So the income tax system, in conjunction with the family tax credit and similar arrangements, is already a very steeply progressive tax system. To make matters more progressive still, Government expenditure typically is spent in ways that are quite progressive in the same sense. The person on $25,000 a year is much more likely to be using Government-funded services of health and education than the person earning $100,000 a year. So we have a very steeply progressive tax system.

I am arguing that the tax system is too steeply progressive, because a system that is that progressive involves very substantial deadweight losses. It means that the people who are most likely to invest, most likely to acquire skill, and most likely to take entrepreneurial risks, are the people whom this tax system clobbers most heavily. We know that high tax rates have high deadweight costs. This bill locks those high deadweight costs into the system, despite the fact that the Government’s fiscal position would make it quite straightforward for it to at least move back to a situation where the top personal tax rate and the company tax rate were the same. I would argue that the Government should go further and reduce both. We have a situation now where Australia’s company tax rate is significantly lower than our company tax rate. At least, the headline rate is significantly lower. We are missing a golden opportunity by keeping tax rates at their present level.

There has been a lot of discussion in the last week or two about the Prime Minister having to back off her promise to take New Zealand to the top half of the OECD within one decade. Why have we backed off that? I think it is because the Government recognises that its policies will not move New Zealand to the top half of the OECD in two or three decades—not one decade, but two or three decades. We will not make it, and one of the reasons we will not make it is that this Government’s ideologically driven policies are intent on increasing the tax rates on people on quite modest levels of income by international standards. That is our first reason for being concerned about this bill and wanting to oppose it.

The second reason we oppose it is the one that Mr McNair alluded to—the preferential treatment for Māori organisations. I have to say that the previous way in which Māori organisations were taxed was unfair and unacceptable. There was clearly a level of taxation that was totally inappropriate. There was a perfectly sensible precedent that could have been used to ease that problem, and it is called the company tax system. There is no reason at all that we could not have applied the same system to Māori organisations as is applied now to companies—a 33 percent tax rate, or something lower, if the Government was not so miserable. It is a tax rate for companies that is a withholding tax for the beneficial owners of companies, which the recipients of the dividends, or the income flow from those Māori organisations, could have treated as a credit against their tax liability, and if their personal tax rate was lower than 33 percent, it could have—

💬 John Carter: It would have been fair.

Absolutely. It would have been fair, as my colleague Mr Carter points out. That would have been fair and it would have been racially neutral. There would have been no racial preference involved. This party, the National Party, stands for one standard of citizenship. That is a very important principle. This bill locks into place a tax system that gives a preference to one particular racial group. That is very, very sad. We have enough potential problems in race relations in New Zealand already, without creating the widespread public perception, based on a reality, that a preference is being given to Māori organisations. I think that is very sad.

What an honour it is to follow Dr Don Brash, who headed up the Brash committee on taxation, which produced a very, very fine report indeed. I wish David Cunliffe had read it, and I wish David Benson-Pope had read it, and then they might have paid attention to what Dr Brash had to say. The fourth Labour Government certainly paid attention to it. I am very pleased also, in speaking to this bill, to see that my good friend and colleague Annette King is down here in the House. I am looking forward to her speech confirming the tax rates, because I remember her as a Cabinet Minister supporting a Government that took the top rate of tax down to 33c. At the time she was 100 percent behind it. I have to say that at the time, I voted for it. In fact, it was so scary I realised I voted for Jim Anderton, because I lived in his electorate. Annette King took the top rate of tax down to 33c. Members should ask themselves about that. Annette King really owes this House an explanation, does she not? If it was a good idea to take it down to 33c in the eighties, why was it such a good idea to take it up to 39c in the nineties?

💬 Hon Annette King: Will the member stand aside and let me tell him?

The member can have a 10-minute speech, if she cares to take a call. She is the most senior member in the House, so I look forward to Annette King, rather than trying to shut down the Opposition, spending some Government time standing up in this House and explaining why she voted for 33c in the eighties, voted for 39c in the nineties, and again, this week, is voting for a 39c tax rate.

The ACT party will be voting against this bill, because we think that the 39c tax rate is wrong. We thought Annette King was right when she voted for 33c. We thought Peter Dunne was right when he voted for 33c, and I look forward to my good friend and colleague Mr Copeland taking a call and explaining why he supports voting this week for a tax rate of 39c, because that is what United future is doing.

💬 Hon Annette King: Catch up. It has been that for 3 years.

Annette King says the Government has been doing that for 3 years. I know, and I have been saying the same thing for 3 years. It is wrong. But every year Annette King comes down here and votes for 39c, when before, she used to come down every year and vote for 33c. I would like to know from her what she has learnt, or what has changed in those years to make a difference. So we will vote against it.

💬 Hon Annette King: It used to be 66c. He doesn’t want to hear that bit.

It is very nice that Ms Annette King wants to explain her principles to us, by way of interjection. But I invite her just to take a call and let me make my point in relative silence. She is most welcome to take a call. But maybe Helen Clark does not let Annette King speak on matters of tax. [Interruption] Maybe Helen Clark does not take the opportunity to give a speech. ACT will be voting against the bill for those reasons.

A second reason that we will vote against it is that in the Finance and Expenditure Committee we did not agree with taxing Māori authorities at 25c in the dollar. That is wrong. We did not agree with not allowing Māori authorities imputation credits. That is wrong. Māori authorities should be taxed like every other agency and organisation in New Zealand. Our taxation system should not be based on race, ethnicity, religious belief, or creed. We should be taxed according to the rules, and those rules should not apply to the agency that we belong to, or to our race.

💬 Gordon Copeland: On income.

My friend Mr Copeland pipes up and says that it should be based on one’s income—

💬 Gordon Copeland: Marginal tax rate.

Absolutely! That is why we advocated imputation credits. I say to Mr Copeland that that is how the taxation system in New Zealand works. Mr McNair will back me up when I say that every Māori authority that appeared before the select committee said it was good that they were to be taxed at 19.5c in the dollar. They said: “If you want to grow a business, you want to be taxed low, because that way you get to keep more of what you make, and you are allowed to reinvest it—plough it back into making more money and into making your shareholders and people prosper.” Every authority said that, and Mr Copeland will confirm that that is so. That is why the Minister of Revenue, Michael Cullen, is doing this. It is an advantage to Māori authorities to have a lower tax rate.

💬 Hon Parekura Horomia: That’s right.

I am pleased—the Minister of Māori Affairs, Parekura Horomia said: “That’s right.” Well, we say that every business in New Zealand, every organisation in New Zealand, and every person in New Zealand should be able to enjoy that same benefit and be taxed at 19.5c in the dollar. Why allow just Māori to enjoy that benefit? Why not non-Māori? Why not Chinese people? Why not European people? Why not Croatian people? Why should they be taxed at 33c or 39c in the dollar when Māori are to be taxed at 19.5c?

There is a third reason. We have a serious problem with this bill. I take members to clause 103. This is a shocker. We had an Inland Revenue Department inquiry, ably chaired by Mr Peter Dunne, and members of that committee were shocked to learn that when the Inland Revenue Department asserts a debt, a taxpayer is required to produce 50 percent of the debt that is asserted. Members were shocked to hear that. I give a scenario. The department comes along and tells, for example, Mr Catchpole, that he owes it $1 million. He replies that he does not think he does, but he is told that he does. It is then Mr Catchpole’s job as a taxpayer to prove that he does not. That means he has to go to the Taxation Revenue Authority and to the court. But before he does that he has to pay half of the assessment—$500,000. We have heard of New Zealand taxpayers who have gone bankrupt having to pay that half, then finding out that the original assessment was wrong, as the courts would rule—somewhat pointlessly after the taxpayer has been bankrupted. So this bill, quite rightly, does away with that. Clause 103(1), repealing section 138I(1) and (3), has been struck out and now inserts, under new subclause (1C), the following new subsection (2B): “Despite subsection (2), the Commissioner may require a disputant to pay all tax in dispute that is the subject of the challenge if the Commissioner”—which means any tax officer with the delegated authority—“considers that there is a significant risk that the tax in dispute will not be paid should the disputant’s challenge not be successful.”

I ask Government members opposite whether they have ever heard of a more iniquitous clause. For example, the Inland Revenue Department could assert that Mr Catchpole owes $1 million. It is not its job to prove that he does; it is Mr Catchpole’s job to prove that he does not. The commissioner, or his or her officer—anyone in the department—can then say that he or she thinks that Mr Catchpole will do a runner, and hit him for the $1 million. He can be hit for the $1 million before he proves that he does not owe the money—before he can get to the court. This clause means that it is not only 100 percent of the tax that Mr Catchpole would have to pay, but all penalties and interest owing. The commissioner is being given the discretionary power to declare an assessment that may not be true and to demand that that assessment be paid before the taxpayer’s case is tested in court. Not only that, the commissioner can demand that the taxpayer pay any interest or penalties that the commissioner deems are payable, and therefore to rule on, and to bankrupt, a taxpayer before that person has his or her day in court. This bill is wrong. We oppose it.

The ASSISTANT SPEAKER (H V Ross Robertson): I call the honourable member, David Parker.

I raise a point of order, Mr Speaker. I took the call for this speech well before Mr Parker. According to your schedule we are No. 10 in the speaking order, and this is the 10th slot.

The ASSISTANT SPEAKER (H V Ross Robertson): Because someone has spoken out of order, the next call goes to the Labour Party.

It is not my responsibility for Labour to seek the call at the right time.

I called just as Mr Hide stood down, within a second of the call being sought by the member who has just spoken.

I would like you to point this out. I think Mr Parker is absolutely right. He did call as soon as I sat down. The difficulty he has is that he called when he was on the floor of the House. It is quite incorrect that a member can call from the floor of the Chamber. We have a problem, because the call was incorrectly called. But I have to say to my good friend—I am friendly today—Mr Rod Donald that, unfortunately, Mr Parker has been given the call and cannot have it taken away from him. I suggest that you advise Mr Parker that members cannot call from the floor of the Chamber.

The ASSISTANT SPEAKER (H V Ross Robertson): I thank the honourable member for his contribution. The call had already been given, so I call the honourable member, Mr Parker.

One of the things we have not heard from Opposition members when they talk to address the taxation of Māori authorities is the recognition that at present Māori authorities suffer from double taxation, and they have suffered from it for many, many years. In addition to paying 25 percent, if the income has not been distributed within 4 years, a Māori authority has suffered an additional 33 percent taxation. That is a total of 58 percent tax paid by Māori organisations, which is plainly out of sync with the tax paid by other members of the community and is unjust. The bill contains a number of protections for other taxpayers. One is that the rate of 19.5 percent can be applied only when the Māori authority records the tax number of the taxpayer where distributions are $200 or more. So there is an easy mechanism for the Inland Revenue Department to check where people are receiving income taxed at the lower rate of 19.5 percent, to see whether they have a higher marginal tax rate. In that case if they had underpaid their tax they would be required to pay the balance of the tax at the end of the year.

The other protection that was inserted through the efforts of the Finance and Expenditure Committee was to limit the definition of a Māori authority to exclude wholly-owned subsidiaries of Māori authorities. There was a concern—and there are arguments on both sides of this debate—that a wholly-owned subsidiary of a Māori authority that was taxed at the 19.5 percent rate would have an advantage over another company that had paid tax at 33c in the dollar and so had less retained earnings to plough back into the company. The committee heard views from the Inland Revenue Department that said that in a pure academic sense that was incorrect and that the company paying 33 company would not be disadvantaged. Having said that, there were concerns amongst committee members, including myself, that that would have been a practical advantage to the Māori authority competing with another company. Therefore, we changed the definition to limit the definition of Māori authority by excluding those wholly owned subsidiaries. I, for one, am completely supportive of this proposal. It will save the Department of Inland Revenue compliance costs.

I rise in support of this bill. The Greens are very pleased to see this bill take another step forward. In particular, I would like to comment on the significant improvement to the tax rules for Māori organisations. It is fair and logical for Māori authorities to be taxed at 19.5 percent, given that 90 percent of their beneficiaries are on that tax rate. The old rules created a severe disincentive for Māori authorities to retain earnings and it double taxed them. I am pleased, therefore, that we have changed the rules in relation to Māori authorities and that the select committee has agreed to a fair definition of a Māori authority. It is wider than some submitters sought, and narrower than others requested.

In particular, as the previous speaker mentioned, the committee decided to exclude wholly-owned subsidiaries of Māori authorities from the lower tax rate. That was a sensible decision because it removes what could be seen as an unfair competitive advantage, but I also acknowledge that beneficiaries of a Māori authority are unlikely to be penalised, because the authority will be able to arrange its affairs to achieve the lower tax rate, in any case.

We are also pleased to support the widening of the definition of charitable purpose. At the moment no person related by blood can be a beneficiary of a charity, and this bill changes that definition to recognise that beneficiaries of a trust, or members of the society or institution who are related by blood, can be a beneficiary. The bill also includes marae that do not have charitable status in their own right that are situated on land defined in the Te Ture Whenua Maori Act as being charitable providing the funds are used for administration and maintenance of the marae or for regular charitable purposes.

This change is not only a practical one, but it is also a change that is very important in principle because it is a recognition of the treaty partnership, and it is an acknowledgment that Māori society is not only a communal society, but one that predated the arrival of Europeans, and a society that does not fit neatly into the British charity and tax structures. Therefore, it is quite a significant step forward for this Parliament to recognise that through the change to the definition of charitable purpose.

I am pleased to support this bill, particularly as it applies to the taxation of Māori authorities. The first point to be reiterated is that there is nothing special and nothing new about special tax treatment for organisations that face special constraints. In this case, Māori authorities are distinguished because they manage assets that are communally owned. It is not possible for the authorities to dispose of those assets, and for that reason, amongst others, they are given tax treatment appropriate to that class of assets. They are not, however, singled out on the basis of race. This is a bill that tries to fairly represent the tax position of the overwhelming number—about 90 percent—of the beneficiaries of those Māori authorities. It is therefore absolutely correct, and absolutely appropriate.

It is worth reiterating that there is absolutely nothing new about this type of provision. It has been in existence since 1939. Indeed, the last revision was in the 1950s, and it has carried on under both National and Labour. The difference is that we are upfront about supporting it and modernising it to reduce compliance costs. Every time that happens the Opposition trots out the old race card. I was surprised, because it really is not worthy of what we would expect of the Opposition’s new spokesperson on finance. I would like to spend a moment or two on his contribution.

First off he did fairly represent the bill in one respect when he said: “There is much in the bill that is plain common sense.” Indeed, that is true. There is much in the bill that is taxpayer friendly. It increases the maximum amount people can claim as a tax rebate for donations, it broadens the definition of “good behaviour” that can be taken into account when imposing shortfall penalties, it allows business to pool provisional tax payments with those of other businesses, thus reducing their exposure to use of money interest, it allows for the use of intermediaries for PAYE, and so on and so forth. These are simple, common-sense measures designed to reduce compliance costs and the tax burden on ordinary New Zealanders and their businesses.

Dr Brash could not help himself though; he leapt back to the future, as he seems to be in the habit of doing, and argued that this bill should have been used to drop the top tax rate. Of course he failed to mention that it was a previous Labour Government that dropped the top tax rate down from 66 percent; 39 percent is quite reasonable. Where he really departed from reality was when he trotted out that old argument from the Reagan days. It is called the Laffer curve, in the economic jargon. It says that because rich people already pay a lot of tax, if they are given a tax cut they will end up paying more tax. It is a kind of circular logic. The trouble is it has never worked. In the history of economics it has never been proven, and I warrant that it would not work in New Zealand either.

It is a funny thing that has come over Dr Brash. When he was the Governor of the Reserve Bank he used to call Dr Cullen “fiscally prudent”, but now he calls him “miserable”. I suppose it is the same thing. It means that he does not spend everything that he gets in tax receipts. Indeed, that is true. The Government has been very prudent, and we have taken a prudent approach to paying off debt and managing expenditure. That is what I cannot understand about the National-ACT argument about tax policy. On the one hand they want to cut taxes, but on the other hand they want to pay off even more debt. We cannot do both of those things and still fund schools and hospitals. Something has to give, especially when we have people like Dr Wayne Mapp running around and wanting to buy more frigates and strike aircraft. They just cannot have it all ways. The National Party is indulging in voodoo economics. It should know better.

But all that pales into insignificance compared with our old friend Rodney Hide. We have come to enjoy his jovial banter in the House, and he has been doing rather a lot of that lately as he continues his ongoing tour of tax havens in islands around the Pacific and the Hauraki Gulf. He comes from a party that is very familiar with wholly-owned Māori subsidiaries. ACT seems to have one of its own at the moment. The only difference is that it does not want to keep it, and Donna Awatere-Huata wants to stay.

Taking tax advice from the ACT party is something that even its own parliamentary staff are finding perilous. I suppose it is a bit like taking investment advice from Dolf de Roos on a Fiji island. Rodney Hide criticised the 39 percent tax rate as being too high, and again made the mistake of ignoring that it was Labour that dropped it last time. He asked why Māori authorities should get away with 19.5 percent tax—ignoring the plain fact that 90-plus percent of Māori qualify for 19.5 percent anyway, because they earn less than $38,000.

On the one hand, we have a Government that is trying to simplify tax and make it easier for ordinary New Zealanders to meet their obligations. On the other hand, we have an Opposition that seems to be split between going “back to the future” into voodoo economics that have never worked, as Dr Brash is doing, and indulging in a tour of Pacific tax havens, as Mr Hide is doing. Neither of those add up. This bill is good policy, it is good ethics, it is fair, and it reduces compliance costs. I am proud to support it.