Taxation (Income Tax Rate and Other Amendments) Bill

Members, the House is in committee on the Taxation (Income) Tax Rate and Other Amendments Bill. Members, we come first to Part 1. This is the debate on clauses 3 to 31, Income tax rate amendments. The question is that Part 1 stand part.

Well, thank you, Mr Chair. I think a lot of members in the House are looking forward to a thorough examination of this legislation, such is our duty, and particularly given we’ve got the extraordinary circumstance of tax legislation being pushed through under urgency for no apparent reason other than that the Government is a political party that campaigned for it and would like to do it quickly. Some people would say that’s not particularly good use of urgency, and others would go further and say it’s a constitutional outrage—people can pick their own level of concern—but certainly the facts are that this is not the reason that urgency is available in the Standing Orders. It is to deal with things that are practically urgent, not things that a political party thinks are politically urgent.

CHAIRPERSON (Adrian Rurawhe): On the other hand, the House did agree to it.

Be that as it may, we still have the opportunity to ask questions—

CHAIRPERSON (Adrian Rurawhe): The House did agree to it. The member should address the bill.

Well, that’s certainly true, Mr Chair, but that doesn’t mean that we’re not able to debate the position that members have taken on the House agreeing to a particular course of action, particularly when it impacts on the nature and urgency, or importance, of investigation through the committee stage, which, as it happens, is precisely what I was about to get to.

In particular, I’m very interested in the purpose of Part 1, which, of course, is to give effect to the new tax rate of 39 percent on income above $180,000. Now, it states the purpose is to raise revenue for the Government, but then we turn to the departmental disclosure statement—which I think is a very handy thing to look at—and it seems to outline a very high level of uncertainty over the projections for revenue.

In the tradition of these new Standing Orders that we have around the committee stage, I’m interested in whether or not the Minister has actually got any guidance for the committee about what he thinks the sensitivity will be to behavioural change. In other words: where does the Minister really think this is going to land? We say $550 million if there’s no behavioural change, but, of course, we know that once people see that they could save, perhaps, tens of thousands of dollars by changing the way they structure their affairs or their income over $180,000—as one wag on the National Party benches put it, another way to avoid tax is to stop working. Does the Minister have any conclusive sense over what levels of behavioural change there will be in response, and how much revenue will come from this?

Of course, this is a question the Minister should be very careful about answering, because, of course, we’re going to know the answer. One thing the IRD does is it publishes very good statistics about the amount of revenue that emerges. So I guess it would be helpful for the Minister to just tell the committee now: does he think that they’re going to get the $550 million, which is what we hope will be raised if there’s no behavioural change, or does he think that, actually, the amount of money raised will be quite a lot less? He’s asking the officials now—that’s a good sign. Do we think it will be less than that, or do we think, actually, there could somehow magically be more? Because one of the things that we heard in the second reading—from, I think it was, Greg O’Connor—is that, actually, there are people who are begging to pay more tax. So is it possible that the advice the Minister has received doesn’t capture the full amount of tax that might be paid? Because, actually, if we take some of the Labour members who spoke earlier seriously, this might be seen by taxpayers as an opportunity to pay even more tax than expected.

So perhaps the Minister might care to rise to his feet and just give the committee some sense of what he’s concluded, given the advice he’s received. Does he believe that it’ll be about half a billion dollars? Does he think it could be more because of the exuberance of people who Greg O’Connor’s talked to, who apparently want to pay more tax? Or is it possible that, in actual fact, there’s going to be significantly less than $550 million worth of revenue? If so, how much revenue does the Minister think will be brought in over each year over the next four years, based on his expert judgment and assessment of the advice he’s received?

Thank you, Madam Chair. If I could respond to the questions that have been raised by David Seymour, the best estimate of the Commissioner of Inland Revenue is as set out in the statement that the member has already quoted. That includes an allowance for tax avoidance. The tax avoidance may be less; it may be more. But it is the best estimate of the commissioner as to the likely outcome; so the figures that are there include some allowance.

Why it’s a little bit difficult to be more accurate is that the—

💬 David Seymour: More precise.

—more precise—jurisprudence on the income shifting that occurred under the prior iteration of the 39c in the dollar tax developed pretty late in the piece during the period when that higher rate applied. The case concerned was called Penny and Hooper. In Penny and Hooper, a professional taxpayer diverted quite a bit of his income through an alternative structure in order to minimise his own income and put income through another taxpaying entity. That was found to be tax avoidance, and we are confident that some of the behaviour that was effective at avoiding tax would now be determined to be tax evasion as a consequence of the Penny and Hooper decision, which will still have authority in respect of these changes.

However, there remains uncertainty as to how much trusts will be used as a way in which to divert income in other ways, and that’s one of the reasons why we’ve got these information-gathering powers, which other members have already spoken about.

Thank you, Madam Chair. Further to that, I appreciate the Minister’s answer about the amount of revenue that might be forgone compared with the estimates because of avoidance activity and because of the uncertainties around Penny and Hooper and the jurisprudence of whether or not people will be able to use particular vehicles to avoid tax, and we accept that the Minister is being quite candid that he can’t be very precise about how much avoidance activity might go on and, therefore, how much revenue might actually be raised, which, in fairness, is the whole purpose of the policy. But I’d like to ask if he’s got any advice or any wisdom on another question, which is around not so much people earning income and then structuring their affairs to avoid declaring it in a way that qualifies it to be, I guess, rated as or declared as income tax but actual behavioural change in the sense that people don’t actually carry out productive activity at all, given the reduced return for that activity. In other words, does he have an estimate for the dead-weight loss?

Traditionally, economists have tried to estimate what is the true cost of raising a dollar of revenue, allowing for the dead-weight loss that comes from people simply not undertaking activities that they might have, were there to be a lower tax rate—for example, when firms are trying to compete, and we hope soon that we’ll be able to be competing for skilled labour across the world and people will be able to move around again. The Minister will be interested to know the UK is going to be rolling out a vaccine next week, but the world is changing very quickly. I didn’t believe the Minister when he said at the University of Otago several months ago that there might be a vaccine in the first quarter of 2021. It turns out he was not only correct; he was a little bit late in what seemed to be a bold estimate at the time.

Now, we hope that we’ll get people moving around the world and firms will be competing for skilled labour for executives who might be affected by this tax rate. Has he had any estimates on what might be the impact on the ability of New Zealand firms to attract skilled people who are weighing up what the incomes are in New Zealand, what the tax rate is, and so on?

So I guess—just to conclude the questions—does he have any advice on it, and does he understand what the effect might be on the propensity of people to work and the propensity of people to migrate to New Zealand, because it really matters that we’re able to get people to work, save, and invest, and also come to this country. There’s at least a prima facie case that increasing the top marginal tax rate will discourage people from doing that and that there are wider dead-weight losses to the economy from having a higher tax rate. If the Minister can tell us whether he’s had any advice about those questions and what that advice was, I would be very grateful.

Referring to the last point first, I thought Julie Anne Genter covered those issues well in her contribution in the second reading debate. She didn’t think there was going to be much change in the behaviour of international people coming to New Zealand caused by this rate difference, because people make choices for lots of other reasons, including the sort of country that they want to live in. In respect of countries such as Australia and Great Britain, of course, their marginal tax rates are higher than is proposed here at similar income levels that are proposed here for 39c in the dollar. People in the United Kingdom and Australia are paying 45c in the dollar; so I don’t think the member needs to have concern that people won’t want to move to New Zealand from those countries on the basis of this change.

In respect of the dead-weight cost and whether this will demotivate people to work, if the member really is concerned about that, far more people sit in the band below this rate than above it who pay an effective overall tax rate on income that is higher than the people even now at a 39c in the dollar income tax rate will pay overall as a percentage of their income when GST is taken into account, because savings in respect of higher-income people do not incur GST, whereas middle-income people pay a higher proportion of their income in GST, at 15c in the dollar, in addition to their income tax, whereas this 6c increase in income tax on incomes over $180,000 is often saved, avoiding GST at the rate of 15c in the dollar. I don’t say “avoiding” in any pejorative sense, but the effective tax rate of a lot of people that are in this higher tax bracket will still be lower than the effective tax rate paid on the taxable income of people at lower incomes.

Thank you, Madam Chair. In the absence of other people seeking the call, I’m quite happy to continue asking the Minister questions, and I thank him for his engagement and his answers. What he appeared to be saying is that we shouldn’t worry about the tax rate because people will come to New Zealand for many other reasons but we are competitive with other countries that have a higher tax rate than us because we have a lower tax rate than them, which, in fairness, I think seems a little bit like he was picking the argument to suit him in each case.

He also pointed to the effect of taxation on people in other areas of the tax spectrum or the income spectrum, and I agree with him that people are motivated, or at least demotivated, by the taxes that they pay, but that’s not in debate in this bill. What’s in debate in this bill is the effect of the tax rate on people earning income over $180,000, or at least on the income over that level. It seems to me that the real answer to the question is that the Minister’s not sure what the impacts will be on people’s motivation to work, but he said that he thinks not much, is the answer that we actually got, and that he thinks that won’t affect competition for skills and talent, but it wasn’t clear why he doesn’t think that.

I noticed that the regulatory impact statement says that an additional objective of the bill is to increase the, I guess, progressivity of the tax system and make New Zealand a more equal place. That is sort of a secondary objective. But I have to wonder—the Treasury has said in the departmental disclosure statement that the change in the Gini coefficient is going to be 0.2 percent if there’s no behavioural response. But, of course, the policy doesn’t actually make anyone better off directly; it just takes money off some people to achieve that. So I just wonder if the Minister can explain how this policy is supposed to work. Is it that it makes people more equal by taking money off some, and, if so, is it really worth a 0.2 percent change in the Gini coefficient?

Then, I guess, a sort of related question—I’ll give you two for one, because we wouldn’t want to be here all night. There are other ways to, I guess, reduce the Gini coefficient, if that’s one’s goal, and the other way from taking money off people that have it is to give to people that don’t, or at least take money off people that have more and give to those who have less. I wonder if the objective is to transfer half a billion dollars—although, as we’ve heard, it could be a lot less than that; we’re not sure. Did the Minister, in his discussions with his Cabinet colleagues, ask if maybe somewhere in the hundred billion - odd that the Government spends, rather than going down this route, it might be easier to find economies and efficiencies elsewhere, if the objective was to transfer cash and reduce the Gini coefficient? Could they have reduced Gini by more than 0.2 percent by finding greater efficiencies in other Government spending? Now, it may be that the question was asked and the answer was “No, there’s no inefficient spending in this Government”, but it would be helpful to know if the Minister asked that question first.

Then maybe if we get past that, who knows? Someone else might want to ask a question, but I do have some more if they don’t.

Thank you, Madam Chair. In respect of the progressivity issue, progressivity is achieved both through transfer payments but also public services that are delivered to New Zealanders through funding that’s provided by the tax system. In respect of cost-saving measures, we are—as all Governments do—trying to avoid the waste of taxpayers’ money. No one wants to take more money in tax than is needed to meet the proper business of Government. At the moment, many Government departments have, in fact, suffered very large reductions in their normal fee revenue, particularly as a consequence of the disruptions to the economy caused by the COVID epidemic.

Thank you, Madam Chair. I was just listening to my colleague David Seymour, who’s rapidly traversed a whole range of issues, and I thought we just might go back and start to actually ask a few more detailed questions.

I think the line of questioning the member from ACT was talking about around the extent that you’re going to collect the $2.2 billion as set out in the report—the first thing I’d have to ask the Minister: if you average that by five years, it’s actually $440 million a year, and everyone seems to be quoting $550 million; so just one point of clarification. But the real bigger issue, I think, is the issue of uncertainty around that, and the advice that you’ve received from officials is pretty clear, saying these revenue estimates are highly uncertain—highly uncertain, they say. And what I would be keen to ascertain is they note that people may reduce and also may divert income to other entities. Does the Minister have a breakdown of what is the maximum possible that could be achieved under this arrangement, with this new arrangement? And, from there, how much has been deducted to arrive at this $2.2 billion figure, because what I’m interested to understand is to what extent are people diverting income to other entities, and that might be into company structures, it might be into trusts, it might be into a portfolio investment entity. So whether he’s got any figures around that.

Secondly, the issue around reducing hours and also the issue which was raised before: there is a specific comment in here about the issue around the impact it will have on people not wanting to come to New Zealand. Contrary to what Julie Anne Genter spoke about earlier, I was talking about people coming to New Zealand. She got us a little bit confused. My quote that I noted earlier was on page 29, and that was “will reduce the number of highly skilled workers and reduce the efficiency of their location.” So what is going to happen with people coming to New Zealand and the impacts of that? To what extent have all those aspects been taken into account? And what is the quantum of that assessment of loss of income which otherwise would have been achieved if this new tax policy had come into being and would not have had those other untoward consequences?

In respect of have I had advice as to what would be the likely diversion into other vehicles like companies or trusts, I haven’t got the range in front of me. I’m sure that, in the calculations that the Revenue has made to get to their estimate of revenue, they will have commitments that they will—

💬 Andrew Bayly: Can we ask them?

I’m happy to ask them. Now, I doubt if they’ll have that detail of figure yet, but I’m happy to ask my officials if they have got it there and provide it to the committee if they do have.

In respect of these arguments about the effect on differentials between different tax types, I do find it a little ironic that some people complain about the differential between income tax and the company rate being enlarged by a tax increase but they don’t make the same argument when the differential is enlarged by a decrease to the corporate tax rate, and yet the same argument would logically apply.

💬 Hon Michael Woodhouse: Yes, they do. Exactly, we had that conversation when we were considering that.

Well, I was in this House when the National Government dropped the corporate tax rate to 28c in the dollar, which had previously been closer aligned to the highest rate of income tax, which was 33c in the dollar, and they increased the differential.

💬 Nicola Willis: Cutting taxes is so much more fun.

“Cutting taxes is so much more fun.” That’s the response that I’ve just heard from Nicola—I’ve forgotten—Willis. Thank you. Sorry, Mrs Willis, I didn’t mean to forget your name, but I think that really sort of shows the simplicity of the arguments from the Opposition.

Thank you, Mr Chair. Just a quick supplementary—firstly, a comment on that and then a question about the estimated revenue from the new tax rate. The Minister in the chair, David Parker, is right that the previous conversation about this had a 5c differential between the company tax rate and the top personal income tax rate. We’re now talking about, potentially, 11c to 13c. Is the company tax rate still 28c, or has it gone to 26?

💬 Hon David Parker: 28.

I think we looked at it, but—so it’s an 11c differential, which is a significant difference, more than double what the current differential is. The Penny and Hooper case was an extreme one—there’s no doubt about that—where surgeons were actually paying themselves the sorts of salaries a senior house officer or a junior registrar would get, and that was despite them having been consultants in private practice for a considerable period of time. But, even so, there was a dissenting view by Justice France, I think, in that case, and the question of whether that case will apply in all circumstances is an open one.

We’re not talking about orthopaedic surgeons earning a million dollars a year; we’re talking about Joe and Jill the plumber, the garden maintenance person, the electrician who may have been in a sole trader situation and had been given advice by their accountant or lawyer to say, well, look, that could lead you to a couple of situations, not the least of which is a personal liability that might accrue, which wouldn’t be the case under a limited liability company, but the effort that would be gone to, which would also have the secondary impact of a lower year-on-year tax rate, may now become very much in focus. I have no doubt that it’s not an avoidance strategy but simple tax planning and personal estate planning that the Minister himself, I’m sure, embarked on from time to time in his practice as a lawyer in Dunedin. That was just the observation; it went longer than I thought it would.

The question is this: if we can’t get the exact degree of analysis by officials on the degree to which the estimated revenues were calculated and in what scenarios, can we reverse the question, say, to what degree did that matter to the Government? To what degree was the collection of revenue a material factor in the increasing of the top personal tax rate? Might, if the advice from IRD had been that it was under a hundred million dollars a year, under $50 million a year, would the Government have turned around and said, “You know what? It’s not worth it.”? We may, as a consequence of increasing the top personal tax rate earn less revenue than we would otherwise because of the entity flipping that the Minister is so concerned about, particularly with trusts. So was revenue in itself a material factor in the decision to introduce this bill, or—and I believe that this is the case, in any event—is this a matter of principle that those who are earning over $180,000 should pay a top marginal tax rate of 39c regardless of whether the Crown benefited from it or not?

The issue of revenue was first and foremost in the Government’s mind. A secondary consideration that I think I’ve already covered quite well—or it’s not for me to say whether I’ve covered well, but I’ve attempted to cover—is the issue of tax fairness.

In respect of trusts, while I’m on my feet I’ll address something that Nicola Willis raised in her second reading contribution, which she said she’d like me to address during the committee stage, which is why we have these powers to get further information from trusts. We’ve had very strong advice, which we’ve disclosed to the House in the associated documents, that there is a significant risk that trusts will be used increasingly as an avoidance mechanism. The advice that we had from revenue officials, which we have accepted, is that we should be looking into that. In order to look into that, we need the ability to gather the information, which is not gathered retrospectively; it is gathered prospectively. But the information that is gathered prospectively includes information from yesteryear to compare with current and future practices so that you can see whether there was a pattern of changed behaviour.

Where do the avoidance risks lie? Well, it’s not just in the fact that income could be earned through an alternative vehicle paying a lower rate than the 39c rate, namely the 33c in the dollar tax rate paid by trusts. It’s also the ability for trusts to declare some income to be beneficiary income rather than trustee income. Trustees under the tax Act can nominate that income that is earned through the trust is attributed to beneficiaries of the trust in that income year, which then flows that income through to the beneficiary of that trust at the tax rate payable by the beneficiary. Now, that’s often very proper; there are some very good and proper reasons to have trusts, for example, for the protection of a disabled child or for the delay in paying money to a child under an estate—for example, if their parent dies while they’re still young, it’s quite proper that the income accrued to the benefit of a child beneficiary until they gain a later age. Those are very proper uses of trusts, and we’re not concerned about that.

But it is also possible, and this is a pattern that’s not really a pattern of behaviour except for very wealthy people, to use trusts to, effectively, divert income from the primary taxpayer through a trust to a beneficiary on a lower tax rate. If that becomes a prevalent form of behaviour—it’s already possible to do that for reasons of tax advantage even with the tax rate at 33c in the dollar for trusts. It does become a greater incentive to do that, if you like, at a higher marginal tax rate elsewhere in the tax system of 39c in the dollar. If that behaviour is prevalent, we want to know about it. We want to know how much that’s currently happening in respect of this differential between a 33c in the dollar trustee rate and maximum income tax rate and some beneficiary trust rates. We’re pretty blind as to what is happening now. We think, for tax policy reasons, we need to know that.

I welcome this back and forth. It’s actually very important for this bill, where there has been an absence of a select committee process, and where, by Minister Parker’s recent admission, there are significant matters relating to the way in which trusts pay tax that have not previously been canvassed in the public domain or in Labour Party manifesto policy. So it is very appropriate that we use this committee process to ask questions about those clauses.

Before I move to a question I want to ask, I do just want to address a comment that the Minister made where he talked about me saying that cutting taxes is more fun. I’ll remind the Minister—who I remember going to a shared dinner with Al Gore almost a decade ago; so I certainly remember his name—that having been a member of the National Party for a very long time it should come as no surprise to Minister Parker that I enjoy letting people keep more of their money far more than I do confiscating that money from them, and that is a principle that I hold dear to.

But, moving to my question on the bill, my first is a technical question, and it relates to the revenue that this new tax rate will raise. The reason this is important, of course, is we only need to go back to the purpose statement of the bill, which is explicit that the reason that we are here under urgency passing this bill is that this is all about raising revenue. So it is of some issue that the estimated revenue that the Inland Revenue Department have shared with us is incredibly lumpy. We’re looking at $95 million in revenue this next year, increasing to $160 million in 2021-22, then leaping up in the 2022-23 year to $830 million, and then dropping back again the next year to $540 million. I just invite the Minister: would he please address for me—would he elucidate, explain to this member—why we’re seeing such a lumpy pattern of revenue, and whether the Minister can explain why that is.

I was just fascinated with the Minister’s comments before. So the Minister of Finance said two months ago that there would be no new increases in tax other than the 39 percent change that we’re debating tonight. What I just heard from the Minister was his concern that trusts are being used so that money is diverted—using his words—or sent via a trust and then that is used as an arrangement to pay beneficiaries at a lower rate. Is he now saying to the House that that approach, which is legitimate at the moment, is very much of concern, and he will seek to change the trust tax rate and the trust rules to stop that practice from occurring in the future?

Dealing with Nicola Willis’ question—and I apologise again for forgetting your surname. I sometimes, I think, do it with my own children, just about. I’m terrible with names. The revenue varies from year to year, in part because of provisional terminal tax payments. I think it peaks at about $800 million, is the prediction, but the average over the longer term is expected to be $550 million per annum, which is why that number’s been used by other members.

In respect of the trust issue, the Minister of Finance, when he was asked these questions during the election campaign, said we’re not campaigning on increasing the rate of the trust tax rate, but we will look at the issue if there’s a lot of tax avoidance. The advice that we got from the Commissioner of Inland Revenue and the department after we won the election—and this is disclosed in these papers—is that there is a heightened risk that they’re more worried about than perhaps we were. Therefore, they say that we need to keep an eye on it, and they need the powers that are in this bill in order to keep an eye on it. So we’ve got no current plan to increase the trust tax rate, but we’re not promising that we won’t. We’re just going to see what’s happening.

Whilst I’m on my feet, I want to deal with the amendment that sits in my name as having been filed at 12.21 p.m. It hasn’t got a number on it. It’s an amendment to clause 33.

CHAIRPERSON (Adrian Rurawhe): Order! That’s in Part 2.

Oh, sorry, Mr Chair.

Thank you, Mr Chair. Just a brief question to the Minister. In relation to the earlier line of questioning, he was talking about the powers that are in the bill to keep an eye on what’s happening in terms of behaviour change as related to people diverting income towards trusts and so on. The thing that I’m most worried about is actually the effect of that on asset values. So, whilst keeping an eye on what’s going on in terms of behaviour is useful, it’s somewhat too late if by the time it’s happened people have diverted some of their remuneration package into trusts, which then inflates property and other asset values and further increases the gap between people who have wealth on the one hand and people who earn a living but don’t have wealth on the other.

So I just wanted to ask for his thoughts on, I guess, the lag effect between being able to get the information using the powers that are in the bill and the actual effect of that on asset prices and asset value inflation and the potential, then, for that growing gap between people who have wealth, on the one hand, and people who work but don’t have wealth, on the other.

These things are very hard to quantify to the extent that there are investment signals that are imperfect in New Zealand based on tax signals for certain forms of investment compared with others. My own view is that the change from 33c to 39c for incomes over $180,000 won’t have much of an effect on that. Those background issues are not resolved through this, but I don’t think they’re made much worse in it. I give the example of someone who earns $200,000. That would be $20,000 that would attract 6c higher tax, which would be $1,200 a year, which is $23 a week. I don’t think it would change investment behaviour much.

💬 Andrew Bayly: Mr Chair?

Order! Members shouldn’t seek the call until the person with the call has actually sat down.

Well, thank you very much, Mr Chair, and thank you to the Minister for his continued engagement. If I may, I’d like to speak to Andrew Bayly’s amendment on Supplementary Order Paper 1. It appears—as far as I can tell—to raise the threshold for the lowest tax rate from the present $14,000 to $17,000, having the effect that people will pay 10.5c of the first $17,000 and 17.5c thereafter—as opposed to the status quo where the threshold is $14,000. This, I have to say, is a most extraordinary proposition to come from the National Party.

We are in favour—or at least the ACT Party is—of broad based - low rate taxes. The reason that we’re opposing the bill that’s being debated tonight is that, while it doesn’t change the broadness of the tax base, it does raise the rate on a certain strata of personal income. We think that’s unhelpful because it’s distortionate. The point of broad based - low rate taxes is that people face the same rate of taxation regardless of their behavioural choices, so people can go about their lives seeking to use the knowledge that they have in their society to make their life better for themselves and their loved ones in their community, without having to spend a lot of time trying to change their behaviour to avoid the IRD. That’s the point of broad based - low rate taxes. So that’s why we’re opposed to a bill that, while leaving the base the same, increases the rate on higher incomes.

But this amendment by Andrew Bayly, on Supplementary Order Paper 1 that I’ve described, actually appears to narrow the base. What it does is it says: we’re not going to have tax to the same extent on the widest part of the tax base—that’s the income that everybody earns at the lower end of the spectrum at any given year—we’re actually going to cut the tax at the lower end and have higher taxes at the higher end. That’s the effect of this Andrew Bayly amendment. He’s actually going to make taxes more progressive. He should think very hard—

💬 Hon Michael Woodhouse: Rubbish.

Well, I just heard “Rubbish.”, and I’m not sure if it was Andrew Bayly or Michael Woodhouse, and I apologise to Andrew Bayly for accusing him of saying that. If the policy is to actually narrow the tax base and make it more progressive, well, one reason that I’d really caution Andrew Bayly and ask him to think carefully about whether he really wants to advance this is that, in some future universe, when there’s a different Government in place, and that Government sets about saying, “How can we get to a lower, flatter tax regime that’s less distortionate?”, then the question that’s going to be asked is “Well, we could but, sadly, because we reduced the tax rates at the base, because we narrowed the tax base, our ability to have a lower, flatter tax regime is less than what it would otherwise be.”

And we’ve actually already been there, because the 2010 tax changes—reducing the 19.5c rate down to 10.5c—may have seemed like clever politics at the time, but the effect of it is that it has become almost impossible to get meaningful tax reform for lower, flatter taxes, because so much revenue is lost from that 9c drop on just about all income tax, because just about everyone who earns income tax earns that first $10,000 or $20,000. Of course, the problem with that is that you end up where Steven Joyce was come around 2016, where he was actually boasting that the National Party had made the tax system more progressive. Sadly, this amendment by Andrew Bayly is at it again.

So I’d just put it to the member, if he wants to put this forward and have it debated, is he in favour of broad based - low rate taxes? Is he in favour of less distortion? Is he in favour of low, flat taxes? Or does he actually want to be the guy that comes to Parliament and makes the tax system more progressive? Because if that’s what he wants to do, my suggestion to him is he should walk across the Chamber and join the other side, because that’s what they believe. The member’s confused; he’s sitting on the wrong side.

I want to return to what you were talking about before—I don’t think the Minister is suggesting this, but I want to check. Does the Minister have concern with trusts being used as a conduit where money is being paid into the trust, or incomes directed through the trust, and paid out to beneficiaries at a lower rate of tax? I’d just like him to, first of all, confirm whether or not he has concerns with that practice at the moment. But my second question, given his comments before: what, then, is his concern about the way that trusts are going to be used in the future that would give rise to the Minister contemplating increasing the trusts rate of tax?

I move, That the question be now put.

Mine is a very brief question. I know that there are members with a lot of questions to ask. My question is simply around this issue of the trustee rate and how much revenue that would increase. What I note in the documents is that there’s an estimate that increasing that rate would generate $1.5 billion in additional revenue. Obviously, that stands out as a particular temptation for any Minister that enjoys the revenue that comes from tax. The Minister of Revenue will be looking at that number and thinking “How do I get my hands on it?”, potentially, and I invite the Minister to disabuse me of that notion if it’s incorrect.

So my question is simply: at what point or what factors would lead the Minister to believe that the information he’s collected suggests there’s such a pattern of behaviour that he would be justified in taking that additional $1.5 billion in revenue and increasing that top tax rate? Can the Minister outline for us and illustrate more specifically what factors would be at play for the Government to choose to increase that trust rate?

Trusts have many legitimate purposes. Tax avoidance is not one of them.

In respect of David Seymour’s points in respect of Mr Bayly’s Supplementary Order Paper 1, well, that’s not for me to argue for that on behalf of Mr Bayly, suffice to say that the Labour Party will be voting against that Supplementary Order Paper 1.

So can Minister Parker just clarify what he means by that statement about tax avoidance? Does he agree that using a trust structure where money is paid out to beneficiaries, albeit maybe at a lower tax rate—is that legitimate, that practice? But, secondly, what would stimulate the Minister contemplating an increase in the tax rate on trusts as a result of tax avoidance? What does he mean by the statement “tax avoidance”, other than the practice that would generally happen in a trust?

I’ve already listed in detail the legitimate reasons why you can have trusts and have income being attributed to beneficiaries who pay a lower rate of tax than 33c in the dollar for good and proper reasons. In truth, I think most people in this country would be surprised that the Inland Revenue Department doesn’t really know the extent to which trusts are being used for tax avoidance purposes. It’s notable that, in a lot of other countries, Revenue does have that information. After tomorrow, after this legislation passes, the revenue authorities in New Zealand will be able to be in the same position as revenue authorities in other countries.

I move, That the question be now put.

Thank you, Mr Chair. I just want to turn to the question of the $180,000. First of all, we really never had a proper explanation around why $180,000 and a tax rate of 39 percent was decided on and put forward in this bill, and so it would be useful to have the context of why the rate of 39 percent—why it wasn’t 37 percent or why it wasn’t 40—and why it was struck at $180,000. But, just on the issue of the $180,000, I have put forward a Supplementary Order Paper because one of the issues that we’re worried about in the National Party, and we proposed it privately last election, is this issue of fiscal creep, or tax bracket creep, where people end up being pushed into higher tax rates as a result of inflation.

So my Supplementary Order Paper deals with this issue. If there’s to be consistent practice, then it would be appropriate that not only are other, lower forms of personal tax subject to a Consumers Price Index - type index so that they’re increased—otherwise hard-working New Zealanders will inevitably end up getting into a higher tax rate merely through the impact of inflation. I think it’s important that we make sure that hard-working New Zealanders aren’t subject to unnecessary tax just because of inflation. It should be as a result of genuine increases in their wages and salaries other than through the impact of inflation over time.

Just before I reply to that, officials have just passed me a note in respect of minor beneficiaries as opposed to adult beneficiaries. There is already a provision that allows the Revenue to move against payments to minor beneficiaries to prevent that being used to pay out income at a low rate, but the rule doesn’t apply to adult beneficiaries. In respect of the issue as to inflation adjustment of the different thresholds at which different tax rates apply, we will be voting against that amendment also, and we would note that, in the nine years of the prior National Government, of which the member was part, they never introduced that rule when they had the opportunity to do so if they thought it being wise.

Thank you. Thank you very much, Mr Chair. Dr Webb, you shouldn’t be disappointed. You might get an education in spite of yourself. Listen up.

I just thought I should comment on Supplementary Order Paper (SOP) 2 and Andrew Bayly’s amendments on that. I’m afraid to say that they’re not quite as disappointing as the amendment he’s put forward on Supplementary Order Paper 2 but nearly, for a number of reasons.

As Lord Keynes, a beloved economist on the other side of the House, once said, “When the facts change, I change my mind. What do you do,”. I’ve actually changed my mind on indexation of tax thresholds. ACT advocated for them quite strongly in the 51st Parliament, when, of course, the National Party had the Treasury benches and refused to do indexation, presumably because, when one holds the Treasury benches, one is much less keen to erode revenue than they are when they’re in Opposition. So I’d say to Mr Bayly that there was a good opportunity to do indexation. You had a very willing Government support partner with, really, quite a lot of pluck and alacrity and potential telling you that actually you should do it. Of course, Mr Bayly’s party didn’t introduce indexation, as he proposes now, when it would have been much easier to do so.

But, actually, I think it’s for the better because, as I said earlier, we actually want broad based - low rate taxes. We want to have the same rate across all incomes so that we don’t distort people’s decisions. We don’t want to continually hollow out the tax base by giving an exemption on some income, necessitating tax rates on other incomes to be higher than they would otherwise be. In other words, we don’t want to keep raising the threshold for the bottom rate, because that means we have to have higher tax rates on higher incomes. That’s actually more distortionate. It’s less fair because it means that people who earn more income don’t just pay more tax because they earn more income; they pay disproportionately more. The more that tax thresholds are indexed to inflation, the more of the effect I’ve just described you get.

So these amendments on Supplementary Order Paper 2 are actually designed to give us a more progressive, more distortionate, more complex tax system than we would otherwise have. I’m glad that I didn’t succeed in lobbying for tax bracket indexation all those years ago, because having reflected and thought and read about tax policy over the years, I’ve recognised that it’s actually not a policy that will make New Zealand a fairer, more meritocratic, more prosperous country over time. It certainly sounds good, a lot of policies sound good, but this one won’t actually work.

But I would be concerned if I was to discover that the Minister’s intention was that the Government was going to adopt this retrograde and not regressive, but actually more progressive, amendment. I hope that the Minister is going to say that the Government will vote against it along with ACT, because we certainly don’t want to be involved in anything that would make the tax system more progressive than it already is. And we certainly don’t want to make it more complicated than it already is. We certainly don’t want to move away from broad based - low rate taxes to narrow bases and higher tax rates, and yet those are all the left-wing things that Andrew Bayly’s amendment on the SOP does.

I’d just be a little bit heartened, especially given some of the pretty out there speeches I heard—particularly between 4.30 p.m. and 6 p.m. today—that the Labour Party is still the party that has some reference to economic orthodoxy and won’t be supporting amendments to make the tax system even worse in terms of its progressivity. So I’d be very grateful to get an answer to that, from the Minister. Being very grateful to hear that he’s not going to support the amendment on SOP 1, which is certainly of the same ilk and takes us to a much greater level of progressivity and complexity in our tax system. Thank you.

Members, I’m going to refer to the new Standing Orders that we can finish up to five minutes early. Therefore, the time has come for me to leave the Chair. The committee is suspended until 9 a.m. tomorrow morning.

Debate interrupted.

Sitting suspended from 9.57 p.m. to 9 a.m. (Thursday)