Brian Fallow: IRD goes on a wealth hunt

OPINION:

The Government is setting up a unit within Inland Revenue,tasked with pulling together harder, higher-definition information on the distribution of wealth and how it is acquired, in order to underpin policy advice on ensuring the tax system operates fairly.

Predictably, those staunch defenders of vested interest, the Taxpayers Union, have reacted by making the case against what they call — aping American Republicans — a “death tax”.

They are jumping the gun.

It is generally accepted that New Zealand does not have good data on wealth inequality, particularly at the high end of the range. The tax working group chaired by Sir Michael Cullen called for more resources to be put into gathering it.

The unit, expected to comprise six analysts, is due to report publicly in the first half of 2023.

When Revenue Minister David Parker appeared before the finance and expenditure select committee last month, National MP Nicola Willis asked him: “So you’ve already got 4200 officials at IRD but you’re setting up this unit to look at tax fairness. Is it anything more than a research unit to provide you with the data basis of campaigning for a wealth, inheritance or death tax at the next election?” Parker replied that he was not planning any such tax or seeking advice from officials on any of those issues.

Written responses last week from IRD to questionsfrom the select committee about the initiative confirmed that no specific tax policy is being investigated.

“The goal of the project is to fill a well-known gap in the information available for discussing economic income and wealth in New Zealand, to ensure that future tax policy advice is based on reliable evidence,” it said.

Economic income is different from taxable income. A standard definition, called the Haig-Hicks-Simon measure, defines someone’s income in a period as what they can consume during that period without reducing their real wealth. So it would include capital gains and bequests.

It is a concept people recognise when they say their house “earned” more last year than they did.

The Cullen tax working group noted that in the United States over a 10-year period, capital gains accounted for almost 40 per cent of the income of the richest 1 per cent of taxpayers. By comparison, capital gains made up only 5 per cent of the income for all non-elderly taxpayers and 14 per cent of income from those over the age of 64.

It may be why Warren Buffett has famously observed that he pays tax at a lower rate than his PA does.

The new IRD unit’s terms of reference tell us that: “This project will seek to collect information on capital gains and the level of net worth for high net worth individuals. This information will be used to develop basic research into how the tax system redistributes income and to evaluate the proportion of income this group pays in tax”.

In the previous term, Parker commissioned some work from officials on the distribution of wealth and income.

“It really ended, that particular piece of work, when the Statistics Department provided me a report in respect to the household economic survey to show that it is such an imperfect measure of the distribution of these things that … in its most recent iteration the highest net wealth of anyone surveyed was $20 million — in a country that has billionaires,” Parker told the MPs.

The household economic survey (HES) trawls too coarse a net through the population to pick up what is happening in the top percentile of people ranked by wealth.

So some research undertaken by the Treasury at Parker’s behest, supplemented it with numbers from NBR’s rich list, assuming that the chances of a rich lister being picked up by the HES is so small that the risk of double counting is close to zero.

The results, though festooned with caveats, raised the proportion of national wealth held by the top 1 per cent in 2018 from20 per cent in the HES to 25 per cent.

The tax working group recommended the Government fund “over” sampling of the wealthy in existing surveys and that it include a question on wealth in the Census.

It also recommended asking Inland Revenue to regularly repeat its analysis of the tax paid by high wealth individuals (HWIs).

This was a reference to work done spontaneously within IRD in 2016, and which came to light during the tax review, which looked at a group of 212 people worth, on average, some $270m.

It found that more than a third of the wealth controlled by the HWI group was untaxed, having been derived from one of these sources:

• Establishment of a new business which was subsequently sold, or its value crystallised in a public listing
• The acquisition and subsequent sale of an existing business
• Long-term property investments
• Long-term investment in other passive investments such as shares

Taking the NBR’s estimates of their wealth at face value, the tax paid by three-quarters of that group that year would have amounted to less than three-tenths of 1 per cent of their wealth.

The Government is following another recommendation from the Cullen review, that it commission research to estimate the wealth of individuals, using a variety of data sources on capital income, including administrative data.

Willis raised the issue of privacy concerns, if IRD officials were able to access information from other departments.

In response, Inland Revenue said: “At present the research team does not have access to data sets from other departments, outside of pre-existing information-sharing arrangements. External information that is considered will be subject to existing privacy requirements and will require staff to undertake the necessary privacy training.”

Data that Inland Revenue collects under new provisions of the Tax Administration Act can only be used for policy development purposes, it said, and it has well-established principles and processes to ensure employees abide by their legal obligations to maintain secrecy of taxpayer information.

But just in case, they will continue to liaise with the Office of the Privacy Commissioner over controls as the initiative develops further.

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