Speaker: Why we can’t just fix secondary tax
81 Responses
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Rich of Observationz, in reply to
Section DC 5 of the Income Tax Act 2007
Does this apply if you're co-owners of a limited company, or have a business partnership?
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Lilith __, in reply to
Long story short: the benefits of income splitting flow disproportionately to high income earners, especially those households where one person is in a very high paid job, and the other person is very low paid or not in work at all. It’s worth thinking about which sorts of people are likely to fit into that pattern (hint: it’s not low paid workers in South Auckland).
I realise tax breaks benefit high-income folks more.
BUT. A little extra can make a huge difference for those who are struggling.I've been in the situation of being a disabled spouse wholly supported by my partner working 2 jobs. No WFF, no Community Services Card (just over the threshold), no Disability Allowance. Actually bloody hard. Income splitting would have been a huge gift to us.
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Moz, in reply to
I realise tax breaks benefit high-income folks more.
BUT. A little extra can make a huge difference for those who are struggling.I think that's an argument for better tax breaks for low-income folk, rather than an argument for "give huge benefits to the rich, and hope the poor also get something". At the very least it would be a very badly targeted form of assistance. I suppose if you buy the "deserving rich" myth it makes sense but I don't.
Income splitting would help us a bit now, and would have helped a lot when I was working and my partner was studying (or vice versa), but it's just a bad way to get that outcome.
But really, we would benefit a lot more from a vigorous attack on tax minimisation and tax cheats than by any tinkering at the margins. Given the current government budget, putting an extra few hundred dollars in my pocket every year will be at the expense of someone else. I'd rather than be tax cheats than poor people. Especially because if we ripped $80 million out of the pockets of poor people they'd be screwed, but that's roughly how much the tax cheats steal every year...
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Danielle, in reply to
I’ve heard that the USA makes its citizens file annual returns no matter where they are in the world… just to make sure they’re paying enough tax to somebody.
They do. WHICH IS INSANE. So my husband does a tax return for both countries, but only pays tax here. Pointless busywork.
(I have dual citizenship and have never bothered doing my US tax returns, because as far as I'm concerned only my New Zealandness counts when it comes to taxes. Perhaps this will bite me on the bum one day.)
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Deborah, in reply to
When it comes to partnerships, the rule of thumb is that profits get divided up according to the partnership agreement, or in the absence of a formal partnership agreement, then in accordance with relevant law such as the Partnership Act 1908 (yes, that legislation really is over 100 years old, 'though it has been much amended in the meantime). Roughly the idea is that the split of income has to bear some relationship to the underlying reality. So if you and your business partner have put in more or less the same amount of money, and you do more or less the same amount of work, then you're going to end up with a more or less 50:50 split for tax purposes.
One commonplace scenario might be a couple where they own a rental property jointly, and one person works in paid employment. From a tax point of view, it would be good to be able to stream all the rental property income to the person who is not in paid employment, to take advantage of the lower tax rates, but in practice, you can't get away with that.
Long story short: you have to look at the underlying economic and legal reality, not just what would be convenient in terms of splitting partnership income.
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Deborah, in reply to
Does DC 5 apply to companies?
If you're a co-owner of a company, then you are a shareholder, and excessive remuneration to a shareholder, or an associated person of a shareholder (eg. a spouse / civil union partner / de facto partner) gets treated as a dividend and taxed accordingly. So there's a different mechanism that achieves the same end ie. you can't pay a salary to an associated person who hasn't actually done any work for that salary.
The same sort of thing applies to a partnership, except that the remedy is for the Commissioner to set aside the salary and re-do the profit split.
The rules are in section GB 23 of the Income Tax Act 2007.
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Rich of Observationz, in reply to
Wow, thanks for all the free tax advice. Not that I have any need to try anything like that at the moment.
I'd suspect though, that this is a bit like income tax on property trading - you have to be "taking the piss" to a fair degree before the IRD will consider it worth examining things, and most accountants have a very good idea of what one can get away with.
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Deborah, in reply to
Hmmm... it's a bit non-specific really. Not so much tax advice as generalised observations about the tax system.
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Ian Dalziel, in reply to
I think the answer is “there be dragons"
Indeed, but don’t worry the IRD is onto it, and is getting some foreign professionals onto the redesign and overhaul of their computer systems…
– what could possibly go worng?Why couldn’t they get the people who use it to design it open source for functionality – with a core secure section for personal data?
as I comment on the Dom page, it worries me that IRD’s criteria for acceptance of interest/quotes was that the firm had to have implemented a programme of change – nothing about it being a successful transition – Novopay anyone?
(where is that particular debacle at these days?
– have they broken the company into two sections yet:
the profitable ‘Nopay’ and the loss leading ’Ovopay” ?) -
I hope this isn't seen as a thread hijack, but it is a taxation question. What is The PAS readership's opinion on Universal Guaranteed Income plus flat tax? It seems to eliminate the issues around secondary tax and income splitting, yet provide the benefits of progressive taxation. And we could rid ourselves of the whole WINZ horror show.
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Moz, in reply to
What is The PAS readership's opinion on Universal Guaranteed Income plus flat tax?
I'm a big fan. As part of a radical simplification of the benefits system it would be great.
But most people don't think of the tax system as part of the benefits system, so I think it would take some smooth talking to get people to accept it. Incremental approaches will probably involve a lot of added complexity before the final reveal "simple!", and while I would love to skip them I fear running a scare campaign would be irresistible to some elements.
The simple version would be so nice but I'm not sure a flat tax would work. I suspect we'd still want a three level "none/some/punitive" setup, but of course you can elide the bottom level by saying the UBI isn't taxed while pretending that is different from not taxing income (a zero rate on the first $X). It makes no sense to me, but I see people do it all the time. So yeah, 0% up to the poverty line (or wherever the UBI is), 20% tax up to, say, the top 10% of incomes, then 50%. The compromise on the top level being between higher rates cutting in higher and pushing people out of the country/making wages unaffordable (because a chunk of the top earners will just say "pay after tax to be $X". I think that group is vanishingly tiny, but they're the ones who get the media coverage)
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Rich of Observationz, in reply to
One way to alter the playing field for top earners would be to have a salary cap for the public sector, as practiced in that hotbed of socialism, the USA. (The President is the highest paid government employee, and the VP's salary of USD230k sets the cap).
That would mean that you wouldn't be able to get rich in the public service, which would possibly attract those with higher motivations, or keen younger people seeking to make a name for themselves. Equally, private businesses wouldn't have to compete with an city council paying its CEO half a mil.
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But in the US that just creates the notorious revolving door to the private sector, and doesn't keep private sector wages down at all.
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Matthew Poole, in reply to
0% up to the poverty line
NZ would have to define one, first. Pull-ya Benefit has strongly resisted calls to establish a formal poverty level.
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Moz, in reply to
One way to alter the playing field for top earners would be to have a salary cap for the public sector
I don't see the point, like Keir says that doesn't affect the private sector at all. Much better to tax everyone and hunt down avoidance with a big sharp axe.
FWIW I see flat tax as an appeal to the libertarian right, and as such it's the sort of pointless concession that just creates problems. It appeals only to people who want a very low tax rate, and most appear to favour regressive taxation (viz, consumption taxes) over wealth taxes. Trying to sell a UBI as "helping the rich"... seems unlikely to work.
So UBI yes, flat tax no. Especially HELL NO to an actual flat tax on every dollar earned. I actually favour an exponential tax if people want mathematical purity... you pay X times log10(income), say. Or X times sqrt(income). So simple, so pure, so easy to understand. So steeply progressive :)
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∫ | A tan( B * x) | dx
(where x is income) -
Australopithecus, in reply to
flat tax no. Especially HELL NO to an actual flat tax on every dollar earned.
That is what I thought too until I read this.
The compelling argument for me was that the difference in tax between the current system, and a flat tax at the top rate, was around 14K for those earning over 70K. Just giving that 14K to everyone (adults, children get less?) would be more progressive. The paper goes into detail of how the difference would be funded with an asset tax, which arguably targets the wealthy more than income tax.
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A UBI could include progressive taxation without the need for 2nd job tax codes, though.
For those on low incomes, there would be a higher basic rate of tax which would be offset by the UBI income.
As incomes increased, this effect would reduce.
For high incomes, say $100k+, a higher rate could be brought in which, for multiple jobbers, would be charged at end of year (assuming that us on $100k+ can reasonably be expected to budget).
If you look at the chart above, which actually surprised me, you see that a 40% flat tax rate and $20k UBI would approximate current tax rates above $50k.
I also did a 35%/50% split rate at $100k for the upper threshold. -
Moz, in reply to
That is what I thought too until I read this.
The marginal effects of not treating the UBI as income on non-UBI recipients could be interesting (immigrants, people who are not tax residents, for example). That paper also assumes that no employer will change wages after the UBI is introduced. Which is unrealistic - can you really imagine McDonalds not trying to reduce wages by the amount of the UBI? Sure, in the long run that won't work, but it'll take a long time to work that through peoples heads.
If I tweak that so spreadsheet that the UBI is more than the dole (I think the dole puts people below the poverty line), to, say $250/week, and leave everything else unchanged, it gets a bit less pleasant. $11.65/1000 asset tax instead of $1.37, for starters. That suggests that a top marginal rate will be needed.
Just giving that 14K to everyone (adults, children get less?) would be more progressive.
Only for people earning between $14k and $70k who have no assets (and I assume they mean net assets). The net assets issue is annoying because it links your tax to variations in the rateable value of your home (assuming you own or part-own it). And at a more realistic $11/1000 someone on $48k with a $500k home is $1200/year worse off with the UBI. Someone on $70k is $1900 worse off.
I haven't hacked the spreadsheet to see, but if we kept the 33% rate on income but added a 50% rate over $100k per Rich's plan we could avoid pushing the asset tax quite that high. Or make the asset tax progressive,m which is what some of the economist geeks are excited about this week.
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The trouble is that any Income Tax rate significantly higher than the Company Rate can be avoided by funnelling income through trusts, Limited liability Companies, etc. And pushing the company rates up, makes other countries look good for transferable businesses.
But I like the idea of $14K UBI (effectively National Super for everyone !). The trick is how to pay for it. The Govt should get a proportion of it back in tax (GST, and taxed profits from what people spend it on), and by doing away with a lot of existing welfare (and its administration), but there is still a lot of money to be gotten from somewhere. Company and flat income tax at 35% ? Ensure multi-nationals actually pay taxes here ? Capital Gains tax ?
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Robert Urquhart, in reply to
What is The PAS readership’s opinion on Universal Guaranteed Income plus flat tax?
I'm a big fan of a UBI but I don't see it working with a flat tax. I actually included some thoughts about what I would do to tax in conjunction with a UBI here.
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Australopithecus, in reply to
I admit I haven't played with the spreadsheet, but I have played with this. My best effort is- Tax Rate: 50%, GST: 15%, Return on Capital: 6% (@50% that's 3%), UBI children: 7K, everyone else: 18k.
Ideally I would use the living wage, estimated (pdf) at 57K for a family of 4
can you really imagine McDonalds not trying to reduce wages by the amount of the UBI?
One thing I find appealing of the UBI is it frees workers from the implicit threat in employment relations - take it or stave. With all your basic needs covered, your income is now cream (by this I mean you can spend it on the fun stuff). As such you could justify the high rate of tax. However, this is also stuff you could do without if employment conditions become too unfair. So if MickyD drops wages too much it might face a lack of workers.
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Australopithecus, in reply to
Excellent. When I raised UBI with my farmer in-laws, a good foil against my worst left-wing daydreams, those were the issues they raised. They did have one more - won't folks just stop working? I don't think the spirit of capitalism will die that easily :-). Some might say I have enough, by far the majority will want more than the basics.
There is much angst about the idle poor (not the idle rich, note) getting something for nothing. On bad days I point out the alternatives: the workhouse (private prisons?), starvation, or euthanasia. In medieval times they bemoaned the Sturdy Beggar. Should we bring back the stocks?
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BenWilson, in reply to
I have dual citizenship
You do? I thought that was all but impossible with the USA.
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BenWilson, in reply to
When I raised UBI with my farmer in-laws, a good foil against my worst left-wing daydreams, those were the issues they raised.
Which is interesting in light of how Social Credit was mainly a rural party. I don't think farmers so much as people from small towns, though. A UBI is an old, old idea, dating back at least until the 1930s. It got outcompeted as a set of ideas by Labour parties, though, with their alternative, unemployment benefits. This played well with their core demographic (back then), workers, who had a far greater power through industrial action to demand such a benefit.
They did have one more – won’t folks just stop working?
I think you have to accept that under a UBI there would be less incentive to work in low wage, low pay jobs. Which would seem all good, except that we get a lot of our work done by people in low wage, low pay jobs, so a likely consequence would be prices going up for things we currently expect to be cheap. It would change the face of society quite a bit. I'd expect a corollary effect, that the price of things we expect to be expensive might become cheaper, if more people had the freedom to pursue careers in them. So lawyers and dentists might become a bit more affordable. That depends whether the respective unions would actually allow more of them to be produced.
I personally do not think it would matter enough to worry about, and if we found wage inflation was going crazy, it wouldn't be hard to put taxes up to suppress it. The two really should be basic tools of inflationary control, along with the government's ability to print money and to pay for projects. They could also use an adjustable savings rate. Then we could ditch this whole stupid idea that we create money and control inflation by using the OCR.
What I think would really change about work, though, is that people would work a lot more on things for their own direct benefit however they perceived that. So mums/dads would be a bit freer to look after their own kids. A lot more people would engage in projects they believe in, like charities or open source software, or writing on blogs. There would probably be a lot more goofing around. And I think a shitload more people would get tertiary education just for its own sake, and that education might become less career oriented.
All of those things are good, IMHO.
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