T he dishe ve lling of the pla ying fie ld: Tax neutrality and saving in New Zealand Susan St John and Michael Littlewood Retirement Policy and Research Centre 9 th May 2007
T oda y’s a g e nda � Tax treatment of savings � New Zealand’s 20 year experiment � A brief review of some evidence � Where to from here? A presentation from the Retirement Policy & Research Centre
T a x ba se c hoic e s � Income Y � Expenditure Y-S � Equivalent if bequests are taxed as consumption � Hybrid system- some types of income given an expenditure tax treatment. This is typical of most OECD countries A presentation from the Retirement Policy & Research Centre
Diffe re nt ta x tre a tme nts - supe ra nnua tion Expenditure Income tax tax treatment treatment Contributions Exempt Taxed Investment Exempt Taxed income Withdrawals Taxed Exempt Summary EET TTE A presentation from the Retirement Policy & Research Centre
T a x ne utra lity � 1987 Treasury found New Zealand tax treatment of saving to be: � Distortionary, anti-growth � Unfair � Costly - 1.2% GDP � Suggested TTE • All saving treated the same as putting money in a bank savings account � 1988 comprehensive income tax reforms � Broad base � Low rate � Supplemented by broad-based 10% GST � Flat tax � Capital gains A presentation from the Retirement Policy & Research Centre
T T E a nd a ll tha t 1988- 1990 � Roger was right! ( At least about super) � EET to TTE - a dramatic world first � Part of whole package � Industry rolled over � But was Roger only partially right? � Brash Committee dissent � They recommended ETT • Also tax neutral • Less tax revenue foregone • More natural to have a final T A presentation from the Retirement Policy & Research Centre
Compre he nsive inc ome ta x 1988- 2007 � Broad base and low rates of income tax � GST a supplemental tax � OECD waxes lyrical “After the radical reforms undertaken in the 1980s, the NZ tax system has long been regarded as one of the most efficient within the OECD.” OECD 2007 A presentation from the Retirement Policy & Research Centre
T he simple st a nd most c ost e ffe c tive re tire me nt sc he me in the world? � Public provision � New Zealand Superannuation • New Zealand Superannuation Fund � Private provision • Voluntary unsubsidised • TTE tax treatment A presentation from the Retirement Policy & Research Centre
F lie s in the ointme nt? T a x ne utra lity ha rd to a c hie ve 1. Housing remained TEE • no capital gains tax • no imputed rental tax • traders scot-free 2. TTE does not fit well with progressive taxation A presentation from the Retirement Policy & Research Centre
1988 sta tutory ra te s 24 % a nd 33% 90 80 Actual scale was not flat 70 3 effective rates with low Effective Marginal income earner’s rebate Tax Rate (%) 60 50 40 33 30 28 Flat tax 20 15 10 0 0 10,000 20,000 30,000 40,000 50,000 60,000 Income ($) A presentation from the Retirement Policy & Research Centre
Curre nt pe rsona l ta x sc a le le ss fla t tha n in 1988 90 80 Big tax reductions in 1996 and a new top rate in 2000 Effective Marginal 70 Tax Rate (%) 60 50 40 39 33 30 28 20 21 10 0 0 10,000 20,000 30,000 40,000 50,000 60,000 Income ($ p.a.) A presentation from the Retirement Policy & Research Centre
T he T OL IS c ommitte e - 1998 � Failed to reconcile ‘tax paid’ funds with taxing the individual at their appropriate marginal tax rate � Various half-hearted policy changes A presentation from the Retirement Policy & Research Centre
Wha t ha ve re vie ws sa id? Hard won consensus around TTE � Brash Committee 1988 � Task Force 1992 � Accord 1993 � Periodic Report Group 1997 � Super Taskforce 2000 � McLeod Review 2001 � Periodic Report Group 2003 � Retirement Commission Review 2007? A presentation from the Retirement Policy & Research Centre
Wha t ha s T re a sury ha d to sa y? Saving Incentives Paper 2002 - Have tTE if you must! But rich gain most Annua l Ho use ho ld F ina nc ia l Sa ving by Inc o me De c ile - 1997- 98 $5,000 $4,000 $3,000 $2,000 $1,000 $0 1 2 3 4 5 6 7 8 9 10 - $1,000 - $2,000 A presentation from the Retirement Policy & Research Centre
Wha t L a bour sa id � December Economic and Fiscal Update 2002 “The government is not considering upfront tax incentives. These are likely to have to be very large - with fiscal costs running to many hundreds of millions of dollars a year - before they have any desirable effect on overall savings. Their abolition in the mid-1980s represented sensible tax policy on both equity and efficiency grounds.” A presentation from the Retirement Policy & Research Centre
Culle n sig na ls more proa c tive sta te inte r ve ntion 2003 “I do detect a change of attitude. The 1990s were a high watermark for individualism. A part of that was the rise of the idea of the total remuneration package. … While this is fine in theory, there is a growing body of research that suggests that the hands-off approach works against some of that total remuneration going into long term saving.” A presentation from the Retirement Policy & Research Centre
E nte r KiwiSa ve r - 2005 Budg e t � TTE but with $1,000 “sweetener” � Lump sum � Progressive � Limited � Cabinet papers 2006 � Don’t go there with anything else! A presentation from the Retirement Policy & Research Centre
T he slippe ry slide “V. Whether employer contributions to KiwiSaver should be exempt from specified superannuation contribution withholding tax (SSCWT): [Comment: Officials do not recommend exempting employer contributions to KiwiSaver from SSCWT. On the one hand, this would create benefits for an employee to sacrifice his/her salary or wages in exchange for an employee contribution, higher amounts could be saved and compliance costs for employers would be reduced. On the other hand, this would create a tax distortion in favour of employer contributions to KiwiSaver relative to existing schemes, could have a fiscal cost of up to $330 million, could lead to pressure to exempt all employer contributions, and would lead to no tax on employer contributions under the taxed/taxed/exempt (T/T/E) model.] Recommendation: g. Agree that employer contributions to KiwiSaver are subject to SSCWT;” (July 2006 IRD paper released under the OIA) A presentation from the Retirement Policy & Research Centre
T he e nd of the 20 ye a r e xpe rime nt The progression: � 1988 “the ideal” TTE with flat tax � 1990 TTE ‘penal’ for low income earners below 33% Housing remains TEE � 1996 TTE favoured for high earners above 39% � 2005 TTE KiwiSaver announced � PIE taxation regime solves MTR problem $1000 sweetener � 2006 tTE Employer contributions tax-free � 2007 ETE Budget 2007? A presentation from the Retirement Policy & Research Centre
Implic a tions � Universal New Zealand Superannuation does not fit with tax-subsidised private saving � High earners get two bites of the cherry � What then the future of NZS? � Will KiwiSaver be made compulsory? � How can lump-sum tax-free payments from KiwiSaver be justified � How do lump-sums help the saving problem? A presentation from the Retirement Policy & Research Centre
OE CD 2007 Two options for NZ: � Comprehensive income tax � Dual system � Income and capital treated differently • Deja vu? “Future changes to the tax system need to be consistent with the approach ultimately adopted” A presentation from the Retirement Policy & Research Centre
OE CD’s c omme nt “Tax policy in New Zealand is grounded within a coherent overall strategy and the changes for various parts of the system are generally scrutinised with a view to how these might affect the efficiency equity and simplicity of the system as a whole” Dalsgaard OECD 2001 Yeah right! A presentation from the Retirement Policy & Research Centre
T a xa tion of sa ving s – a wide r vie w � Does it matter? � A personal journey � Some international evidence � What do we know about New Zealanders’ behaviour � SoFIE’s symmetry � What might we expect? � Will it be déjà vu, all over again? A presentation from the Retirement Policy & Research Centre
T he dire c t c ost of inc e ntive s � Lost tax on employer contributions (Treasury estimate – “up to $330 million”?) � Lost tax on employee contributions (probably at least $150-200 m) � IRD costs probably $30 m a year � Sweeteners: � “Kick start” about $240 m � Fee subsidy – probably $10 m � First home – possibly $80 m � Total - $800-900 million a year in first few years A presentation from the Retirement Policy & Research Centre
T he indire c t c ost of inc e ntive s � Deadweight cost of extra tax � Taxes higher for all …. � …including the low paid who can’t afford to save (also those who don’t need to) � Regulatory boundaries created …. � ….. that can only get higher and become more complex � Providers become less efficient � Direct costs of investment will rise …. � …. as will the price of suitable assets A presentation from the Retirement Policy & Research Centre
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