Only bold long-term thinking can fix our tax system and infrastructure crisis

So how do we find the hundreds of billions of dollars we need to sort this out? The answers include a mixture of long-term debt, public private partnerships, private ownership tolling and greater taxation, but Kiwi voters seem to resist every tax initiative that would make a difference. 

Short-term thinking is a major roadblock to better taxation

There are so many ways to create a better tax system, and often the government knows about them. We’ve had tax working groups and reports that recommend a wider tax net, with greater taxation on capital. But voters are not open to change, even when it has clear and demonstrable long-term benefits. 

We tend to choose short-term cost-saving at the expense of long-term success. New Zealanders won’t stomach extra property duties or levies. We don’t want any new taxes, and we don’t want to cut back on benefits. 

How, then, do we improve our infrastructure and raise our standard of living? This is an extremely challenging question for a very small country with low productivity, low wages, a slow-growing population and a meaningful number of adults who choose not to work. The current government is having to go inch by inch, within very tight parameters, to try to fix some enormous issues. 

One of those issues is that we’re already committed to a massive spending bulge of public sector wages and other fixed costs. Our national economy and recent spending spikes are like an anaconda swallowing an antelope; it’s too late for the antelope, but eventually it will work its way through the system. 

Households pay most of the tax – and resist the alternatives

Treasury’s budget stats from May 2020 showed that of the 3.850 million Kiwis who are taxpayers, over 79% had income under $70,000 and paid an average of $4,300 in income tax. Those earning over $70,000 per year paid an average of $29,700 in tax, and those earning over $150,000 pay an average of $71,000 in income tax. 

The reality is that under our current system, 70% of all tax is paid by individuals. Most of that comes from end user GST charges and personal income tax/PAYE, creating a massive dependence and burden on every household. There are other ways we could gather tax which would ease this burden, but people tend to get quite emotional when politicians suggest widening the tax net. 

Look at Australia. It imposes a tax on property transfers. Take a $2 million house purchase in Queensland. A local resident of Australia will pay $88,350 in duty when they buy the home. A foreign buyer will pay a further $140,000 or AUD $228,350 when they purchase the same home - compare that to the 79% of Kiwis who are paying on average $4,300 in income tax per year, and the foreign buyer that just contributed 53 years’ worth of one taxpayer’s annual contribution! I’m sure the average Kiwi taxpayer in this example won’t be too upset with that. Sydney transfer charges are even higher and it’s obvious that these foreign buyer charges have not dampened the foreign buyer appetite much at all.  

In addition, the foreign owner will suffer a land tax charge which might exceed a further $25,000 for the foreign owner each year assuming the land itself is worth $1 million. 

Yet when a Kiwi politician talks about a foreign buyer levy – or a capital gains tax, or a land tax – the idea is met with uproar from all quarters. To me, this is a strange and irrational reaction. Australia’s approach is far more determined and any barriers to charging additional duties on foreign buyers are being addressed by law changes. In the meantime, Australia collects substantial duties on locals and foreigners every year; in the year to 30 June 2023 it collected AU$33b. 

We overtax earned income, and under tax unearned income from investments, which widens inequality and leaves the average New Zealand family struggling to stay afloat. 

Recently a Treasury report found that the lowest-earning half of all households are net recipients of tax, receiving more in government services than they paid in taxes. Instead of a well-functioning tax system, we have a very costly wealth transfer system that is locking families into dependence on the government. That doesn’t need to be the case. Australians pay no tax on the first $18,200 they earn, which is a far cheaper and more efficient way to support low earners. Plus, not being a net tax recipient fosters a sense of independence – one that could boost Kiwi families to raise their expectations and ambitions. At the same time Australia boldly taxes non-residents at a starting rate of 32.5% on the first dollar of income.  

Australia also provides tax breaks on contributions to compulsory superannuation via a reduced 15% income tax rate on the salary/wages put away into superannuation; this means more of the individual’s income gets saved and grows and is eventually paid out tax free.

Here, in New Zealand we tax the individual’s retirement contributions at full rates.  There is a limited $521 annual government top up to those who have made sufficient contributions each year. But in a cost of living crisis this is not enough to encourage greater voluntary KiwiSaver participation. The balance of KiwiSaver funds (approximately $104b at December 2023) compared to Australian superannuation savings (approximately 3.6 trillion at January 2024) speaks for itself. 

This is money that can fund infrastructure.

Can infrastructure assets pay for themselves? 

Another way we can fund infrastructure is by making it pay for itself. Strategic borrowing and public-private partnerships can create assets that are self-funding, either until their debt is paid off or they eventually start turning a profit. 

Consider Auckland Council. It’s by no means a perfect organisation, but one thing it did get right was setting up Watercare so its residents pay for water use. It wasn’t popular at the time - previously Aucklanders had been paying around $100 a year and they were understandably reluctant to pay more. But now there’s a user pays system where different areas have different rates based on their ability to pay. This allowed Auckland to spend $3 billion of ratepayer money on its water system, from which it has built assets now valued at $11 billion, and the city has a water system that operates fairly well. This is in sharp contrast to Wellington, where there is no money saved or available to fix a water system that’s in crisis. 

Toll roads are another success story. They paid for the Auckland Harbour Bridge and the Lyttleton Tunnel, ending when the loans were paid back. Toll roads can also improve safety; before the Tauranga Eastern Link, there were 1.8 fatalities annually on that 23km stretch of road, but now there are only 0.17. People resist toll roads, but they work all over the world and they’re already working here. 

Under a public-private partnership, a privately-owned company could build a road and have the right to operate it and charge for its use. Eventually, after 30 years or so, the road reverts to public ownership. 

A better tax system can set New Zealand up for success

I believe that taking the tax pressure off households would have a colossal impact on the wellbeing and optimism of thousands of everyday Kiwis. 

To improve New Zealand’s infrastructure, reduce inequality and boost every resident’s quality of life, it takes targeted spending and more targeted taxation. 

Funding that spending is entirely reliant on our tax system. The current tax model is not delivering and unfortunately New Zealand is locked in with limited thinking about the financial options to make game changing moves with taxation and savings.  It is not a pretty picture.  In the meantime, the universal super cliff looms ever larger …