Tax neutrality and saving in New Zealand Susan St John and Michael - - PowerPoint PPT Presentation

T he dishe ve lling of the pla ying fie ld:

Tax neutrality and saving in New Zealand

9th May 2007

Susan St John and Michael Littlewood

Retirement Policy and Research Centre

A presentation from the Retirement Policy & Research Centre

T

• da 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

• f most OECD countries

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Diffe re nt ta x tre a tme nts - supe ra nnua tion TTE EET Summary Exempt Taxed Withdrawals Taxed Exempt Investment income Taxed Exempt Contributions Income tax treatment Expenditure tax treatment

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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

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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

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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

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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

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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

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Income ($)

10,000 20,000 30,000 40,000 50,000 60,000 10 20 30 40 50 60 70 80 90

Effective Marginal Tax Rate (%)

1988 sta tutory ra te s 24 % a nd 33%

28 33

Flat tax

Actual scale was not flat 3 effective rates with low income earner’s rebate

15

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Income ($ p.a.) 10,000 20,000 30,000 40,000 50,000 60,000 10 20 30 40 50 60 70 80 90

Effective Marginal Tax Rate (%)

Curre nt pe rsona l ta x sc a le le ss fla t tha n in 1988

28 21 33 39

Big tax reductions in 1996 and a new top rate in 2000

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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

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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?

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Wha t ha s T re a sury ha d to sa y?

Annua l Ho use ho ld F ina nc ia l Sa ving by Inc o me De c ile - 1997- 98

• $2,000
• $1,000

$0 $1,000 $2,000 $3,000 $4,000 $5,000 1 2 3 4 5 6 7 8 9 10

Saving Incentives Paper 2002

• Have tTE if you must! But rich gain most

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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.”

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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.”

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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!

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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)

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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?

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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?

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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!

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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?

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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

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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

Be ha vioura l re sponse s Tax treatment is now complex and lacks:

Transparency Logic But will cost more to administer As the boundaries are constantly tested

Amounts in superannuation will rise …. …. but not necessarily ‘saving’ Tax planning will re-emerge

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Ca n g ove rnme nts c ha ng e thing s?

International evidence is ‘no’ For example, 48 country study: 1980 –2004 $1 in pension saving adds 0-20 cents to national saving Ignores cost of incentives and sub-optimal investment decisions Small “improvement” with maturity “Reforming countries” don’t seem to be different

Pensions and Saving: New International Panel Data Evidence - Bebczuk and Musalem (2006)

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Do ta x inc e ntive s work? Incentives change behaviour Direct incentives probably don’t increase saving “… between 0 and 30 percent of 401(k) balances represent net additions to private saving” Ignores direct/indirect costs of incentives

The Effects of 401(k) Plans on Household Wealth - Engen and Gale (2000)

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Hig he r sa ving s = g rowth? More savings matter for ‘poor’ rather than ‘rich’ countries Review of 118 countries over 1960-2000 Open capital markets disrupt theories based

• n closed economies

Local savings matter for innovation in ‘poor’ countries – not significant for ‘rich’

When Does Domestic Saving Matter for Economic Growth? Aghion, Comin & Howitt (2006)

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Ne w Ze a la nde rs be ha ving ba dly? Scobie et al. have looked at available evidence Latest numbers conclude that about one third are not saving ‘enough’ Conservative assumptions No better information So, the problem is ……. ?

Are Kiwis Saving Enough for Retirement? Preliminary evidence from SOFIE Trinh Le, Grant Scobie and John Gibson (2007)

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SoF IE ’s symme try Eight year longitudinal survey Substantial population sample Started 2002 – first tranche of financial data for 2003/ 2004 Subsequent financial data 2006 and 2008 Perfectly straddles KiwiSaver’s introduction We will be able to measure impact

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KiwiSa ve r – inte rim judg e me nt

Some positive aspects Workplace participation should increase But … the ‘problem’ not defined Founded on questionable assumptions Little research – no debate Rushed introduction; imperfect implementation Not designed for employers Tax breaks unjustified Introduces unnecessary public policy risks Probably won’t ‘work’ – definition? Could be improved but still probably won’t ‘work’

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Whe re ha ve we g ot to? A unique, simple, transparent retirement income system (1990-2000) …. …. gradually unravels (2000-2007) Now we have a solution (looking for a problem)… … that reduces transparency, ….increases cost and complexity To achieve ….now, what exactly was the problem again?

“F a c ts do not c e a se to e xist be c a use the y a re ig nore d.”

Aldous Huxley