Tax neutrality and saving in New Zealanddocs.business.auckland.ac.nz/Doc/Presentation-The... · A...

The dishevelling of the playing field:

Tax neutrality and saving in New Zealand

9th May 2007

Susan St John and Michael LittlewoodRetirement Policy and Research Centre

A presentation from the Retirement Policy & Research Centre

Today’s agenda

Tax treatment of savingsNew Zealand’s 20 year experimentA brief review of some evidenceWhere to from here?


Tax base choices

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


Different tax treatments - superannuation

TTEEETSummary

ExemptTaxedWithdrawals

TaxedExemptInvestment income

TaxedExemptContributions

Income tax treatment

Expenditure tax treatment


Tax neutrality

1987 Treasury found New Zealand tax treatment of saving to be:

Distortionary, anti-growthUnfairCostly - 1.2% GDP Suggested TTE

• All saving treated the same as putting money in a bank savings account

1988 comprehensive income tax reforms Broad baseLow rate Supplemented by broad-based 10% GSTFlat taxCapital gains


TTE and all that 1988-1990

Roger was right! (At least about super)

EET to TTE - a dramatic world firstPart of whole packageIndustry rolled over

But was Roger only partially right?Brash Committee dissentThey recommended ETT

• Also tax neutral• Less tax revenue foregone• More natural to have a final T


Comprehensive income tax 1988-2007

Broad base and low rates of income taxGST a supplemental taxOECD 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


The simplest and most cost effective retirement scheme in the world?

Public provisionNew Zealand Superannuation

• New Zealand Superannuation FundPrivate provision

• Voluntary unsubsidised• TTE tax treatment


Flies in the ointment?Tax neutrality hard to achieve

1. Housing remained TEE• no capital gains tax• no imputed rental tax• traders scot-free

2. TTE does not fit well with progressive taxation


Income ($)0 10,000 20,000 30,000 40,000 50,000 60,000

0

10

20

30

40

50

60

70

80

90Ef

fect

ive

Mar

gina

l Ta

x R

ate

(%)

1988 statutory rates 24 % and 33%

2833

Flat tax

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

15

A presentation from the Retirement Policy & Research CentreIncome ($ p.a.)

0 10,000 20,000 30,000 40,000 50,000 60,0000

10

20

30

40

50

60

70

80

90Ef

fect

ive

Mar

gina

l Ta

x R

ate

(%)

Current personal tax scale less flat than in 1988

2821

3339

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


The TOLIS committee - 1998

Failed to reconcile ‘tax paid’ funds with taxing the individual at their appropriate marginal tax rateVarious half-hearted policy changes


What have reviews said?

Hard won consensus around TTEBrash Committee 1988Task Force 1992Accord 1993Periodic Report Group 1997Super Taskforce 2000McLeod Review 2001Periodic Report Group 2003Retirement Commission Review 2007?


What has Treasury had to say?

Annual Household Financial Saving by Income Decile - 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


What Labour said

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.”


Cullen signals more proactive state intervention 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.”


Enter KiwiSaver - 2005 Budget

TTE but with $1,000 “sweetener”Lump sumProgressiveLimited

Cabinet papers 2006Don’t go there with anything else!


The slippery 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 toSSCWT;” (July 2006 IRD paper released under the OIA)


The end of the 20 year experiment

The progression:1988 “the ideal” TTE with flat tax 1990 TTE ‘penal’ for low income earners below 33% Housing remains TEE1996 TTE favoured for high earners above 39%2005 TTE KiwiSaver announced

PIE taxation regime solves MTR problem$1000 sweetener

2006 tTE Employer contributions tax-free2007 ETE Budget 2007?


Implications

Universal New Zealand Superannuation does not fit with tax-subsidised private saving

High earners get two bites of the cherryWhat then the future of NZS?

Will KiwiSaver be made compulsory? How can lump-sum tax-free payments from KiwiSaver be justifiedHow do lump-sums help the saving problem?


OECD 2007

Two options for NZ:Comprehensive income taxDual system

Income and capital treated differently• Deja vu?

“Future changes to the tax system need to be consistent with the approach ultimately adopted”


OECD’s comment

“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!


Taxation of savings – a wider view

Does it matter?A personal journeySome international evidenceWhat do we know about New Zealanders’behaviourSoFIE’s symmetryWhat might we expect?Will it be déjà vu, all over again?


The direct cost of incentives

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 yearSweeteners:

“Kick start” about $240 mFee subsidy – probably $10 mFirst home – possibly $80 m

Total - $800-900 million a year in first few years


The indirect cost of incentives

Deadweight cost of extra taxTaxes 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 complexProviders become less efficientDirect costs of investment will rise ….…. as will the price of suitable assets


Behavioural responses

Tax treatment is now complex and lacks:TransparencyLogicBut will cost more to administerAs the boundaries are constantly tested

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


Can governments change things?

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

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


Do tax incentives work?

Incentives change behaviourDirect 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)


Higher savings = growth?

More savings matter for ‘poor’ rather than ‘rich’ countriesReview of 118 countries over 1960-2000Open capital markets disrupt theories based on closed economiesLocal savings matter for innovation in ‘poor’countries – not significant for ‘rich’

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


New Zealanders behaving badly?

Scobie et al. have looked at available evidenceLatest numbers conclude that about one third are not saving ‘enough’Conservative assumptionsNo better informationSo, the problem is ……. ?

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


SoFIE’s symmetry

Eight year longitudinal surveySubstantial population sampleStarted 2002 – first tranche of financial data for 2003/ 2004Subsequent financial data 2006 and 2008Perfectly straddles KiwiSaver’s introductionWe will be able to measure impact


KiwiSaver – interim judgement

Some positive aspectsWorkplace participation should increaseBut … the ‘problem’ not definedFounded on questionable assumptionsLittle research – no debateRushed introduction; imperfect implementationNot designed for employersTax breaks unjustifiedIntroduces unnecessary public policy risksProbably won’t ‘work’ – definition?Could be improved but still probably won’t ‘work’


Where have we got 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 complexityTo achieve ….now, what exactly was the problem again?

“Facts do not cease to exist because they are ignored.”

Aldous Huxley

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