Jeremy Vargo

By Jeremy Vargo

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What’s dragging beneath Gareth Morgan’s new TOP sail?

The story of last week was of course, John Key, and the end of his incredible run of political popularity. However, on Wednesday, journalists found aspiring populist politician Gareth Morgan of The Opportunities Party, or “TOP,” standing on the street outside John Key’s Parnell home, keen to unveil his party’s first policy. For a party created from the public profile of an economist, it’s no surprise: they want to change the way we’re taxed.

Morgan wants to introduce a tax on the non-cash income of our “productive assets,” namely: houses, boats, expensive cars, etc. He says that owning a house or car means that you don’t have to pay rent or pay for taxis or public transport, so the benefit you get from owning these things each year is a form of income to you. Under the Opportunity policy, that “income” would be taxed, based on the overall value of each possession.

This proposal is aimed at discouraging the kind of over-investment we’re seeing in housing, introducing a tax on the annual benefits of home ownership to level the playing field with other forms of investment that are already taxed. Morgan’s policy explanation is high on economic superlatives like “efficient,” “maximising,” “rational,” and “assessable,” but it fails the real world political sniff test. This new tax would be majorly inefficient to administer.

To explain, I’ll use a sailing metaphor. We can view different tax policies like sails on a ship designed to capture wind to push the boat forward, with well-designed sails able to capture a lot of wind very efficiently. The TOP tax seems to be an attempt to change the ‘sail’ to a far more effective design to capture income that hasn’t been captured before.

However, there’s a lot more to the ship than just the sail. The administration and bureaucracy involved in implementing a tax plan are like the keel that you don’t see, dragging through the water, creating friction and inefficiency, but necessary to manage the energy captured by the sail.

At the moment, our ‘keel’ is very well designed and efficient. The costs of implementing and managing a tax system dominated by PAYE, GST and other taxes based on income and consumption are low. To appreciate this, just ask any American what it’s like doing their personal taxes each year.

By contrast, despite the efficiencies of the TOP ‘sail,’ the keel of this proposed tax policy would be enormous and unwieldy. Just imagine the assessment and reporting involved in estimating the value of every person’s house and car, assuming the annual ‘income’ they receive from it, and determining the tax due. Add to this the new structures needed to provide the loans on equity pensioners will need from the IRD so they can pay tax on their assets without any regular income to support it.

Gareth Morgan’s proposed tax change is conceived as a beautiful sail that will propel us forward. But until he provides details of how it could be administrated with similar efficiency, it is destined to simply be an unused kite, dead in the water.

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Jeremy Vargo

By Jeremy Vargo

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