New style of reform way out of growing inequality divide

Inequality is an issue likely to dominate politics over the next several decades. The bottom 50 per cent own almost nothing: less than 5 per cent of total wealth, both at the world level and within NZ. The public are being scandalised by headlines like "NZ's two richest men own more wealth than the poorest 30 per cent".

Worse still, the bottom 50 per cent face threats to their healthcare and living standards when they retire. Why? The public system is running out of money. Debt to retired and working Kiwis for health and super exceeds $800 billion, assuming it's calculated the way required by law for New Zealand businesses. Low-income earners are worried.

What is the solution? The "left" want higher taxes on the rich. The prospect of new capital taxes looms here. Thomas Picketty, author of the best-selling book, Capital in the 21st Century, favours them. His book is bedside reading for ministers in our Labour Party.

The "right" are in denial. They won't admit inequality is a problem. "Who cares?" about Picketty's findings, declared a former chair of President George W. Bush's Council of Economic Advisers. The American dream is open to all, it is argued, if you work hard. We need not stress about the very wealthy. Their fortunes get broken up by high living, bequests to children and charity. Or so they say.

In New Zealand, the left have followed the same path of welfare state expansion for 80 years. It hasn't worked. Certainly not for Maori, whom it has patronised. Only now, using the capital received by way of Treaty settlements, is some hope of independence being restored.

The position of the right is hardly any better. It has become untenable in a modern, just society. The American dream will remain a dream for most at the bottom of the wealth ladder.

Nor will the Cullen tax review solve much. For political reasons, it was made too narrow. It is forbidden from proposing a joint reform to both the tax and welfare system, a necessary condition to address inequality. The limited scope of the review means the bottom 50 per cent will keep owning practically nothing.

How can this be solved? New Zealand has low productivity growth compared with many nations. We must think of smart ways of doing things, given our limited resources. An alternative to the traditional left and right wing positions outlined above is to adopt a new style of reform. One that defies partisan labels. One which will enable low and middle-income earners to establish their own capital and become independent.

This can be achieved via individual savings accounts. Every Kiwi should have one to help provide for their welfare needs and build personal wealth for retirement. The mandatory and universal nature of these new accounts would stand in contrast to KiwiSaver, which is a voluntary scheme not used by all.

The funding of the savings accounts would come from existing tax revenues. Put another way, there should be no personal income tax until individuals and families can provide for themselves. Employers should also make contributions, offset by a reduction in their corporate tax rate, ACC and other Super levies.

To further help fund the accounts, there should be an end to "privilege". In particular, welfare payments to corporations and students from wealthy families should stop. The loss of such subsidies would be offset by lower tax rates. The wealthy should look after themselves.

This reform would enable each person to build between $500,000 and $1 million of wealth over a 40-45 year working life. An income of over $30,000 per annum during retirement would become available, on top of the pension. Low-income earners would be able to buy medical insurance using their own savings. They would gain access to the private healthcare now only available to the wealthy.

More broadly, a shift to savings accounts would help end the class warfare needed by our two main political parties to keep their support base. Wealth would accrue to low-income earners. The quality of their healthcare would improve. For high earners, the need for new capital taxes would be pre-empted. Choice and efficiencies in the delivery of welfare services would follow.

It could become a practical reality. The numbers add up. A full set of Government budgets incorporating these changes, both for the present year and forecast out to 2050, has been done.

A line needs to be drawn under the old tinker-here, tinker-there policies. A fresh approach is needed to stop our slide into becoming both an inequitable and a low productivity society.

Robert MacCulloch has been appointed the Matthew S. Abel Chair of Macroeconomics at the University of Auckland business school.

This article reflects the opinion of the author and not the views of the University of Auckland.

Reproduced with permission from NZ Herald, New style of reform way out of growing inequality divide published on 24 April 2018.