A Radical Tax Plan To Avoid An Economic 'Car Crash'

Scoop

2 days ago

Have you ever wished the tax you paid on your income was going into savings, rather than to the government?
That's the idea behind a plan developed by former Finance Minister Sir Roger Douglas and University of Auckland economics professor Robert MacCulloch.
They first developed the proposal in 2016 but have updated it for 2025.
"Back in 2016, the original version said we're going to struggle with paying the welfare bills and there are going to be budgetary problems due to the aging population, from health to pension spending and we have to work out how to protect the welfare state so there are not cuts to those services," MacCulloch said.
"At the time, Bill English had an economic advisory group that I used to go to in the Beehive and… he didn't have any interest whatsoever. I remember him saying, 'look that's for future governments to deal with and people will have to adapt'."
But MacCulloch said the governments since then had done nothing to address the issue.
Treasury and Inland Revenue have both raised questions in the past year about how the government will collect enough revenue to fund the increasing cost of NZ Super and healthcare.
By 2060, 26 percent of New Zealanders will be over 65, up from 16 percent in 2021.
MacCulloch and Sir Roger said that income tax on earnings up to $60,000 a year should instead be redirected into individual savings accounts to fund each person's healthcare pension and risk cover.
That would replace much of the current public system with private provision.
People who did not have enough in their individual accounts could still be helped by the public system, which would be funded on taxes collected on income over $60,000 a year. This would mean larger numbers of middle- and higher-income people paying for their themselves, while the system helped lower-income people.
"It retains that wealth redistribution - so is not at all like the US system which leaves many low income people without proper healthcare. It's more like France where everyone is covered and everyone can choose whether they go public or private."
MacCulloch said that would mean government costs were reduced, the quality of outcomes increased and the plight of low-income earners improved.
He said too many low-income people had no savings in KiwiSaver. This model would help to address that.
According to the model, an individual could save around $21,000 annually: $9450 into a health account, $7350 for superannuation, and $4200 for risk cover.
A drop in corporate taxes would help fund employer contributions.
"Our savings-not-taxation reform offers scope for efficiency gains in healthcare. It does so by opening up choice for individuals," MacCulloch said.
"Rather than the government dictating where to go, people can choose their preferred public or private supplier."
They would keep the pension but raise the age of eligibility to 70 over a 20-year period.
Subsidies and interest-free loans for tertiary students would be means tested.
They would scrap grants to the movie industry, winter energy subsidies to wealthy households, favourable tax treatment for owners of rental housing, and allowances to sectors such as forestry, fishing, and bloodstock.
The money saved from these changes would be directed towards helping low earners build savings and cover the welfare needs of those who are chronically unwell.
"Perhaps more than any other feature of our reform, it's the 'miracle of compound interest' that governments like New Zealand's are not taking proper advantage of," MacCulloch said. "If we can do this, it'll help our financial situation."
He said the problem the government now had was that it was not set to return to surplus in any meaningful way.
"What the government calls a return to surplus is a projection [of] a tiny surplus in 2029 and then [the deficit] blows out again with health and pension spending."
He said many countries around the world were having to make changes because of similar pressures.
But he said there was still limited political interest.
"What I can tell you is by not going down this road, what they're not telling you is a slow motion car crash crisis is enveloping New Zealand and it's not my job to save the country with this.
"I did the proposal. They have no interest. I've given up on them. But you know what? Without doing something like this, they're gradually descending into a situation where our entire health system is going to become run down."
He said New Zealand had missed a chance to require compulsory retirement savings.
"The average KiwiSaver balance is $30,000. A mandatory retirement scheme was set up by Keating around 2000 in Australia and the average balance in the Aussie system scheme is $300,000."
He said the power of compound interest meant that large balances grew much faster, which meant New Zealand was being left increasingly behind. But his plan would allow New Zealanders to take advantage of that.
Finance Minister Nicola Willis said the Government was not considering changes to the tax system of the sort proposed by Sir Roger and MacCulloch.