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  • Writer's pictureIan Fletcher

Why Taxes Need to Rise

Apiculture industry consultant and former top bureaucrat Ian Fletcher gives his monthly “Views from Outside the Apiary” as a non-beekeeper but deep thinker on the plight of New Zealanders.

Ian Fletcher.

Last month I said that taxes in New Zealand needed to rise. This month I explain why. Before I do, I need to say that my reasons are pragmatic, not ideological: 250 years of revolutions from the French to more recent times shows that handing over one’s future to plausible middle-class megalomaniacs (from Napoleon to North Korea, via Hitler, Stalin, Mao and a regrettably long list of genocidal also-rans) is a short road to ruin. Public policy should be based on good data and informed consent.

So, the data first. Cohesive societies do better than divided societies at tackling common problems. Ethnographers (Peter Turchin for example) and political scientists (eg Robert Putnam) point to the benefits of cooperative social values – and the almost inevitable failures of societies that fail to nurture cooperation. A relatively small gap between rich and poor, the prospect of social mobility (betterment), and a fair social safety net all demonstrably help that process.

"moving and evocative as well as informative" says Ian Fletcher of David Hackett Fischer's work.

None of this seems surprising. It’s also partly cultural: In many ways it reflects the values of fairness that may be an enduring feature of New Zealand’s political culture. The American historian David Hackett Fischer’s book “Fairness and Freedom” (2012, Oxford University Press) compared New Zealand (with what he saw as a dominant value of fairness) with the US, with a dominant value of freedom. His description of important events in our social history are moving and evocative as well as informative. I hope they find a place in our schools.

Steeply rising house prices and rents are socially damaging. That’s something we face now. House prices are determined by supply, demand and interest rates. As interest rates fall, buyers can (and do) borrow more at any given level of housing supply, and prices rise. Over my lifetime, interest rates have trended steadily down, and house prices up. Efforts to increase supply are undermined by falling rates: when rates are effectively zero, the ability to borrow becomes very large indeed for those in a position to do so, while others (the young, Maori, and others) are marginalised permanently.

What makes interest rates fall? We now know. The Federal Reserve of Kansas City (yep, I do read widely) has recently published a solid and well-reviewed research paper that shows that rich people save so much that they produce a glut of savings, leading to falling rates. The conclusion is that “rising income inequality is the more important factor explaining the decline in [interest rates]”. The paper had set out to test the previous prevailing theory that interest rates fell as an aging population spent less and saved more.

So, if we can get rich folk to save less, interest rates will stabilise or even rise. That will cause adjustment problems for current borrowers (already happening with inflation). Those problems are serious and may need regulatory intervention to help struggling homeowners. But it also means that efforts to build more houses will have a chance of success in rebalancing the market and giving everyone a fair go. Falling rates will just undermine those efforts by propping up ever rising real prices.

So, how do we get income inequality down? Raising minimum wages, and wages set by the state (nurses and teachers) would help. But that’s only part of the story. Putting a cap on inequality through carefully designed progressive taxation is the other part of the story. This is not the place to debate the merits of a capital gains tax, but in a society addicted to property like ours, that seems an obvious part of the answer. It’s also worth remembering that in 1969 the US top rate of personal taxation on incomes was 70 per cent. That wasn’t a failing economy.

New Zealand is a society "addicted to property" and a capital gains tax could be the answer to some issues, Ian Fletcher believes.

Higher taxes would also enable nurses and teachers to be paid more, stemming the export of skilled people to Australia and the UK (at present our taxes subsidise their health systems through the export of people trained here, which I think is unconscionable). It would also enable other public investment in carbon transition, in wider infrastructure, and in better public services. As I’ve noted before, only the state has the capacity to support really risky or large investment projects.

Finally, I certainly don’t relish the idea of paying more. But we need to face the facts, and act. I do relish the thought of living in a community which does treat everyone fairly and gives opportunity to everyone as a result.

Ian Fletcher is a former chief executive of the UK Patents Office, free trade negotiator with the European Commission, biosecurity expert for the Queensland government and head of New Zealand’s security agency. These days he is a commercial flower grower in the Wairarapa and consultant to the apiculture industry with NZ Beekeeping Inc.


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