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Labour's new tax plan: embedding IRD monitors in Google's office would backfire, economist says

A leading economist is skeptical of a number of elements of Labour's new tax policy released this afternoon, including a crackdown on multinational tech companies' revenue booking practices.

Labour is looking to crackdown on Facebook, Google, Apple and others' practice of booking NZ sales to subsidiaries in Ireland, where corporate tax rates are lower.

"The proposal to install IRD monitors in Google's Auckland office seems more likely to result in the closure of Google's Auckland office than to provide any increase in collected taxes," University of Canterbury senior economics lecturer Eric Crampton tells NBR.

Google's Auckland office isn't huge, Dr Crampton says. (When NBR profiled Google's local operation recently, there were a dozen staff.)

"Would you really want to work in or run an office with twelve staff and a government monitor?

Google used to service New Zealand from Sydney; they could do it again. I worry that some in Labour would see it as a win that they'd succeeded in pushing Google out of New Zealand, were it to happen."

Top tax rate change would 'skew the pitch'
Neither is Dr Crampton a fan of the centrepiece of Labour's new tax policy: bumping the top tax rate on New Zealand's highest income earners from 33% to 36%. But it's not for the reason you might think.

"While I don't particularly like Labour's proposed 36% top tax rate, that reflects my preference against expansions in central government expenditure rather than any particular worry that a 36% top marginal rate would be especially damaging [to the economy]," he says..

"The most harmful aspect of the higher top marginal rate is that it skews the pitch for any future tax moves that could improve efficiency but that would require compensating higher income earners," he says.

"Recall that part of the cut to income tax rates across-the-board was compensation for the GST increase and that part of the cut to higher earners' rates was as compensation for other changes to depreciation and LAQC [loss attributing qualifying company] rules that largely hit higher earners [in 2010]. The package was able to go through because higher earners were compensated for those losses.

"Suppose, for example, that some future National government proposed a tax shift away from income taxation and toward taxing land. They'd propose compensating higher income earners, who also have more land value at risk, through proportionately larger income tax cuts that keep the overall tax mix neutral. That kind of a deal is hard enough to broker to start with. If everybody expects that the next Labour government would just unwind the parts of the deal that compensated higher income earners, while keeping the parts that differentially hit higher income earners, then the deal's that much harder."

Comments and questions

I thought the IRD Monitor was hyperbole in this article - but holy s$%t Labour actual said it! Sounds like the KGB or Gestapo!

Before Labour embeds tax collectors within businesses, how about they agree to embedding a senior independent auditor within their organisation? After all, they're the ones who can't track donations and broke election spending rules in previous elections.

Strange - the tax men never hit the gross revenue booked in corporate entities instead of net profit, never consider removing all the tax concessions and exemptions for Iwi, terminating the Fonterra cooperative structures, the mutual closed structures, cancel all the foreign head office loan repayment schemes, the false invoicing to Chinese subsidiaries to reduce profit in NZ, terminate all the false insurance underwriting arrangements, the intercompany loans between spread balance sheet dates, the stripping of profit from entities with management company side entities, the trusts and dividend schemes, all the other strange circumstances such as farmers paying less tax than beneficiaries...ohhh dear, sorry, the list is far too long to keep compiling in this space.

Why fonterra cooperative?

Even 3% is nothing compared to what has been stolen of a generation.

If the warehouse CEO states this of his own volition I think we can all agree even the top rich people are wondering why they get so much money compared to the value if their contribution.

They don't want the guilt.

What utter rubbish. Increasing the top marginal tax rate may be of no concern to the ultra wealthy - many of whom can structure their affairs to minimize income tax anyway. Labour's policy will hurt the upper middle class - doctors, lawyers, accountants, engineers, et cet. This class of people already shoulders a significant proportion of the tax burden, 80% of which goes towards tax credits and benefits. Labour will increase class warfare and ill feeling between the lower and middle classes, and the truly wealthy will keep laughing all the way to the bank.

Its fantastic that labour are spouting this nonsense. Its just going to harden the resolve of all who don't vote labour. These policies are pandering to the emotive uneducated who are unable to produce the income they want so rely on the state to provide.I for one am sick of the state and its interference in peoples businesses. So socialist and undemocratic. Keep it up Mr Parker you are weakening labours position by the day.