This is getting ridiculous

So yet another article on Stuff about Kim Dotcom (now, apparently, he faces tougher travel restrictions – limiting him to 80km of his house, no chopper or sea travel, etc.). What I thought was rather ironic was twofold:

1) According to his US lawyer, they have 100m worth of filing surrounding the case (I think that’s a bit funny, given his business ventures) 2) The extradition proceeding is now being pushed back, yet further, to June 2015. What’s worse, his US lawyer thinks this ‘won’t be enough time’ for a new firm to get acquainted with the case.

I am not usually prone to conspiracy theories, but the fact that he gets another 4 months-odd in NZ due to his law firming wishing to withdrawal is a bit interesting. So he can, yet again, delay his date in court. When are we finally going to get this answered? Forgetting that they could still, potentially, deport him for immigration fraud, the point is that this entire legal process has made an absolute mockery of our courts (low as I hold them already). We are supposed to have a quick and fair system (where, if there are insufficient grounds, he can stay, and if not, he’s extradited), not one which allows someone to continue living here for years afterwards by delaying tactics.

And, of note, I am not generally in favour of extraditions to the US, which I view as a generally undesirable jurisdiction to extradite anyone to. But his response to such an extradition was to interfere in our political system (whether with John Banks, setting up the Internet Party, or attempting to take down John Key specifically). I think there may be justice for him in the US, no matter how rare that might be for most people.

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The nature of taxation

I thought it was time for a post about taxation, as people often make comments about taxes with seemingly little knowledge of the subject. I , myself, am not a tax expert), so this post is thus not concentrated on specific tax technical matters, but instead on the economic nature of taxation.

People often propose new taxes, under whatever name they choose, or to expand the scope of existing taxation, with limited regard for the nature of taxation itself. In very simple terms, there are three fundamental issue of taxation:

1) How much does it cost to raise the tax? (this is the cost to the state)

2) How much does it cost to comply with the tax? (this is the cost to taxpayers or associated intermediaries, such as employers)

3) How much economic distortion does the tax cause? (does the tax reduce economic output, does it change peoples behaviours?)

It should be noted that these factors do not remain static. What made a good tax in the 1980s may not be so simple any more (hence, GST was a fantastic tax when retail sales were limited, by their very nature, to NZ – the internet throws this on its head). Generally speaking, a ‘good’ tax is one which is very simple to levy at both ends (the cost to the IRD and to the taxpayer is low). Hence, Resident Withholding Tax (RWT) can be viewed as an improvement to Income Tax through reducing the need for every taxpayer with a bank account, term deposit, shares, etc. to file an income tax return, which reduces both IRD and taxpayer costs (although it imposes some compliance costs on the banks, which invariably will pass the cost on to account holders). The economic impact is, effectively, zero (as the only ‘distortion’ is that people who previously evaded tax now cannot).

The third point is more politically contentious, as people often propose taxes which are intended to cause distortion. The Greens will propose a ‘Carbon Tax’ expressly because they want it to reduce emissions. We (the centre-right) tend to put taxes on tobacco for the very same reason (less people will smoke or smoke less). So the third point cannot be taken for granted, as people often want a distortion.

However, from my perspective, 3 is linked into another issue which is ‘tax stability’. This, strictly speaking, doesn’t make a ‘good’ or ‘bad’ tax, but it does make for good or bad government finances. If you create a tax which is unsustainable (such as tobacco tax), it may make for a nice temporary windfall, but it will invariably fail to provide a long-term stream of state revenue. Now, by comparison, alcohol duties don’t suffer from this, and the difference is that the state is not trying to end the consumption of booze, merely to make people pay more for it (often under the guise of ‘reducing harm’). A good tax, in context to public finances, shouldn’t be ‘killing the golden goose’ (hence, a property tax, if based on space rather than value, presents a good source of tax for public revenue, as the space is set and, if looking at built property rather than only land, this currently is within the control of the state).

Now, what are ‘good taxes’ then? Well, historically,  I would say GST, but that is becoming less the case / less relevant. While it will remain relevant, as things like food will remain taxable, non-perishable items are becoming ever more problematic. The compliance costs (at both ends) for internet services are prohibitive and all this talk of taxing foreigners is only going to yield to avoidance/evasion and a loss of services to New Zealanders (Netflix doesn’t officially offer services to NZ, so good luck in taxing them for their services to Kiwis, let alone Google or Facebook). Income taxes (including on perceived capital gains) are a bit mixed, in that they can be reasonably simple to administer for things like work (through PAYE), but have some unpleasant distortionary effects, and become ever more problematic as you get into darker areas (whether taxing people who let a single room, a house, or hold investments abroad). A property tax would be a nice addition to the New Zealand arsenal, not as an additional tax, but as a method for reducing more dictionary taxes and make the total quantum of tax set (with increases announced by the government, rather than through inflationary drag).

For the most part, NZ gets its tax arrangements reasonably right, but with a lot of the detail making things not as attractive as they seem on the surface. The Foreign Investment Funds (FIF) regime is opaque and distortionary. Financial arrangements, for tax purposes, are complex, and our system retain a number of ‘exemptions’ which provide unfair taxation (such as the non-taxation of certain health funds which were in operation before an arbitrary date in the early 2000s).

In many ways, the irony of how Kiwis talk about taxes, is that we should be proud of our system, but it could use a bit of consolidation (too many ‘changes’ and ‘additions’ have crept in to an otherwise sound tax system). What’s more important is that people stop viewing tax as something which is emotive. The state needs to raise revenue, although the quantum is subject to significant opinion. Saying that people ‘should’ pay more tax, whether through wanting to levy new taxes (such as CGT), or complaining about changes in the nature of taxation (such as wanting to tax companies based on ‘where’ a profit is generated or where a consumer lives) is becoming problematic for a sensible discussion. If we want to increase taxes, fine, but we must accept that all this talk of ‘international’ tax reform is just claptrap from people who can’t seem to understand that increasing the complexity and (invariably) costs of the tax system, along with its distortions these changes will bring, is both futile and makes us a less impressive (or competitive) country. We should be figuring out how to continue our tradition of straightforward taxes designed to maximise revenue at the lowest total system cost. Instead, our media and left-wing politicians seems fixated on the internet and ‘fair’ taxation and taxing people who don’t need to actually do business with us.