During the 1960s the National government’s rhetoric was critical of excessive taxation, yet it actually changed little.
There was a gathering awareness that New Zealand’s economic performance was falling behind other developed countries. The majority of the government favoured retention of high progressive income taxes, but wanted special tax treatment for selected industries. This led to an era of tax incentives for farming, tourism and export marketing. For example the 1962 budget allowed export manufacturers to deduct 150% of expenditure on export promotion from their income. This became seen as a junketeers’ charter. Once one sector of the economy got preferential tax treatment, others also sought tax relief.
The 1967 tax commission
In 1966 Auckland accountant Lewis Ross chaired another tax commission. Its report, released in 1967, proposed reducing income tax rates, abolishing land tax, and introducing a comprehensive tax on sales and services. New Zealand, the commission found, collected 69.5% of its revenue through direct taxes – a very high rate compared to other countries such as the United Kingdom and Australia, which collected only about half their revenue in direct taxes. New Zealand’s use of indirect taxes to collect revenue was, conversely, low.
The commission was also critical of tax incentives like those for exporters, saying they encouraged wasteful expenditure and were inequitable. Like the 1951 Gibbs report, the Ross report was ignored by the government.
Robert Muldoon and ad hoc taxes
National had portrayed itself as the party of low taxes throughout the early 1960s. From 1966 imports became more expensive and the country earned less for its exports. The government found it increasingly difficult to balance its books but was reluctant to court unpopularity by introducing new taxes.
Robert Muldoon was finance minister from 1967 to 1972 and prime minister and finance minister from 1975 to 1984. He did not favour indirect taxes as he felt these penalised those on lower incomes, and led to expectations of wage increases which would make it difficult to rein in inflation. Muldoon introduced ad hoc taxes to try to raise more revenue. He introduced a payroll tax in 1970: companies were taxed on the number of employees they had. This tax was unpopular with business and contributed to National losing the 1972 election. In May 1979 he imposed sales taxes of 10% to 20% on a wide range of goods, including petrol, lawnmowers, caravans and boats.
Fiscal child abusers
For the decade after 1975 the government did not collect enough tax to cover its spending. Labour finance minister Bob Tizard ran a deficit of 9% of GDP in 1975/76. National’s finance minister during this era, Robert Muldoon, also ran budget deficits. Governments borrowed money to make up the shortfall. Effectively this passed the burden on to future taxpayers – the children of the 1970s would pay the bill over the 1980s and 1990s. Ruth Richardson, a finance minister during the 1990s, dubbed the practice ‘fiscal child abuse’.1
Muldoon tinkered with the tax system rather than reforming it. Many professionals who earned high incomes but had limited scope for deducting their business expenses poured their profits into tax-exempt kiwifruit orchards so as to avoid a 66% income tax rate. After a number of years they sold the orchards for large profits. Muldoon moved to close the tax loophole by introducing the Income Tax Amendment (No. 2) bill in 1982. This was very unpopular with National supporters, who saw it as both a capital gains tax and retrospective legislation.
As the country faced increasingly difficult economic times the government tried to use exemptions, incentives and subsidies to increase exports and so raise overseas revenue. The list of exemptions and incentives that farmers enjoyed stretched to many pages by the early 1980s. Domestic manufacturers were also protected by tariffs (taxes on imports). People found loopholes in all these exemptions and incentives. Many business decisions were taken to reduce or avoid tax, not because they made business sense. Incentives led to business behaviour that was not productive – consumers and producers were not exposed to the true costs of decisions.
By the 1980s some could use the loopholes, exemptions and incentives extensively to minimise their tax payments while others could not. Not only was the tax system unfair, it was distorting the economy.