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."