When people think about Government support, they think about benefit payments and public services.

The most obvious form is direct payments. Cash in your hand. Benefits, super, Working for Families. The Government collects tax, and then gives some of it back to people who meet certain criteria.

This is an extremely visible form of Government support. Everyone knows it exists. Everyone has opinions about it.

Another obvious form of Government support relates to the services it funds and provides. Public hospitals, schools, roads, police. Instead of giving you money, the Government provides something you’d otherwise have to pay for yourself (or probably wouldn’t or couldn’t, in the form of public goods like military spending).

These are still pretty visible. You interact with these services, you notice when they’re underfunded, you complain when they deteriorate. Different people benefit in different ways, and we can argue about what should be funded and how this funding should be used.

But there’s another type that’s just as significant, and most people don’t recognise it as support at all. The purpose of this article is draw your attention to this form of support – not to pass judgement about the appropriateness of any given policy or support that is given in this way.

Government support in the form of tax concessions

This is where it gets interesting, and doesn’t show when you look at what the Government spends.

Instead of collecting tax and then spending it, the Government simply… doesn’t collect it. When you get a tax concession, the money never leaves your pocket, so it doesn’t feel like support.

But it is.

Let me make this concrete. Let’s say someone earns $60,000 per year, and they’re meant to pay $10,000 in tax on a portion of it. But some policy means that $10,000 isn’t collected. They end up with $60,000.

Now consider someone else who earns $50,000 after tax and receives a $10,000 Government benefit. They also end up with $60,000.

Both people are in the same net position. In one case the Government paid out $10,000. In the other, it chose not to collect $10,000. The effect is identical, but one feels like Government support, and shows up in a lot of reports, and the other doesn’t. People often have strong opinions about the $10,000 payment, but rarely about the $10,000 that simply wasn’t taxed.

This type of support is sometimes called “spending through the tax code” (or “submerged spending”). I think the phrase should be part of our general vocabulary.

Consider a couple of New Zealand examples.

  • PIE tax rates are capped at 28%, even though the top marginal tax rate is 39%. If you’re a high earner with money in a PIE fund, that gap is a type of Government support. You’re paying less tax than you otherwise would, and the Government is forgoing revenue it could have collected.

  • The absence of a capital gains tax. Whether or not you think a CGT is a good idea, the absence of one is a policy choice that benefits property investors, business owners who reinvest in their companies, and other asset holders that grow in value over time. The decision not to tax these gains is a benefit that they accrue, relative to the majority of people, who generate their wealth through taxed income.

Why spending through the tax code matters

In short: this type of Government support matters because it’s opaque, and invisible to most of us.

When budgets get tight and a Government needs to “tighten its belt”, the conversation almost always centres on the first two categories. Should we cut benefits? Should we reduce public services? These are visible line items. They appear in budgets. They have dollar figures next to them. Politicians can point to them and say “we’re saving money here.”

Tax concessions, however, rarely face the same scrutiny. They don’t appear as a spending line. The people who benefit from them don’t think of themselves as receiving Government support. They think they’re keeping their own money.

The decision not to tax something should be as deliberate as the decision to fund something. Revenue forgone through a tax concession is revenue that could have funded services or reduced other taxes. The net effect on the Government’s books is the same.

The language itself works against visibility: “concession” or “deduction” sounds like the absence of something, not the presence of support.

The result is a lopsided public debate. Some Government support is visible and gets scrutinised, challenged, and cut. The rest is largely invisible and often sails through untouched.

Tax concessions tend to disproportionately benefit people who are already well off.

I’m not arguing that any specific tax concession is bad. Some are good policy. They provide appropriate incentives that are in our best interests. But some aren’t. The debate of whether any given concession is appropriate is one that’s worth having, case by case, on the merits.

New Zealand is better than most other countries with respect to spending through the tax code

One thing I will say is that New Zealand is much, much, much better than most other countries in relation to spending through the tax code.

This is a consequence of our tax system being relatively simple. A good rule of thumb is that the more complex a tax system is, the more spending through the tax code there is.

Take the United States. The tax code is so layered with deductions, credits, exemptions, and carve-outs that spending through the tax code is enormous. It shapes entire life strategies: American billionaires routinely borrow against their share portfolios to fund their lifestyles, rather than sell shares and trigger a taxable event that would require them to pay enormous amounts of capital gains tax.

In Australia, tax concessions to encourage people to save for retirement are approximately the same as the amount of money actually paid in pensions (the New Zealand equivalent of superannuation). And of those tax concessions, more than half of the benefits go to the wealthiest 20% of households, who probably don’t need the incentive to save for retirement because they are likely to be fine. In fact, the tax benefits these wealthiest 20% of households receive are significantly more than what the Government spends on public schools.

Where incentives show up like this, the tax system becomes so complex that avoiding tax is itself an enormous industry. New Zealand’s relative simplicity means we have far less of this. I hope it stays this way and I am sensitive to any additional concessional treatment that is ever offered. This is because most changes of this nature become ratcheted in through inertia and an ever-increasing group of professionals and interest-holders who are incentivised to keep things this way.

But even though New Zealand is better in this respect, I still believe it’s worth paying attention to the concessions we do have.

The first step is noticing

You can’t have that debate if you don’t see this type of Government support. The first step is simply noticing that it exists, and that it’s fundamentally the same thing as other forms of support: the Government making a choice about who gets supported, and how much.

(NB. The image for this article isn’t meant to imply that people who benefit from spending through the tax code are partying behind our back! I used the picture because it captures the idea that sometimes we can be so conscientious and focused on something, we miss what else is happening. And I liked it.)