THE PRESS THURSDAY, MAY 3, 1984. Inappropriate tax threat

Press, 3 May 1984, Page 20

THE PRESS THURSDAY, MAY 3, 1984. Inappropriate tax threat

The Prime Minister’s determination to reduce interest rates on mortgages has the support of much of the community. However, when he proposes to use inappropriate methods to achieve lower interest rates, he needs to be reminded that reducing interest should not be achieved at the price of damage to other important aspects of the economy. Life assurance offices have been told that, if all their rates for mortgage interest do not come down to the levels decreed by Sir Robert Muldoon, the tax concessions on premiums paid for new life insurance policies may be removed in the Budget later this year. Such a measure would reduce the attraction of life insurance as a means of saving for many people. The companies’ new business would be hurt. The community would be hurt even more.

Life insurances, in various forms, have been an attractive form of long-term, regular saving for many people, not least because of the exemption from taxation on the first $l4OO paid in premiums. For middle-income earners, especially, the exemption makes a significant difference to the amount of income tax paid. The premiums gathered by the life offices are an important source of mortgage funds for houses, farms, and businesses, and also of funds for investment in other areas — Government and local authority loans, and company shares. Without the tax incentive, the amount of new money coming forward for investment through the life offices would be reduced.

Saving through regular insurance premiums has other virtues. It encourages the habit of thrift and of planning ahead, perhaps for years, in one’s financial affairs. When policies mature, or are paid out on death, they usually accrue to people in need and help to reduce the demands on the social welfare system that have to be paid for through taxation. Such considerations were important when tax relief on life insurance premiums was first introduced, in Britain, by William Pitt the younger in 1799. They are considerations that should still carry weight, especially when the tax-free element is some compensation for the loss in the value of savings through inflation over a long period.

Apart from the savings element, much weight must be given to the fundamental idea of a risk-spreading insurance to ensure better provision for a family in the event of death. This is often highly relevant to home ownership when money has been borrowed to buy a property. Striking at one of the attractions. of being prudent and of providing family security means striking at the centre of one of the social goals for which the Government stands. The Prime Minister has pointed out that the Chancellor of the Exchequer in Britain, Mr Nigel Lawson, in his Budget in March, abolished the tax exemption on premiums for new policies there. The British measure, however, was part of a much wider reorganisation of taxation, and was applied in a community where patterns of savings, investment, and taxation are significantly different from those in New Zealand.

If Sir Robert Muldoon is determined that all mortgage interest rates must comply quickly with the levels he has set, he has other ways of regulating the life offices. In due course, the market itself will bring life assurance offices into line with other lending institutions. Mortgage interest rates, and the tax exemption on life insurance premiums, are only tenuously connected. A measure that would discourage young people from one important avenue of saving, and would reduce the money available for investment, is an inappropriate way of ensuring a tidy uniformity in mortgage interest rates.

The life offices have the answer to Sir Robert’s threat in their own hands. They no doubt know that he means what he says, regardless of the logic of the action he proposes. To this extent, the conflict over interest rates is political gamesmanship, employing whatever gear seems to be at hand. Even so, battering the life offices is also battering their clients. The prospective client should not be the victim of Sir Robert’s desire to bring the offices’ lending policies into line. Once the tax concession is removed for this purpose, nothing is more certain than that it will not be restored.