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Keith Rankin: Taxing Times

Keith Rankin's Thursday Column

Taxing Times

14 September 2000

There's nothing like a big rise in either fuel prices or taxes to stir up a bit of direct democracy, of the revolting petit bourgeoisie kind.

The blockaders in France, Belgium and now Britain are right. Their governments, and ours, are profiteering from the rise in oil prices. The size of the real economic pie is smaller than it would have been had oil prices stayed as they were. That's not a problem.

The problem is that governments are using the situation to take a bigger slice from a smaller pie.

Petrol taxes are applied on an ad valorem, or percentage basis. That's not appropriate for a specific excise tax. Petrol taxes should be set as a certain amount of dollars, pounds or francs per litre of petrol. Then the tax take per litre of petrol sold would stay the same, regardless of the price of petrol.

Some tax principles. A general tax should be set in percentage terms. As the economy grows, in real or nominal terms, that percentage should stay the same unless a tax increase or cut is legislated for. Hence, GST, a general consumption tax, should be set at a fixed percent. The revenue from GST should grow in proportion with consumption growth.

Some products which need to be kept affordable for social reasons - eg those which the Australians have made GST exempt - should be counter-subsidised. Such subsidies should be indexed to a "basic needs price index". (Such an index would be dead easy for Statistics New Zealand to calculate.)

Income tax, which is really a production tax, should also be set on a percentage basis. In the absence of a legislated tax increase or decrease, the income tax take should grow in proportion to national income. In fact income tax, like petrol tax, grows disproportionately. Back in the early-mid-1980s, fiscal drag - the disproportionate growth of the income tax take - was huge. It enabled Roger Douglas, a spendthrift Finance Minister, to balance the budget. In Australia, it enabled Paul Keating to run record budget surpluses.

A general tax on imports should, like other general taxes, be set at a percentage of the imported products' price.

Tax revenues on specific products, on the other hand, should rise, not in proportion to the prices of those products, but in proportion to revenues from general taxes. The tax per litre of petrol should be indexed to the CPI (consumers price index). That is basically what the European truckies are arguing.

Governments however are reluctant to give up windfall revenue gains, and are reluctant to be seen to give in to the peasants. So they try and present a tax crisis as an oil price crisis.

There is another reason for the reluctance for governments to acknowledge the underlying fiscal issue. As I have noted, the same argument, in essence, applies to income taxes. A comparable solution is available as well; a solution that would open the Pandora's Box of 'public property rights'.

If income tax revenue is to rise in proportion with the economy, then a flat rate of income tax is required. Not a low flat tax, as the Act Party argue for. Rather, given that the public wants a wide range of collective goods and social security benefits, we need a moderately high flat rate income tax; eg somewhere in the 33%-39% range.

What about equity then? How can we justify charging low-income New Zealanders as much as 39% tax? The solution is to pay every adult an equal share of the income tax take. Such a payment can be thought of as a counter-subsidy to offset high tax rates on the first dollars of earnings.

That 'tax credit' or 'social dividend' should be indexed to per capita national income. In that way the net income tax paid is low (or negative) for low income recipients, and is 30-something percent for high-income recipients. This is called the "basic income / flat tax" (BI/FT) formula for progressive taxation. It is equitable, efficient, and it prevents governments from benefiting from covert tax increases.

The BI/FT formula already exists in New Zealand for persons grossing between $38,000 and $60,000 per annum. In effect such New Zealanders pay income tax at a flat rate of 33%, while receiving an annual credit of $5,130. (For a person on a $50,000 salary, that means paying $16,500 in tax and receiving a tax credit of $5,130. Today, such persons would say they pay $11,370 in income tax.) If we think of that $5,130 credit as a cash return on public assets, then we are talking public property rights; about drawing private income from public equity.

The idea that poor New Zealanders have a legitimate claim to property income is actually quite empowering. Indeed, a proper definition of public property rights would stub a few rich men's toes. As I said, a Pandora's Box.

The fuel tax crisis in western Europe may yet prove to be a slow catalyst for overdue tax reform, here as well as there. As expatriate kiwi philosopher Rachel Hunter says: "it won't happen overnight, but it will happen".


© 2000 Keith Rankin


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