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Keith Rankin: Business Handouts

Nobody really cares that the Government has spent slightly more than it planned to spend this financial year (to June 2001). Indeed there appears to be widespread if understated support for an expansionary fiscal policy to be outlined in today's budget. Unfortunately much of that support is of the pork barrel variety. Businesses and businessmen want public revenue to help them make private profits.

An easing of fiscal policy means that the government plans to purchase more goods and services without raising more taxes. Or it means cutting what economics textbooks call "net taxes". Business in New Zealand, the Business Herald has revealed, favour one particular version of the tax-cut scenario. Not surprisingly, it's the version that gives them and only them private access to public funds.

Private sector economists such as Ulf Schoefish, who argue in a more sophisticated way for tax cuts, nevertheless fail to note that an increase in government spending is at least as sensible as a way of invigorating the national economy. Cautiously, Schoefish argues for a fiscal policy that is less contractionary than the present policy, rather than arguing for the kind of outright expansionary fiscal policy that nowadays resides only in stage one economics textbooks.

All of the major spending Ministries and Departments are desperately short of funds: Education (esp. tertiary education); Health; Defence. The problem is though that an injection of additional spending doesn't always go where it is most needed; it goes where it is most wanted by those who are not in need. Fortunately, with a new electoral system (MMP) that allocates seats in Parliament in accordance with the nationwide party vote, the scope for pork-barrel fiscal politics is severely curtailed.

Contrast the USA, where spending is beholden to local interests. There, perfectly good 40-year-old sports stadiums are being destroyed and rebuilt with the support of various kinds of public subsidy. In New Zealand, despite the redundancy of the triennial spend-up in the marginal electorates, it is likely that more people would respond to a policy to convert our roads to four-lane highways than to a policy of spending more on things - things like public science, remedial education or humanities - which have a less direct impact than roads on most of us.

When asked to rank their fiscal policy preferences, spending increases ranked lowest. In particular, seed capital for new ventures, improved tertiary education, increased public investment in infrastructure and regional development all ranked in the six least favoured options. Yet all of these will benefit business, collectively, if they happen.

The trouble is that the businesses surveyed were looking only at the small picture; at what kinds of fiscal injection would have the most immediate impact on their individual businesses. Not surprisingly, they favoured options that would give their businesses - and themselves as businesspersons - a direct injection of public cash. And of course existing businessmen instinctively oppose initiatives (eg seed capital) that would encourage new businesses to enter their markets. Indeed, existing businesses (whose opinions are solicited) often favour a tax cut (which puts money in their pockets) over an interest rate cut (which helps new businesses - or ventures not yet started - much more than helps established businesses).

It seems more likely, however, that an easing of fiscal policy, when it does come (and it probably will not be this government), will take the form of a cut in net taxes. So let's consider the possibilities.

We should first note that an increase in "transfers" (usually defined as benefits, family tax credits, NZ Superannuation etc.) is, to an economist, as much a cut in net taxes as is a cut to the company tax rate.

The best way to consider a tax cut is to think of it as the creation of an fund which, instead of being spent by government, will be returned as cash to all or some of that country's public. For example, the George Dubbya Bush multi-trillion dollar tax cut should be thought of as the creation of a multi-trillion dollar fund that will be distributed as cash in one way or another to the American public.

When we think of it this way, we can think of who owns such a fund. We can also think about who gets it, and upon what principles of fairness a 'tax cut' should be distributed.

Obviously, the most just way to give away a trillion dollars of public money is to give an equal share to everyone. For example, the USA has about 250 million people. If a trillion dollars is to be handed out to the public by the new Republican- dominated administration, then every American should get $4,000. Fair's fair.

The problem is of course that the lion's share of George Dubbya Bush's fund - a fund that is the equal property of all Americans - will be handed out to the richest 10 percent of Americans. The Bush "tax cut" is nothing less than a direct transfer from America's poor (equal owners of the tax-rebate fund) to America's rich (the predominant beneficiaries of the fund). Imagine a millionaire picking the pocket of a homeless man sleeping under Brooklyn Bridge.

This is the kind of fiscal policy that New Zealand's business establishment would like; a carbon copy of the huge handouts that will be paid to rich Americans. Indeed it's getting closer to home. This week's Australian budget also featured handouts to the rich; handouts once again labelled as 'tax cuts'.

So far I have considered two forms of tax cut. One involves an equal distribution of fiscal surpluses; ie an equal distribution of public revenue that is not required for government spending. The second involves a distribution that heavily favours those who least need it.

There is a third possibility; distributing the tax cut in a way that favours those who most need it. Yes, it sounds like communism. The key point is that this option - transferring most of the tax cut to the poor - is at least as valid in economic theory as is the option that transfers most of the tax cut to the rich. Both options are invalidated when property rights are taken into account however. The most just way of distributing public money is to distribute it equally to its owners. The only other just way involves giving people the choice of to whom they should give their money.

If given the choice I would not give my share of public moneys to be distributed as tax cuts to a few rich middle-class middle-aged white men. If I couldn't pocket my own share, I would choose to give it to some person or persons in need; maybe to persons such as those living without electricity in places like Herekino; to persons who cannot afford the necessities of modern life.

The fiscal stimulus of giving the proceeds of tax cuts to the poor is no less than the stimulus of giving tax cuts to established businesses and businesspersons. Both are equally sound, or unsound. Businesses actually stand to benefit when the poor receive substantial transfer payments, as more poor people buy more of the goods and services that businesses produce.

Like our established business community I favour a cut to net taxes in today's budget. Unlike business, I favour a just tax cut. I'm not holding my breath.


©2001 Keith Rankin

keithr@pl.net

http://pl.net/~keithr/

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