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Column: Tax Cuts according to Tau, Dick and Bill

KR's Thursday Column: Tax Cuts according to Tau, Dick and Billy

The pressure is on for governments to pay an annual growth dividend; to give back to New Zealanders something in recognition of the "success" of the reforms that began exactly 15 years ago. It is doubtful that there is much money to divide, though, given that New Zealand's liberalisation experiment markedly reduced the growth rate. (Paul Dalziel's op-ed piece in yesterday's Herald - "15 years on and economic goals remain out of reach" - is just the latest account of the failure of "Rogernomics".)

Nevertheless, the economy has grown. From March 1985 to March 1999, real gross domestic product (GDP) per capita increased by eight percent (ie 0.6% per annum). GDP represents the amount of income generated within New Zealand, including income earned by the foreign owners of many of New Zealand's productive assets. GNP (gross national product), on the other hand, represents the total income of all New Zealand residents.

The official statistics suggest that real GNP per capita has increased by three percent, an average of 0.2% per annum, from 1985 to 1999. (This is almost certainly an overstatement, because GNP statistics treated foreign reinvestment as income to New Zealanders.) Assuming that the GNP data are correct, New Zealanders should on average have $15 per week more to spend in 1999 than in 1984.

How should growth dividends be distributed? The Alliance believes that there should be no cash distribution. Rather, they want growth surpluses reinvested in social programmes such as education, health and housing. Labour is inclined to agree, but insist that if surpluses are to be given back as cash dividends, then it should be as an increase in Family Support tax credits rather than through a general payout. In other words, Labour would give it all to children.

The three parties that support "tax cuts" as a means of giving something back are National, Mauri Pacific and Act. Each has different views on distributing the proceeds of economic growth. Act, in addition, favours public asset stripping to multiply the cash payout.

There are three possible principles for the just distribution of a public surplus: (i) equity, (ii) contribution, and (iii) need.

Bill English's line is one of "sharing the benefits" while "targeting middle income earners". He has two problems. A payout of less than $6 per week for all persons grossing $38,000 or less - 85% of New Zealanders - is not much. A payout of over $10 to the non-targeted group, the relatively high income recipients who get over $40,000, just adds insult to injury. The English dividend conforms to none of the three aforementioned principles.

Mauri Pacific's Tau Henare wants tax cuts to be targeted at low income New Zealanders. An Henare dividend would go to those in greatest need, the poor, the Herald reported on Saturday. The problem is that Tau doesn't seem to have any actual tax cut proposal that returns the growth surplus to the poor. Even a cut to the 15% tax rate for the first $9,500 of annual income) would give more to everyone earning more than $9,500 than it would to the 30% of New Zealand adults who get less than that. The only way that a Tau dividend can be paid is as a benefit, or a tax credit. A tax credit is just a benefit paid by the IRD instead of by WINZ.

Bill English takes care to include all of the Family Support tax credits - ie benefits paid by the IRD - when he talks about what was given back as "tax cuts" in 1996 and 1998. The only bits of those tax cuts that got to the claimed target group - relatively low income working families - are the bits that most New Zealanders would call benefit increases.

We find it difficult to describe increased family benefits as tax cuts. Indeed, the Act Party, the most shrill in calling for tax cuts, are calling for benefit decreases to help pay for tax cuts. Yet Bill English is right. A benefit increase is the same as a tax cut. A tax cut is a cash payout; a benefit.

Act's Richard Prebble wants more assets to be sold so that we can have a much bigger cash payout than the growth of the economy could ever justify. His finance spokesman Rodney Hide is more specific. He was reported in the Herald as wanting, in addition to a reduction in "government initiatives" (meaning abandoning planned investment in a knowledge economy), a sale and divvy up of TVNZ. Selling TVNZ and giving my share to someone else is theft.

It would be possible but manifestly unjust to give tax cuts to the greedy rather than to the needy. Act wants a cut in the 33% top tax rate. That means that 85% of New Zealanders would get nothing out of an inflated payout. And it means that persons on a salary of a million dollars would get a payout 80 times larger than would persons on $50,000. Do Messers Prebble and Hide really believe that your typical Kiwi millionaire contributes 80 times more to the growth of the New Zealand economy than does a typical university lecturer?

No. The Act payout proposal conforms to none of the three criteria suggested above. Rather, it is a plan to give more than the entire growth surplus to the top 10% of income recipients. Act need to be exposed as a party of kleptocrats. Prebble's 1988-89 heist was an amazing act of gall.

It might be possible to divvy up a pot of cash in accordance with individual contributions to economic growth. But who could judge each person's contribution to total factor productivity growth? Economic growth is a team effort. Certainly, individuals' earnings do not measure their contributions. Those people who are now working harder but for less pay than before are contributing more, not less, to the New Zealand economy.

The simplest and most sensible way to divide any public cash payout is in accordance with public property rights. All New Zealanders own an equal share of New Zealand Inc. So, why not just give an equal amount of any distributable surplus to every New Zealander, rich and poor. Did Bill English not say that he wants to "share" the benefits of success? Equity has always been the fairest basis upon which to divide a pot of cash. It's not rocket science.

OK, so the cupboard is bare, thanks to Roger Douglas, Richard Prebble and Ruth Richardson. An equal portion of the 1999-2000 growth surplus might just stretch to $1.95pw per man, woman and child. Equity still matters, however, no matter how small the bounty.


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