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Rankin on Thursday - More Tax Cuts For Rich?

Jenny Shipley has promised that a National government will pay, to New Zealanders who receive high incomes, a dividend in the form of a cut in the 33% tax rate to 30%. The argument of those who seek such a handout is that New Zealand must cut its corporate tax rate to follow Ireland and Australia, and that, once done, we must cut the 33% personal rate to match.

This 'Shipley dividend' will only be payable to persons grossing over $40,000 per annum, and will be proportionately larger the more a person's gross income exceeds $40,000. A person on $50,000 will get $300 per annum. A person on $100,000 will get $1,800 per annum. A person on $1,000,000 will get, from the public kitty, a Shipley dividend of $28,800. The less a person needs the cash, the bigger the cash handback they will get.

Why do we hapless kiwis stand for such an inequitable way of distributing real or imagined fiscal surpluses? On average, each person grossing over $40,000 will get a National dividend of $900 per annum. Each person grossing under $40,000 - two and a half million adult New Zealanders - will get nothing.

Treasurer Bill English does promise, however, to give the same amount - about $400m in total - to a wider range of people, in the form of social services. That amounts to $140 in kind per adult New Zealander, somewhat less than the $900 on average being paid in cash to high income recipients.

The $140 per annum amount is derisory. Further, like the Family Plus scheme which targeted families with a male breadwinner and a mother at home, the next round of social spending is likely to be highly targeted. That means that most New Zealanders will get nothing from either of the $400m funds that Shipley and English have conjured up.

What do other countries do with their public surpluses?

Most other countries have tax scales which incorporate an initial level of income that is not taxed. New Zealand used to have such "tax allowances", but they were abolished by Bill Rowling in 1973. The then Minister of Finance replaced tax-free allowances with income tax rebates. These rebates essentially converted the universal tax allowances into targeted handbacks. At the time of the Third Labour Government, Rowling's tax rebates increased the progressivity of the tax scale by denying richer New Zealanders the benefits that they used to gain from the universal allowances.

The problem was that the tax scale was set, unintentionally, to evolve in a way that enabled rich people to benefit from future tax reductions, while low income recipients would receive diminished rebates. The damage was done. Ever since 1973, low income New Zealanders have paid tax on their first dollar, at rates on or over 15%. The Rowling rebate was the first step in the flattening of New Zealand's income tax scale.

Let's compare New Zealand's income taxes with those of Ireland, a country that tax-cutters like Richard Prebble selectively use as a role model.

Ireland, like most countries, has retained the tax allowance system that Rowling abolished in New Zealand. For individuals in Ireland (it gets more complicated for families), the tax allowance amounts to 5,200 Irish punts (NZ$13,684 @ .38 punts to the dollar). On their new tax scale, announced earlier this year, all taxpayers in Ireland get to earn nearly $13,684 tax free.

For incomes in the range NZ$13,684 to NZ$36,842, Irish taxpayers pay 24% in tax, following this year's tax cuts. For higher incomes, the Irish tax rate is now 46%. If the Jim Anderton announced the Irish income tax scale as their policy, he would be accused of being to the left of Che Guevara.

Irish taxpayers pay social insurance premiums in addition to taxes. As a result an Irishperson grossing $NZ100,000 gets to keep just $NZ61,000. A New Zealander on a $100,000 salary gets to keep $70,930, or $62,430 if repaying a student loan. An Irishperson grossing $NZ25,000 gets to keep $NZ21,750, whereas a New Zealander on the same income gets to keep just $20,000, or $19,000 if repaying a student loan.

Given that high-income recipients in New Zealand now get to keep so much compared to their peers in Ireland and elsewhere, why does our Prime Minister want to put more cash in their pockets. And why is it that we are so coy about reforming our taxes so as to put more money in the pockets of our overburdened low earners, many of whom have better employment prospects overseas?

The truth is that the more cash from the public kitty that we channel towards our rich, the more the rich want. It's got nothing to do with social or political philosophy. Rather, it is naked greed from a group of people who have much bargaining power in New Zealand.

The Irish have not got where they are today on the basis of low tax. Before 1999, when their economic miracle happened, they paid even more taxes than they do today. Their recent tax cuts are a consequence of growth. And they, using a basic tax scale as simple as ours, have shared the gains of their economic growth.

It is true that the Irish have cut their company tax rate from 32% to 28%, and that they offer tax handbacks to qualifying 'knowledge economy' multinationals. Ireland, while playing a zero-sum game on the international stage, really does share its gains.

New Zealand's real GNP per capita (gross national product) has only increased by 2% this decade, yet we plan to distribute a National dividend to our pampered rich from an economic cake that is not growing.

We should complain a bit more about New Zealand's zero-sum economy, and the inappropriate siphoning-off of its non-existent gains. The Irish would complain if they woke up tomorrow morning to find that their politicians had abolished their tax-free allowances while making plans to reward their highest earners with a cash windfall.

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