Rankin: Act on Income Tax and Property Rights

Thursday, 18 November 1999, 8:43 am
Opinion: Keith Rankin

The Act Party has two income tax policies.

One is to "move to a flatter tax rate structure" with "a top rate of company and personal income tax of no more than 20%" ("Tax - A Fair Tax System For Jobs and Growth", 3 November media release, Rodney Hide).

Reducing the top rate does not "reduce the cost of capital" as Hide claims in "Tax - Questions and Answers On Act's Tax Policy" (3 November). Rather, it externalises the cost of capital, meaning that society bears the costs of those who pay little tax. The cost of capital for new projects is the rate of interest, not the rate of tax.

The other tax policy is to achieve a "low, flat tax of twenty cents" in five years (14 November media release, Richard Prebble). It is this version that the Act candidate in my electorate (Mt Roskill) adheres to.

The difference between a flat tax of 20% and having a top rate of tax of 20% is important. With a flat rate income tax of 20% (the Prebble scenario), everyone grossing less than $39,500 today would pay more income tax than they do today. Thus the Prebble tax cut, which would only provide significant gains to the top 5% of New Zealanders, would be partly financed by tax increases for the majority.

Under the Hide scenario, everyone grossing more than $9,500 per annum would get National's April 2000 tax cut (which is less than $5 per week for persons grossing less than $38,000 per annum). From 2000 to 2004, a progression of tax cuts that would only apply to persons grossing over $40,000 would lead to a two-rate income tax scale (15% and 20%). Reading between the lines, Hide would continue cutting the top rate until a flat tax of 15% had been achieved.

Prebble tells us that Infometrics, an economics consultancy firm, believes that the Hide version of Act's policy is affordable. Like the supply-siders who advised Ronald Reagan and Donald Regan in 1980s' America, Prebble believes that stage one of Hide's tax cut would be self-funding; ie funded by the growth it induces. Pigs might fly. After the 1988 tax cut, we had 5 years of economic decline. Yesterday, Donald Brash acted to ensure that there will not be the growth bonanza that Act is supposedly counting on.

Act will not inflation-adjust present spending commitments and will fund no new programmes. Thus, they will cut all social spending in real terms.
The most worrying part of Act's funding proposal is its plan to use one-off asset sales to fund tax cuts; tax cuts which are in reality cash handbacks to those New Zealanders who least need them. Act wants to give the most cash to those who need the money the least.

Of particular interest is the sale of TVNZ. Act claim that they can sell it at $1.2billion above its book value which (according to Prebble in a radio interview with Kim Hill yesterday) is under $300 million. Further, Act argues that when an asset is sold for more than its book value, the excess represents a current revenue rather than a capital transaction. The rest of us would claim that selling assets at their market price is a means of funding a deficit. Selling assets is functionally the same as borrowing.

The reality is that Act is proposing to run a budget deficit to fund its fiscally irresponsible largesse. At the same time any hint of deficit funding of social expenditure by Labour or the Alliance is presented as fiscally disreputable.

I have no problem with budget deficits. Borrowing to fund public expenditure is by no means unorthodox economics. If nobody ran a deficit then the banks would create no money and we would all be in poverty. It's the hypocrisy that surrounds the whole concept of "fiscal responsibility" that I find gut wrenching. I am also dismayed about the lack of awareness of the consequences in the past - eg the early 1930s - of trying to balance the budget at any cost.
Putting all that aside, the crucial issue to confront is "How should the proceeds of the sale of assets such as TVNZ be distributed?" Who owns TVNZ now? What are the rights of the current owners?

It is my view that TVNZ is equally owned by 3.75 million New Zealanders. Therefore, if sold, for say $1.5billion (optimistic), then each New Zealander should be paid $400 in cash or in kind. Instead, Act want to use the entire proceeds to fund a tax cut payable to just 430,000 New Zealanders. 88% of the owners of TVNZ would get, at most, nothing.

Act want to confiscate our property, just as the New Zealand government confiscated Maori property after the New Zealand Wars. It's no wonder that Act wants to put an end to Treaty settlements. Act has an extremely cavalier attitude to property rights.

What if Act's policy (the Hide version) cannot be funded as it claims? Look out for the flat tax version instead; ie tax increases for the low paid to help pay for tax cuts for the highly paid. (We had that in the late 1980s; a rise in GST followed soon after the slashing of the top tax rate from 48% to 33%.)

Look out also for the privatised welfare state. While Act denies that it will withdraw from funding healthcare, education and social security, its overall philosophy is that we should have private insurance for every contingency. Indeed Act's freedom philosophy favours quite a bit of compulsion; eg compulsory private insurance to fund retirement income (and compulsory mentoring for teenage mothers).

OK, Act won't be able to form a government on its own. Act may not need to. From 1984, Roger Douglas implemented the New Zealand Party manifesto, despite the fact that Bob Jones' party didn't get a single candidate into parliament. National have already been panicked into making a commitment to flatten the income tax scale in a way that is consistent with Act's transition to a low flat tax.

I don't think that either Richard Prebble or Rodney Hide believes that Act's published policies can bring about a society in 2004 with a top tax rate of 20% and a lesser rate of 15%. I think that they really want a flat tax rate of either 20% or 15%. And they want to create a pretext for privatising social expenditure by requiring us to individually insure for anything and everything that might affect us in the future. And they want to nick our assets.

ends

© Scoop Media

Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

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