Why Dropping Income Tax To 20 Cents Would Be Better For Kids, Families And Our Future

Post-Budget Speech, Crown Plaza Hotel, Auckland

Let's be clear about one thing: that was a rotten Budget - rotten for our kids, rotten for families and rotten for our future.

The Budget was pork-barrel politics of the worst kind. The driving concern was not what's good for our country and future, but simply what's good for Labour for the next election.

The Clark Government's attempt to buy votes with voters' own money won't work. There's a healthy cynicism about this Budget. The voters know that politics has driven this Budget, not the best interests of the country.

This was a wealth-sapping Budget. There was nothing in it to make our country more prosperous. Nothing in it for our future. It was a re-distributionist, here-and-now Budget.

The Government has abandoned its goal of pushing New Zealand into the top half of the OECD. Labour's policies make that goal impossible and, so, the goal has been dropped.

To achieve the goal of putting our country in the top half of the OECD in 10 years, we would have to grow the economy at 4.6 percent plus a year. The Treasury forecast for the next four years is for the economy to grow less than three percent a year. When Helen Clark took office, she declared that the economy had only "marked time" during the 1990s. We averaged four percent growth through to 1996, and three percent for the decade. By her own admission, Helen Clark has the economy doing worse than "marking time".

20 cents

And that's the tragedy and wasted opportunity of the Budget. Finance Minister Dr Michael Cullen had the best opportunity for a generation to permanently lift New Zealand's growth prospects. The operating surplus for the year was $6 billion.

To drop the top rate of personal tax - and the company rate of tax - to 20 cents in the dollar would reduce Government revenue by $5.5 billion. That's assuming that not one extra job, not one extra dollar of investment, not one extra business as a result of dropping taxes. The estimated lost revenue is conservative.

We know that figure is correct because it's the figure Dr Cullen gave me in answer to my Parliamentary Questions. He repeated that figure in his Budget Speech on Thursday.

And, so, the Government could have dropped income tax to 20 cents in the dollar and still have surplus to spare.

The Labour Government, however, is dead set against tax cuts. After all, it applied the six-cent envy surcharge to taxpayers earning over $60,000. The 10 percent of all taxpayers who earn over $60,000 now pay 46 percent of all income tax.

Michael Cullen is against dropping taxes. He told the `New Zealand Herald',

"It is really [just] an assertion that a company tax rate cut would lift the rate of economic growth. No one has actually demonstrated it."

Dr Cullen is immune to commonsense, and the overwhelming empirical evidence of numerous studies that show the dramatic impact that cutting taxes has on economic growth. He's trapped - at the country's expense - into his ideological "Robin Hood" pork-barrel politics.

The Prime Minister was even less circumspect. She dismissed tax cuts in her Budget Day speech as "voodoo" economics. It seems that everyone's wrong but her.

In his Budget Day speech, Michael Cullen directly addressed my call for a drop in income tax to 20 cents.

"A 20 percent flat rate of tax, at a fiscal cost of somewhere around $5.5 billion a year would deliver a gain of just $39 a week [for a family on $55,000]. On the other hand, the Minister of Finance, with no dependant children, would gain over $600 a week."

That was it. His sole concern was the impact it would have on his $218,000 a year pay packet compared to someone earning just a quarter of what he receives. His concern was simply over the `fairness" of lowering taxes. He gave no thought to the impact on our economy and our future prosperity. That's how short-term and re-distributionist his thinking was in this Budget.

A 20-cent tax rate would boost the profitability of every business in the country by 20 percent. Each dollar of profit would return 80 cents to investors, instead of just 67 cents. There's no other single measure that a government could take that could provide such a boost to business, investment, jobs, and to our country.

A 20-cent tax rate would increase the return to investment, work, and entrepreneurship of our top earners by 31 per cent. Imagine the boost that would give to New Zealand. Our middle-income earners would have a boost of 20 percent.

Dropping taxes to 20 cents would boost the take-home pay of over 700,000 New Zealanders. But, more than that, it would dramatically boost the incentive to work, to invest and to be entrepreneurial.

The resulting boost to our economy would benefit every New Zealander, as increased investment and growth would drive up productivity and wages. Boosting return on investment by 20 percent would see more investment. That means more machinery, more plants, more training, more everything that makes us more productive and able to earn more.

Everyone would benefit. A rising tide does lift all ships.

Our economy is probably set to grow at about 2.5 percent a year for the next 10 years. Dropping taxes could boost that growth rate to five percent. That would produce an extra $250 billion over 10 years. That's an average of $25 billion extra a year. That compares to Dr Cullen's package which, at maturity, just re-distributes $3 billion a year - that means taking $3 billion a year from those deemed "rich" and handing it to those deemed "poor". That compares to $25 billion of extra wealth that we would not otherwise have.

That's over $15,000 a year for each and every household. That would come from the extra wealth that we would not otherwise have.

In comparison, Dr Cullen is only benefiting one family in four - and, on average, by only $3,500. And that benefit for one family in four is at the expense of the other three families.

That extra $15,000 a year would mean better health care, better housing, better ability to provide for our children, better ability to save for our retirement, and the ability to pay off our mortgages and our student debts. That's real wealth - not something pinched from someone else to hand out to those who need persuading to vote for Labour.

Labour's fairness

The Future Directions package taxes everyone hard, but allows families with children to claim a handout. Instead of being allowed to keep your own money, you have to pay it to the Government, and then claim it back.

The system is complicated. So much so that the Government is spending $21 million - that's almost 10 percent of the extra it is handing out next year - just to explain it to voters. One advantage of just dropping taxes is that the effect can be explained in a sentence without costing taxpayers a cent.

The Labour Government thrives on dependency - that's where it gets its votes. Its interest is to extend and deepen dependency. And, so, families with six children earning over a $100,000 are now to be entitled to a Government hand-out rather than simply keeping more of their own money.

And let's consider Labour's view of fairness:

Consider two families. They are alike in every respect, bar one. There are two parents, one income earner, two children aged five and nine, they live next door to each other in an Auckland suburb, and they each pay $300 a week rent.

The one difference is that Family A works twice as long as Family B. As a result, Family A earns $50,000 a year ($962 a week), while Family B earns only $25,000 a year ($481 a week).

Question: how much tax does each family pay? The same? After all, they both consume the same amount of Government services.

Or maybe Family A pays twice as much? After all, they earn twice as much.

Or perhaps Family A pays three times as much because, as Michael Cullen explained, the rich have had it too good for too long?

None of these answers are correct. First up, Family B effectively pays no tax. Instead, the Government tops-up their income by $128 a week. They are net beneficiaries. Their net income is $609 a week.

Meanwhile, the Government takes $220 a week from Family A. Their net income is $742 a week. They must send $128 across to their neighbour each week via Government, and $92 to the Government itself.

And, so, Family A - which works twice as long to earn twice as much - are only marginally better off for their effort. Their effective tax rate on the extra $25,000 they earn is a whopping 72 percent. They get to keep less than $7,000 of it, and lose over $18,000.

It's no wonder middle income earners are feeling squeezed -- they are being squeezed. The Government is hammering them. They earn too much to receive any handouts, but too little to be comfortable. And, on top of paying for all that they must pay for, the Government takes nearly a quarter of what they earn.

It's little wonder that families struggle and our economy is sluggish. The tax-benefit system leaves little incentive for anyone to work hard and produce in New Zealand.

Now let's see what the Budget did for these families. The good news is that the Budget package returns an extra $112 a week in handouts to Family A. They are better off. The other good news is that it hands an additional $144 to Family B. They too are better off.

But the difference between the two families is now only $101 a week. Family A now effectively loses 79 percent of the extra $25,000 they earn.

So picture this: Family A works 60 hours a week. Family B works 30 hours. Family A earns $24 an hour, but only gets to keep $3.36. Why bother? Who would work for $3.36 an hour?

For families with one income earner on the average wage, the effect can be simply illustrated by looking at the effective tax rates they face:

• PAYE tax: 33 percent

• Abatement of Family support and in work credit 30 percent

• Abatement of accommodation supplement: 25 percent

• Total: 88 percent

In other words, Labour is saying to working families that for every extra dollar they earn, they can only keep 12 cents.

And there's the problem with Labour: it just isn't worth working.

We could have done so much better by just dropping taxes. We could have provided more for our families, and more for future prosperity. It's a wasted opportunity, one that we will now have to until the next election to seize.

© Scoop Media

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