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Tax - the issue of the 1999 election

With the release of the Alliance's policy to have an 'executive' tax rate of 47 cents, tax has become the first issue of the 1999 election. All of the parties have issued income tax proposals. They range from ACT's proposals for a low flat tax of 20 cents, to the one percent solutions of National and Labour - National to lower income tax by one percent and Labour to increase tax by one percent - to the Alliance's proposal to increase tax by 36 percent up to 47 cents.

Despite the fact that Mr Peters has been our Treasurer for two of the last three years, his party has issued no tax policy. The New Zealand First Party no longer exists in any meaningful sense.

The dilemma for the public is to determine which tax policy is best. Which tax policy will cause the economy to grow and create jobs?

There is objective evidence. The economic effects of taxation in New Zealand have been the subject of world-leading research. The results have been published in international academic journals, following peer review.

Or we could take the Manufacturers' Federation survey. The Federation surveyed the country's manufacturers, who are major producers of jobs, and asked which of the party's policies would be best for their business.

Or we could take the independent analysis done by Infometrics, a leading independent economic research group. Infometrics were commissioned by the NZ Employers' Federation to do an independent assessment of the 1999 political parties' tax policies.

I want to emphasise that none of these studies have been commissioned by the ACT Party. Anyone who was serious about comparing the parties tax policies could not ignore this research.

Let's take the research commissioned by the IRD into the economic effects of different levels of tax.

The research was headed by Dr Patrick Caragata. The research cost hundreds of thousands of dollars of New Zealand taxpayers' money. It took six years and involved some of the world's leading economists. The results have been published in fourteen leading university academic journals, and two text books including Caragata's book 'The Economic and Compliance Consequences of Taxation - A Report on the Health of the Tax System in New Zealand ' which has been published by a leading publisher of university text books Kluwer Academic Publishers after academic peer review.

As an aside, to give you an idea of how significant this research is, it's my understanding that the New Zealand Treasury which produces a great deal of research, has only had one academically reviewed piece of research published in an internationally recognised academic journal in its whole history.

In a nutshell, Caragata and his economists found New Zealand is over taxed.

I attended a seminar given in Wellington last year by Professor Gerald Scully, who is a world famous economist from the University of Texas. At the seminar he said that his economic modelling of the New Zealand economy and tax system lead him to conclude that the New Zealand government had reached beyond the limit of what was possible to raise in sustainable taxes. The Government could not raise any more tax revenue.

At question time I said, "But Labour and the Alliance propose to increase income tax rates."

Professor Scully replied, "I didn't say government can't change the rate of tax. What my model shows is that an increase in the tax rate will not raise more revenue. Indeed, an increase in tax rates will do so much damage to the productive sector, the model indicates tax revenues will fall."

So Labour and the Alliance are unlikely to get any increase in revenue from their proposals.

Dr Patrick Caragata's research indicates that a 1% increase in tax will result in the destruction of 40,000 jobs. So Labour's tax proposals will see unemployment rise.

Fortunately, Dr Caragata's research also shows that a 1% reduction in tax results over a four year period in the creation of 40,000 new sustainable jobs. So National's proposals will result in 40,000 new jobs, a net difference between the two major parties of 80,000 jobs.

The Alliance's proposals are much worse. In a global economy, a 47 cent tax rate on executives is an export policy. Our best talent will migrate to Australia.

But ACT's tax proposals, according to Dr Caragata's research, will result in the creation of 120,000 new, sustainable jobs.

Let's look now at Infometrics' analysis of the political parties' tax policies. The Infometrics study ranked political party tax proposals by assessment criteria.

The criteria included the ability to raise required revenue, economic efficiency, equity, administration and compliance costs. Infometrics state: "There is clear daylight in the gap in quality between ACT's tax proposals compared with those of the other parties."

Infometrics found the economy will perform best under ACT's tax policy of cutting the top rate of tax to 20 cents within five years.

Let me quote directly from the Infometrics analysis of ACT's tax policies:

"…..add an extra 5% economic growth over the next 10 years….the overall impact is likely to be larger."

"……be expected to yield the most positive results in terms of economic performance, …equity, and reducing the costs imposed on society by the tax system."

"……eliminate the incentive for tax avoidance that has developed since the 1996 tax cuts."

"……increase national savings" and improve the current account.

"……lower the nation's risk premium" leading to a drop in interest rates.

"……increase productivity of the economy, which will improve job opportunities and incomes."

Infometrics state that to finance ACT's flat tax will require a freeze on the growth in government spending for just two years. There is not a business or household in New Zealand that has not had to freeze expenditure for two years. No cuts in expenditure are required.

Infometrics also say that ACT's policies are fairer from an equity point of view when looking at issue of inter-generational fairness.

National's tax policies are second ranked, principally because of the proposal to eventually lower the corporate tax rate to 30 cents.

The study says: "We see very little economic benefit from their year 2000 tax cut proposal."

The study goes on to say: "Labours proposal to raise the top rate to 39 cents in the dollar for incomes over $60,000 would accentuate the gap between tax rates and adds a further distortion through its reintroduction of a gap between the company and top tax rate. These increased gaps would distort behaviour and so lower economic efficiency, which combined with the higher tax burden is expected to lower growth prospects under a Labour government."

Infometrics says the following about the Alliance: "The tax policies of the Alliance seem totally focused on addressing income redistribution issues. Our assessment is that they would have some initial success in redistributing income away from the wealthy, but that these gains are likely to be offset by the consequences they have on reducing economic prospects."

This is before the Alliance announced its proposal to reintroduce land tax. The Alliance was rated a distant fourth, a distance that has now increased.

There is the third independent study. In August the Manufacturers' Federation surveyed their members' response to the main political parties' tax policies. As these are the people who will make the decisions on jobs, I believe the survey is important.

On tax the Manufacturers said: "The single most important measure in the short term to rebuild New Zealand's competitiveness would be a cut in the rate of business tax".

ACT has a clear timetable for reducing the tax burden on business - a 3 cent cut each year down to 20 cents.

National will lower the business rate to 30 cents after the year 2000 as fiscal conditions permit.

Labour will punish hard work with a 33 cent business rate and a 39 cent personal rate.

The Manufacturers did not assess the Alliance because that party in August did not release its 47 percent executive tax.

The Manufacturers also looked at the parties' policies for ACC, employment and red tape and said that ACT's policies are best for manufacturing.

Labour's Dr Michael Cullen has dismissed the economists' findings as quote, "snake oil".

The Alliance does not even try to justify their policies in economic terms. The Alliance policies are the policies of envy.

I believe intelligent, thoughtful New Zealanders cannot ignore two major surveys and the country's most recent leading economic research.

All of the objective independent analysis concludes that ACT's tax policies are the best for growth, for jobs, for New Zealand. No independent commentator who is trying to fairly report this election, and to subject the political parties' tax policies to scrutiny, can fail to report that Labour and the Alliances' tax policies will harm growth and cause unemployment. Equally, that ACT's policies will create jobs, at least 5 percent extra growth and are fairer between different generations.

I am delighted to be leading the party that is producing the fresh new ideas , the ideas rated best, not just by the leading economic research company, but also by those in the productive sector.

I believe the New Zealand electorate is economically literate and that's why I am confident ACT will elect 20 MPs and in 10 weeks time we will begin lowering tax and getting the economy moving up into top gear.


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