ACT Proposes to increase GDP growth by One Third

Media Release
Sunday 3 August
ACT Leader Dr Jamie Whyte

This morning I am releasing ACT's proposal and policy to increase GDP growth by a third.
The main points are:
* 12.5% Company tax rate
* Increased investment, jobs and growth
* Higher wages

The policy is fully costed and supported by some of the world's leading economists
We can achieve this by cutting the Company tax rate to 12.5% which will increase investment, jobs and GDP growth by a third. Overseas research shows reducing the company tax rate results in higher real wages.
ACT proposes to fund the company tax reduction by getting rid of "corporate welfare" which is just crony capitalism and politicians picking winners.
No single policy proposed by any party other than ACT will increase jobs, growth and wealth.
I am releasing ACT's detailed costings showing how a 12.5% Company tax rate is affordable and the international research that supports reducing company taxes to increase growth, jobs and real wages.

The full speech follows:

Speech to the ACT Candidate’s Meeting, Auckland, ACT Party Office, 27 Gillies Ave, Newmarket
A Policy for Economic Growth and Prosperity: Cutting the Company Tax
Dr Jamie Whyte, ACT Party Leader
2 August 2014

Few practical problems will not dissolve in a sufficiently strong solution of wealth. In rich countries the environment is cleaner, people are healthier, children are happier.
Policies aimed at “improving society” while making us poorer are a folly for self-indulgent political poseurs.
The beef of any party’s agenda must be its economic policy. The policy must be aimed at increasing wealth; and it must be based on sound economic reasoning.
Today I am announcing another important element in ACT’s economic policy. This policy will increase investment, grow the economy, create jobs and lift wages.

* * * * *

Six years ago, the two major parties shared the goal of catching up with Australia’s standard of living, measured by GDP per person. Clark’s Labour government had promised to achieve parity with Australia, and John Key was also promising that his incoming National government would achieve parity.
Fast-forward to this election and the two old parties have dropped all reference to the goal of economic parity with Australia.
It is not hard to see why. Under Labour and then National governments, the gulf between New Zealand and Australian standards of living has grown. In 1999, GDP per person was 25% higher in Australia than in New Zealand. Today it is 65% higher.[1]
This increased gap is not surprising. Despite their stated goals, neither party in office has made any real attempt to implement policies that would close the gap. Both the big parties and commentators seem to have concluded the task is now impossible.
It is worth reflecting on why closing the gap was seen as vital.
Robert Muldoon said that migration from New Zealand to Australia raised the average IQs of both countries. It’s a good joke but it’s only half right. Migration to Australia raises the average IQ of Australians but lowers ours. Because it is not, as Muldoon was suggesting, our dolts who move to Australia. It is often our most talented and ambitious who go. The Australian economy benefits and ours suffers.
The recent reduction in New Zealanders leaving, and rise in the numbers returning, has made some conclude this is no longer an issue. They are wrong. This current reversal is due to the calamitous policies pursued by the Rudd-Gillard Labor government and the downturn it has caused in Australia. Tony Abbott’s new Liberal government is trying to sort out the mess and it cannot be long before Australia is moving ahead again.
At the same time, New Zealand’s economic growth is being goosed by the Christchurch rebuild and the billions of re-insurance dollars flowing into the country. These are not sustainable sources of growth. It is all too likely that, within five years, we will return to the familiar pattern of the Australian economy growing faster than ours and skilled New Zealanders moving there in search of a higher standard of living.
What can be done? How can policy be changed to increase New Zealand’s long-run economic growth rate?
Labour and its left wing allies are suggesting that we can simply legislate higher earnings. Labour seeks a minimum wage $16.50 an hour. Mana-Internet want it to be $18.80.
Alas, wages depend on worker productivity, not on the declarations of politicians. Set the minimum wage above the value of workers to employers and you condemn them to unemployment. That is why minimum wages cause especially high rates of unemployment among those with little skill or experience – most obviously, among the young.
The other economic policy being advocated by all the other parties is a return to Muldoonism: that is, to economic planning and picking winners. National has a target to double agricultural sector exports by 2025; Labour thinks more forestry will make us richer; the Greens fancy non-fossil energy; New Zealand First think exports are the answer; and the Internet-Mana party thinks it’s the internet.
They can’t all be right. But they can all be wrong.
These policies will help enrich some crony capitalists on the receiving end of politicians’ subsidies and regulatory favours. But the overall effect will be to reduce growth and further increase the gap between New Zealand and Australia.
ACT rejects Muldoonism. Wealth is not created by the edicts of politicians and bureaucrats. It is created by the enterprise of workers and entrepreneurs seeking to advance their own interests through voluntary trade.
Today I am announcing an important part of our economic policy. No single policy proposal from any party in this election can do more to increase economic growth, create jobs and lift wages.

* * * * *

Taxation has a huge effect on the economy. It does not just shift money from taxpayers to the government, and then to those who the government spends it on. Taxation changes economic incentives and economic output.
The economic effects of taxation are a matter of considerable research. Unsurprisingly, economists have found that lighter taxation promotes economic growth. But they have also found that, when it comes to stifling growth, not all taxes are the same. Some do more damage than others.
Company tax is the most damaging of all taxes to investment, innovation and wages growth. High company tax rates deter investment in favour of spending on current consumption. Reduced investment leads to less capital per worker, lower productivity and lower real wages.
Because the capital markets are increasingly global, high corporate tax rates also drive investment offshore. To compete with lower offshore company tax-rates, companies in New Zealand must deliver higher pre-tax incomes. This is achieved by reducing wages.
Evidence has been growing in recent years that cutting company tax rates can increase economic growth rates and wages significantly.[2] The evidence is particularly strong for small open economies, such as New Zealand. We do not have the luxury of being a global financial hub such as the U.S. or the U.K., where the taxman is less likely to drive investors offshore.
However, cutting the company tax rate can attract foreign capital to New Zealand. Cutting its corporate tax rate to 12.5% was an important part Ireland’s economic transformation in the 1990s.
Ireland is not exceptional. A wide ranging study suggests that 10 percentage-point reduction in a country’s company tax rate increases its stock of foreign direct investment, on average and in the long run, by over 30%.[3]
…this evidence implies that the volume of foreign direct investment, and accompanying economic activity and corporate tax bases, is highly responsive to local tax policies. It follows that countries contemplating lowering their corporate income tax rates can reasonably expect to receive significantly greater foreign investment as a consequence.

Larry Summers, Chief Economist of the World Bank, 1991–1993, United States Secretary of the Treasury, 1999–2001, and Director of the National Economic Council, The White House, 2009–2010
How great, then, are the benefits of cutting the company tax rate?
Studies from the U.S. and Europe suggest that the cutting company tax rate by 10 percentage-points will make economies grow by between 1% and 2% extra a year.[4]The likely effects on a small open economy such as New Zealand are even greater.
If New Zealand’s economy grew at 3% a year instead of 2% – a modest assumption in light of the academic findings – that would make a big difference over a relatively short period. In just 15 years, it would mean the difference between our economy growing 35% and growing 55%. Instead of (real) GDP per person rising from $50,000 to $68,000, it will rise to $73,000: a gain of $5,000 per person in just 15 years.
Evidence also shows that cutting company tax would increase wages. Studies from the U.S. and from Germany conclude that each 1% reduction in the company tax rate increases wages by between 0.3% and 0.5%. In other words, a large portion of the gains from cutting the company tax rate will go to workers in the form of higher wages.[5]

* * * * *

No single measure could do more to promote the economic welfare of New Zealanders than cutting the company tax rate. And it is relatively easy, because company tax raises far less revenue for the government than income tax and GST. Each percentage point reduction in company tax loses the Treasury just $220 million in revenue. In fact, when you take into account the fact that a lower company tax rate will expand the economic base to which it is applied and increase the dividends and wages subject to incomes tax, the loss to the treasury ends up being only $150 million per percentage point (see Table 1).
This means that by eliminating “corporate welfare” – that is, taxpayers’ money doled out to business interests – and the needless spending increases of the last budget, we could cut the company tax from 28% today to 20% next year and to 12.5% by 2020.[6]
Table 1: Revenue forgone from a lower company tax, $million
Tax rate Lost revenue Funded by
2015 20.0% $1,530 Abolishing corporate welfare ($1.5 billion) and carbon trading ($164 million)
2016 18.5% $154 Part of the $1.5 billion of new spending in the Budget
2017 17.0% $153 As above
2018 15.5% $150 As above
2019 14.0% $150 As above
2020 12.5% $150 As above

* * * * *

Company tax imposes a terrible drag on economic growth and wages, while raising relatively little revenue for the Treasury. Cutting it dramatically is a policy “no brainer”.
The Labour Party and their left-wing allies will no doubt complain that this is yet another ACT policy aimed at benefitting “the rich”. They are wrong because, as explained, the primary beneficiaries of a lower company tax rate are workers whose pay increases. But if the left are uninterested in economic argument – which history strongly suggests – they may be interested to know that cutting company taxes is a policy favoured by President Obama.
You’ve got too many companies ending up making decisions based on what their tax director says instead of what their engineer designs or what their factories produce. And that puts our entire economy at a disadvantage.
We need something smarter, something simpler, something fairer. That’s why I want to lower the corporate rate...
President Barack Obama, 7th February 2011
If a tax cut is good enough for President Obama, it should be good enough for New Zealand’s left-wing politicians. And even if it were not good enough for President Obama, slashing the company tax rate would still be good enough for ACT. No single policy will do more to promote economic growth and prosperity in New Zealand.
I recommend the policy to you.
Party vote ACT.

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[1] Source: World Bank.
[2] Gordon, Roger H. & Hines, J. “International taxation”, in Handbook of Public Economics vol.4A, A Auerbach and M Feldstein (ed.) (2002): 1935-1995. Auerbach, A. "Who Bears the Corporate Tax? A Review of What We Know”, in Tax Policy and the Economy vol. 20. National Bureau of Economic Research, Inc. (2006): 1-40. Gentry, W. “A Review of the Evidence on the Incidence of the Corporate Income Tax,” U.S. Department of the Treasury Office of Tax Analysis Paper no. 101 (December 2007).
[3] De Mooij, R., and Ederveen, S. “Corporate Tax Elasticities: A Reader’s Guide to Empirical
Findings,” Oxford Review of Economic Policy, Vol. 24 no. 4 (2008): 680–97.
[4] Lee, Y. and Gordon, R. “Tax Structure and Economic Growth”, 89 Journal of Public Economics (2005): 1027-43. Djankov, S., Ganser, T., McLiesh, C., Ramalho, r., and Shleifer, S. “The Effect of Corporate Taxes on Investment and Entrepreneurship”,American Economic Journal: Macroeconomics 2. No. 3(2010): 31-64. Ferede, E. and Dahlby, B. “The Impact of Tax Cuts on Economic Growth: Evidence from the Canadian Provinces”, 65 National Tax Journal (2012) 563-594.
[5] Felix. R.A. and Hines, Jr., J. “Corporate Taxes and Union Wages in the United States”, NBER Working Papers 15263 (2009). Arulampalam, W., Devereux, M. and Maffini, G. “The direct incidence of corporate income tax on wages”, European Economic Review 56. no. 6 (2012): 1038-1054. Fuest, C., Peichl, A. and Siegloch, S.Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany, IZA Discussion Papers 7390, Institute for the Study of Labor (IZA) (2013).
[6] The corporate welfare spending we would cut is listed in our Alternative Budget (May 2014), available on the ACT website: act.org.nz

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