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Response to the Prime Minister's Tax Announcement

Response to the Prime Minister's Tax Announcement

by Keith Rankin, 10 February 2010

Yesterday's tax announcement has disturbing implications for democracy in New Zealand. This government was elected in 2008 - despite concerns that it might have a hidden agenda - on the promise of a programme of tax cuts that would mainly benefit middle income earners.

In May 2009, the second and third instalment of the tax package we voted for was "postponed" - apparently a euphemism for abandoned - with the global financial crisis used to disclaim the affordability of any tax cuts.

Now, in 2010, tax cuts are well and truly on the table again. The faux tax cut promise that got the government elected has been replaced by what might be seen as the real tax cuts, targeted at high income recipients rather than at middle-income or low-income earners. Such a cynical discarding of its key promise has, furthermore, been accepted by most journalists and pundits with barely a murmur. 100% for political shrewdness; 0% for democracy.

On Monday I proposed a conservative approach to individual tax reform (expressed in Table 4 of that article: http://www.scoop.co.nz/stories/HL1002/S00057.htm) that was essentially the tax cuts announced by National in 2008 with a couple of inexpensive additional changes that targeted persons earning less than $24,000. (In addition I suggested a more fundamental change - expressed in Table 5 of that article - that better addresses the issues that the government claim to be concerned about than anything actually proposed by this government.)

The government should be asked to explain what is wrong with its own 2008 tax cutting legislation, and should never be allowed to claim that "there is no alternative" to what it is doing.

What is the point of what the government now plans to do? The purpose is to achieve a significant net tax cut for high income recipients only. The reasonableness or otherwise of that objective should be at the centre of public debate about the tax proposals being promoted by the government and its principal advisers.

There are two stated reasons for this:


  • Top income recipients find ways to avoid meeting their responsibilities so we should therefore not even bother to ask them to pay an appropriate share.

  • The competitiveness if the New Zealand economy requires low company taxes and low top tax rates to reduce the costs of producing tradable goods and of hiring mobile skilled labour.
  • The reality is that marginal tax rates are already low in New Zealand, and company tax rates are comparatively lower than they may seem because of our imputation system that prevents double taxation of profits. Average tax rates for persons earning around $100,000 may be higher than in some other countries, but only because of the comparatively high tax rates such persons pay on the first $40,000 of their earnings. Thus the cure is to reduce tax rates at the bottom end, not at the top end. My extensions to National's 2008 (now scrapped) legislation achieve this.

    The new proposals are particularly clumsy. In order to achieve the key purpose of cutting tax for people at the top only, the government plans to go through a process of cutting lower income tax rates as well, but plans to fully recoup those tax cuts by increases in GST. All the government will promise for those not at the top is that they will be no worse off.

    Only those on the top are intended to become better off, and the whole exercise of change is being undertaken solely as a means of achieving gains for those few. There is no coherent evidence that a cut in the top rate of tax from 38% to 33% will have any wider benefits for economic growth, productivity, efficiency, sustainability or anything else that might raise living standards. Rather the Prime Minister is exacerbating (at a local level) the imbalances - essentially high income inequality within and between counties - that underlay the 2008 global financial crisis and will precipitate similar (or worse) crises every five-ten years.

    This month I will continue to devote my limited resources to suggesting precise alternatives - looking in particular at the situations faced by couples and families - and publish the results first on Scoop.

    While the government may have enough votes - National, Act and United - to force through its real tax agenda (albeit a watered-down version compared to what some people have been arguing for), it is essential that practicable alternatives are coherently presented. I will do my best to do that.

    The government itself, in 2008, outlined and legislated for an alternative to its present proposals. The media should be aggressively pushing this point, and asking the government to explain why it has abandoned the proposals to deliver to middle-income earners - the policy that got this government elected - in favour of a new proposal that delivers only to high earners and that would have been rejected by the voters in 2008.

    *************

    Keith Rankin
    Dept of Accounting and Finance
    Faculty of Creative Industries and Business
    Unitec New Zealand
    Email: krankin @ unitec.ac.nz

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