Fallow on Tax

February 19th, 2009 at 11:11 am by David Farrar

Brian Fallow writes how scrapping cuts would be bad:

Just for a moment there it sounded as if the Government might be preparing to renege on its promise of income over the next three years.

Now that would seriously piss me off if that ever happened.

At a conference on tax policy at Victoria University last week, Finance Minister Bill English was laying out some home truths about how utterly the fiscal backdrop for such discussions has changed – Budget deficits and relentlessly mounting Government debt as far ahead as the eye can see.

The inherited decade of deficits and debt.

“The opportunities to reduce tax rates further will be fairly minimal,” he said.

But when asked if in saying that he was signalling something about the string of income tax cuts National had campaigned on, the answer was a curt “No”.

While I suspect if Labour had got back in, all the tax cuts would have been cancelled by now – and in fact we may have had tax increases.

There are structural problems as well, and the tax system is one of them.

It is, as PricewaterhouseCoopers chairman John Shewan told the conference, not sustainable. “We rely too much on too few taxpayers.”

The left see this as a good thing, If 40% of the country funds 60% of the country, then that 60% will vote for parties that support higher taxes on the 40% to fund the majority.

Nearly half of the tax take is personal income tax and nearly half of that, in turn, is from people in the top tax bracket ($70,000 plus since October).

Meanwhile, for the bottom half of households, ranked by income, net taxes (taxes less transfers received) are negligible or negative, according to the Treasury’s briefing to its incoming minister. And many of those on middling incomes have very high effective marginal tax rates as Working for Families tax credits abate. The IRD reckons over 500,000 taxpayers face marginal rates of more the 40 per cent.

Combine that with the income gap which has opened up between New Zealand and Australia (or indeed most of the rest of the OECD) and “probably the most internationally mobile labour force in the OECD” and you have a situation where a large part of the tax base is globally contestable. It is vulnerable. It is at risk.

In other words if you tax people too much, they leave.

It is not just that the tax base resembles an iceberg heading towards the equator. It looks as if the taxes we rely on most are the ones which are more damaging to economic growth.

An OECD study last year, entitled Tax and Economic Growth, looked at the relative impact of four kinds of taxes on GDP per capita.

Worst in terms of impact on GDP per capita, it found, are corporate taxes, followed by personal income tax. The least distortionary thing to tax is immovable property.

I find that fascinating. I must try and get a copy of the report.

“Particularly recurrent taxes on residential property,” Christopher Heady, one of the report’s authors, told the conference. “But that frightens politicians.”

In the more demure language of the report, such taxes are “very unpopular in many countries” and tend to be the preserve of local rather than central government. But property taxes do not affect decisions to work, or to acquire skills and education, or to produce, invest and innovate, to the same extent as other taxes.

There is a degree of fairness to consider in taxing an asset, as people who are asset rich and income poor may have to sell them. But having said that, it is important to get the incentives right for working, education, investment etc.

I hope the Government looks seriously at how to improve the structure of our tax system.

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27 Responses to “Fallow on Tax”

  1. s.russell (1,563 comments) says:

    Once again the economic argument is for things like capital gains taxes. I wish that Govt had the courage to bite the bullet on this (though I understand why they are scared of doing so). Of course, not being a property owner, this is easy for me to say…

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  2. gd (2,286 comments) says:

    If any governemnt wanted to kill the economy stone dead then apart from raising taxes killing the promised tax cuts would do it.

    It all about confidence FFS Governemnts are struggling to get their citizens to spend now Thats why consumer goods are piling up Look at the US carmakers Acres and acres of unsold stocks And before the know it all rush in in the auto industry like many otehrs there are things called lead times. You just switch it on and off like a light bulb.
    Panasonic is probably going to fail and the global electronics industry like the auto industry will see a huge reduction in suppliers over the next 2/3 years

    Unless governemnt put more money in citizens pockets by taking less money off them its all going to get worse.

    Fact is governments ahve been raping and pillaging and wasting their citizens taxes and now the citizesn are saying NO MORE

    They have had it up to their necks with these thieving pollies and civil servants raiding their back pockets.

    Time to set the citizens free to make their own spending decisions.

    Nanny state doesnt know it all it just thinks it does

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  3. side show bob (3,660 comments) says:

    gd, “Fact is governments have been raping and pillaging and wasting their citizens taxes and now the citizens are saying NO MORE.” Not quite gd the citizens aren’t saying NO MORE because there is NO MORE.

    I also note that PricewaterhouseCoopers is on to it, for fucks sake, there have been thousands of posts on Kiwiblog over the last five years saying exactly the same thing, get with the program guys.

    I was wondering the other day how much the governments take in GST must have dropped over the past six months given the drop in the housing market. They must have taken in millions from the construction industry and new home builders and now all that is but a fond memory.

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  4. georgebolwing (611 comments) says:

    The OECD’s analysis of taxes and growth is very mainstream, old-fashioned even. Adam Smith said about the same thing in the Wealth of Nations in 1776. It has been reflected in every Treasury post-election briefing since 1984. The McLeod Tax Review proposed taxing houses in its 2000 issues paper, and was howled out of court within minutes.

    Taxation is a classic example of where politics and rational economic arguments just don’t mix.

    Except for Roger Douglas, Paul Keating in Australia (but only in his early days as Treasurer), Ronald Reagan and Margaret Thatcher (and these two only partially), few post-WW2 politicians anywhere been brave enough to face up to the vested interests of the chattering classes and make national-welfare improving tax changes on a grand scale.

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  5. Viking2 (11,138 comments) says:

    I have to say that since Bob Jones floated the idea of not taxing anyone on incomes less than $10000 in the 70′s until today lots of people just have not got the message. Tax me I’ll move and I will stop employing and innovating etc. You stupid socialists and I include you Nats. should get your minds around all this.
    Stop taxing my earnings and if you must have tax, tax my spend. Its not hard, its not rocket science.
    That requires that you decide what tax should really be collected for and that ain’t for the benefit of politicians and uncivil servants.

    How can you all be so slow to learn?

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  6. goodgod (1,363 comments) says:

    Roger Douglas must be bemused that the global media support he needed to finish the job on the first run came 20 odd years too late. Key has it easy by comparison. All he has to do is use Douglas’ ideas and he’ll be remembered as a saviour. With treasury now accepting worst case scenario, he’ll do it too. Just a matter of timing.

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  7. Christopher (425 comments) says:

    Viking2: hear fucking hear.

    I’m sick of this fucking bullshit socialist shit. Seriously, how long can we be expected to tolerate this crap? Here’s how it works:

    Low-tax, Libertarian NZ would be:
    Fair
    Moral
    Wealthy
    Free of crime
    Healthy
    Free

    The current NZ is:
    Poor
    Unequal
    Immoral
    Plagued by crime
    Unhealthy
    Totalitarian

    It really is that simple.

    Just to be grandiose and arrogant: If I were in charge, this country would be fixed overnight. No joke.

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  8. gd (2,286 comments) says:

    Right on Viking2 I got my first taste of how income tax doecnt work in the UK in the mid 1970s I was a tax accountant and had clients with substantial income paying less tax than on because we used legal means to achieve this.

    On the other hand they used to moan because that had no way of avoiding VAT on their spending.

    Fact is the rich pay more VAT GST than the poor because they buy expensive stuff.

    The way around the low paid is to if necessary have a negative PAYE system .

    A GST of 15% IMHO would provide the necessary revenue for any government who had the will the capacity and the capability to govern NZ in an effecient and effective manner.

    The juries still out on the Nats Do they have the intensinal fortitude and the testicles to make such changes or are they captive to the cants wonts they we hear so much from

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  9. georgebolwing (611 comments) says:

    Christopher: double plus good thinking.

    When I suggest the friends that I only need 24 hours of absolute power to put the country to rights, and that I promise to return the power to the people to the end of my short, but speculator, term of office; they tend to get nervous about the chances of said return.

    But if we can get some politicians with the whit to realise that a liberal regime is going to make them immortal, then they might start to have the guts to take on the nay-sayers.

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  10. Right of way is Way of Right (1,129 comments) says:

    The American Revolution occured due to people being required to make payment towards a state in which they had no say in running. The catchphrase was ‘No taxation without representation’

    Well, now the wheel has turned full circle. There are people living of the largess of the state, or who receive in ‘tax credits’ more than they ever pay in tax! These people have representation, yet in purely fiscal terms contribute nothing. I’m starting to think that universal suffrage may not, in fact, be the panacea it purports to be. How about ‘No Representation without contribution!’ Do you think THAT might catch on?

    Imagine, the price for living on welfare being the abrogation of the right to vote. Simply as there is a vested interest in maintaining the status quo for your own personal benefit there must be a conflict of interest.

    Additionally, if you receive more in Tax Credits than you pay in tax, you forgo your right to enfranchisement.

    Now maybe I am being seriously off the reservation here, and no doubt the sentiments in the post are controversial, but as it appears that 40% of the taxpayers in NZ are supporting the other 60%, and as I am one of the 40%……

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  11. PaulL (5,873 comments) says:

    There is no solid economic argument to tax more on those with more income. The argument is that we should tax more on those who are wealthy.

    Income is a proxy for wealth, but an imperfect one. Property is also a proxy for wealth, and also an imperfect one. Arguably carbon footprint is also a proxy for wealth. Spending is a proxy for wealth.

    To my mind, given that it is too hard to directly tax wealth (which is an assumption), we should balance those other proxies. Some tax on income, some on spending, some on property and/or savings, some on carbon emissions. That would mean that the rich would generally pay more tax, but unlike today, those who are very asset rich but with low income (think retired folks and others with opportunities to carefully structure their affairs) would pay their fair share, rather than the whole tax system resting on a relatively few people who have high wage and salary income (but are probably in reality upper middle class, rather than “rich”).

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  12. What would Hayek say (51 comments) says:

    People might like to have a look at the papers presented at the recent Tax policy conference 2009 (held last week) by the Centre for Accounting, Governance and Taxation research http://www.victoria.ac.nz/sacl/CAGTR/taxpolicy_conference/index.aspx. Papers from http://www.victoria.ac.nz/sacl/CAGTR/taxpolicy_conference/abstracts_papers.aspx. Includes a paper on The Growth Effects of Corporate and Personal Tax Rates in the OECD, another on tax and economic growth – enjoy.

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  13. PhilBest (5,117 comments) says:

    Here is a Wall Street Journal analysis of the shares of federal income tax paid by each income level in the USA:

    http://online.wsj.com/article/SB121659695380368965.html?mod=googlenews_wsj

    One thing that is apparent is that they have so many more higher income earners than we do, that those who are in the US’s top bracket actually contribute far more to the total take than our higher income earners do. The bottom 50% of earners in the USA pay almost no tax at all; but in NZ, where we do not have the number of higher income earners to carry the can, we need to spread the net much wider. Our lowest income earners may be the highest taxed in the world.

    The politics of envy always comes back to bite humanity in the bum. As other commentators on this thread have pointed out, all except the pathologically feckless in NZ would be miles better off today had we had a Libertarian government for the last 20 years.

    And there have been quite a few b. good comments on this thread; I wish it could be said to be representative of a wider awakening among NZ-ers generally, but sadly I doubt it.

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  14. grumpyoldhori (2,410 comments) says:

    Low tax NZ, could work, are you prepared to tell all the people on super, sorry but that is the last bit of state super you will get ?

    Cut defense spending, who would protect the wealthy from the mob wanting to put them in carts for a ride over the cobbles ?
    To be blunt there is just too bloody much hypocrisy among the Libertarians types for it to work in NZ.
    They all chant the same mantra, we believe in free enterprise until we run into the shit and then we believe in a bailout by others.
    Libertarians have one thing in common, they do not give a flying fuck about their fellow man.

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  15. gd (2,286 comments) says:

    Dont you just love whats happening in California Arnies discovering what happens when you tax and tax and keep on taxing At some point and hes reached it You run out of taxes.

    Rather than a careful thrifty regime its been a tax and spend grab all

    Well the musics stopped Arnie and its gonna stop for all the other free wasting pollies and civil servants.

    Now we are going to see the taxpayer in the box seat rather than these bozos

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  16. gd (2,286 comments) says:

    ROWIWOR You are on the money and I and others have geen saying this for years

    theres an old saying He who pays the piper calls the tune

    Well those who dont pay mustnt get the chance as they do now to call the tune.

    If you put into the system then you should have a say according to how much you contribute.

    In my system it would be simple. For every dollar of tax you pay you get one vote. Want to have more votes Then easy Contribute more tax

    This is the same as shares in a company 1 share 1 vote simple fair and equitable

    Except for the bludgers who want it all for nothing and want everyone else to pay their share Selfish bastards

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  17. cushla (2 comments) says:

    David,

    Here’s the OECD paper. I haven’t read it yet.

    http://www.olis.oecd.org/olis/2008doc.nsf/LinkTo/NT00003502/$FILE/JT03248896.PDF

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  18. grumpyoldhori (2,410 comments) says:

    gd, I spent a fair bit of time being a volunteer with the rural fire brigade, the volunteers were of all types socialists, conservatives, but no Libertarians for they believe they are too important to ever be holding a hose.

    With Libertarians I would offer them the same amount of help they believe in giving others.
    You were saying about selfish bastards ?

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  19. Christopher (425 comments) says:

    They all chant the same mantra, we believe in free enterprise until we run into the shit and then we believe in a bailout by others.

    That would be conservatives, not libertarians. You fail.

    Libertarians have one thing in common, they do not give a flying fuck about their fellow man.

    That would be the Socialists who want to keep the poor under their thumbs and voting Left. You fail.

    Cut defense spending, who would protect the wealthy from the mob wanting to put them in carts for a ride over the cobbles ?

    Google the following: right of self defense, gun control laws, crime, switzerland

    You fail.

    To be blunt there is just too bloody much hypocrisy among the Libertarians types for it to work in NZ.

    In pure libertarianism it is logically impossible to be inconsistent, let alone hypocritical.

    You fail.

    Low tax NZ, could work, are you prepared to tell all the people on super, sorry but that is the last bit of state super you will get ?

    You honestly think that moving to a Libertarian New Zealand wouldn’t involve repayment of taxes and distribution of state assets to those who paid for them?

    You fail.

    Get the message?

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  20. gd (2,286 comments) says:

    grumpoldhori Just like the world has changed IMHO the old labels have changed rather than the terms you use

    I now refer to Contributors to the System CTTS and Takers from the System TFTS

    You and the other firefighters were CTTS you put something in I term TFTS those who expect to do nothing in return for everything not just in a fiscal sense but in a total societal sense.

    CTTS should be rewarded and encouraged TFTS should be named and shamed and minimised

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  21. Brian Smaller (3,992 comments) says:

    I would just love to go around to the houses of left leaning people who love taxes so much and help myself to a third of their stuff. They would be screaming blue murder.

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  22. georgebolwing (611 comments) says:

    Libertarians are also passionate about the sanctity of contract and the rule of law.

    To suggest that a libertarian regime would involve arbitrarily consigning the elderly with no others means of support to poverty is cant. But as Christopher points out, once the assets currently held by the State are returned to their true owners, wasteful expenditure reduced and taxes cut, many elderly will have a nice little nest egg to add to their other assets to fund their retirement. Those who don’t have any assets would continue to receive state support in the sort of New Zealand that I want to live in.

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  23. PhilBest (5,117 comments) says:

    GrumpyOldHori, how many Libertarians do you expect to find in any given cross-section of NZ society, and how big a cross-section would you have to take before you found one single Libertarian included in it, and was the volunteer fire brigade that big?

    Could you comment, too, on Rodney Hide’s opinion a few years ago, that beneficiaries who have all the time in the world to spare, tend to be under-represented in the ranks of voluntary workers, and if true, how can they justify that attitude any more than a Libertarian could?

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  24. berend (1,634 comments) says:

    DPF, if you get a copy of that report, it would be interesting to know if they discussed the so called Fair Tax as well.

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  25. grumpyoldhori (2,410 comments) says:

    PhilBest, no section of society can justify not helping where needed.
    Now I have heard comments from Libertarian types that there is no such thing as society.
    I would happily allow Libs the right to pay no taxes, but they neither use nor trade with any organisation that gets it’s funding from taxpayers.
    In other words do not use our roads etc etc.
    Comes under property rights, out property rights.

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  26. Viking2 (11,138 comments) says:

    My argument was and is that taxing income hasn’t and doesn’t work with any degree of fairness nor does it encourage enterprise. It allows politicians to corrupt the taxation process to bribe the voters. So stop taxing our earning power and we will do better. Remove from the list anything that the state is paying for that could and should be paid for by ourselves. Allow enterprise to flourish and do what customers really want and tax them on the way through their spending. Encourages saving, (boy have we listened to years of NZer’s must save and haven’t, can’t)
    and allows that people have a choice and will make a choice. Allows for freedom to choose.

    Incidentally the Nats. won’t get their minds around the concept of individual freedom as long as the Pope has his finger in the process. Long ago history shows that the Vikings were the promoters of self responsibility and were responsible for freeing France and the British Islands from the serfdom that reigned under the various Popes.

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  27. OECD rank 22 kiwi (2,811 comments) says:

    A flat tax structure would see New Zealand right.

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