ODT on Key and Tax
November 22nd, 2009 at 3:00 pm by David FarrarThe ODT reports:
Personal tax cuts are back on the agenda of Prime Minister John Key and his enthusiasm for the cuts appear to indicate they could be part of National’s 2011 election manifesto.
Speaking to the Otago Daily Times yesterday, Mr Key talked about how a reformed tax system – rewarding people for hard work and risk-taking – could help productivity, along with other measures the Government was considering.
“A lot of work is being undertaken by the tax working group which is due to report by the end of 2010.”
The tax group would make recommendations, some of which would not be palatable to the Government but others would have merit, he said.
What was true was that the group was concerned about holes in the tax system, particularly around the $200 billion of rental properties from which the Crown lost $150 million in revenue.
Mr Key did not support a capital gains tax but he did favour putting some boundaries around investment property.
“On the tax front, the Crown aims to be tax neutral. If we end up plugging some holes then we can recycle the money through tax cuts.”
Sounds promising.
Asked if he could see a time when he could confidently talk about the reintroduction of the tax cuts postponed once the recession hit, Mr Key said he could but the ability to deliver them depended on the size of the fiscal deficits in the future.
However, tax cuts could be part of the overall tax mix.
All of the academic research he had seen out of Treasury pointed to lower personal tax rates as being the strongest impetus to economic growth.
Research from the United States also confirmed that.
And that is key. How we structure the tax system, can have a major effect on economic growth. And only by growing the cake, can we afford superannuation, health care, education etc.
We should ideally have a tax structure that maximises economic growth, and then use the welfare system to deal with inequalities that need addressing. The problem is people see the tax system as the way to address inequality, and that often proves counter-productive.
November 22nd, 2009 at 3:29 pm
We should reduce personal tax to 0%, seeing as cutting personal taxes is the strongest impetus to economic growth. While we’re at it, cut company and trust tax too.
Vote:November 22nd, 2009 at 3:38 pm
Fool me once, shame on you; fool me twice, shame on me.
Vote:November 22nd, 2009 at 3:46 pm
I thought they were pretty tight on the booze in Dubai, mr Farrar. This is the most amazing bit of unscrupulous spin I’ve seen in a while.
Vote:November 22nd, 2009 at 3:47 pm
The problem is people see the tax system as the way to address inequality
and others see taking money from people who work hard as their right to a free ride.
Vote:November 22nd, 2009 at 4:13 pm
I’m with gazzmaniac, zero income tax
Vote:November 22nd, 2009 at 4:14 pm
“Sounds promising”… will you want chewing gum to swallow that one ?
Tell me again how much the Irish GDP has dropped, the previous year. And yet you still swallow the ‘theory’ of the wasted last few years under Labour
“Fitch said the downgrade “partly reflects the severity of the economic adjustment underway, entailing a far greater actual and expected decline in nominal GDP, about 9% in 2009 and a cumulative 14% between 2007 and 2010″
Vote:November 22nd, 2009 at 4:19 pm
Statement 1 (above): All of the academic research he had seen out of Treasury pointed to lower personal tax rates as being the strongest impetus to economic growth
Statement 2: The numbers from Treasury are nonsense. Treasury can’t tell us what the deficit is going to be in December let alone what’s happening in 2030 or 2040.
Must be a different Treasury.
On the general point, National is polishing its usual electoral line for rolling out next year. First, who would trsut them to deliver? Second, the simplistic logic that tax cuts will produce improved productivity and growth (rather than, for example, house price rises) is risible.
Vote:November 22nd, 2009 at 4:48 pm
Too right Robert . George Bush would push the ‘Iraqi withdrawal’ meme every 2 year election cycle in the US. Even as the situation deteriorated so badly they had to have an increase – not that they used that word , surge was more favoured by the spinners.
Was it only 3 months ago Bill was still talking about a ‘decade of deficits’ – which was the reason the tax cuts were rushed into law and then rushed into repeal again
Vote:November 22nd, 2009 at 4:56 pm
Aah Robert, we’ve had two recent experiments with tax cuts and productivity effects. The tax cuts in the early 90s did lead to increased productivity growth.
The second experiment was when Cullen & Co increased taxes. Productivity growth flatlined.
There is certainly plenty of evidence accumulating that tax cuts do lead to better growth and productivity, and importantly, there are differences in effects of cutting different taxes (indirect, company, personal).
Vote:November 22nd, 2009 at 5:14 pm
@Chthoniid: you must be relying on Evans, Grimes etc, and not Treasury, OECD, Dalziel or the WPWG data, all of which show our productivity performance to be poor, even under the ECA (for those who love neo-liberalism). The government recognises the long-term poor performance (hence the 2025 group – though that will come up with nothing interesting). The mantra (tax cuts equal improved productivity plus growth) is simply that. There is nothing automatic about that causality.
Vote:November 22nd, 2009 at 5:21 pm
ah ok! tax cuts will be part of the 2011 bribe! yay!!!!!
so the first .5% will kick in 2012 and maybe a bit more in 2013??!?
why do i feel like National are pissing in my face?
Vote:November 22nd, 2009 at 5:22 pm
You can use economics and statistics to prove whatever you want in theory. Economic theory and ‘studies’ are not scientific since you can never create a comparable control to measure your theory against.
Simply re-hashing the Neo-Liberal line taxes are bad because they are bad is not enough anymore. The next generation is going to won’t to know what you are going to do about 400+ ppm CO2, rising oil prices and decreasing food supplies. They are worried about the future.
At the election we will see how good his arguments and research are. Labour are developing their proposals it will be interesting to see what they come up with.
Vote:November 22nd, 2009 at 5:23 pm
Ain’t it wonderful. 12 months in office and the next election looming and after making promises to break we are now getting the softeners for the next lot.
Vote:Good God is he just getting round to reading Treasury?
There’s been plenty of evidence to support lower taxes for years. ( long years in opposition should have been enough time to learn.
As he wants tax neutrality I guess that means he’s gonna attack someone, probably the housing market,(at his peril),.
I can guarantee he won’t remove the tax privileges that abound round trusts etc.
November 22nd, 2009 at 5:29 pm
I might be interested if there were tax cuts coupled with reduction in government spending. Not capping spending, but real reductions. Shave off $10billion for starters.
Vote:November 22nd, 2009 at 5:32 pm
Brian- I think they would like to do that. But the models on what that will do to unemployment would be pretty ugly. Very ahrd to be re-elected with 10% unemployment.
Vote:November 22nd, 2009 at 6:52 pm
If personal and company tax were lowered to less than 10%, all they’d have to do is sit back and watch the capital roll in.
Vote:November 22nd, 2009 at 6:54 pm
Yep, that is after they clean up their mess with the ETS. Looks like its al turned to shit. Good fun
Bring on keisha and the Warrior. They can team up with Smith and Keys.
Vote:Showdown at the Al Gore coral.
November 22nd, 2009 at 7:07 pm
Agree with dime and Viking2. Key is just playing to the grandstand on this. I’m not fooled. Socialism is thriving on his watch.
Vote:November 22nd, 2009 at 7:58 pm
Yeah, it’s all nice talking about tax cuts, but the government hasn’t actually been shrunk. When the welfare state starts contracting, rather than expanding, and I actually see some tangible evidence that the people who need welfare provision are getting it, rather than people who simply don’t want to work, I’ll rethink the position. But at the moment we’ve had twelve months and no serious proposals to shrink the state back to a more manageable size. Part of the problem is that Labour created a dependency problem which isn’t easy to get people off of, but we could at least encourage work programmes and get people back into work, even if subsidised, rather than paying them to be of no productive value and not gaining experience or skills which they can ultimately use. I haven’t seen the Government enact anything which will increase work skills and remove people from social provision which, ultimately, shouldn’t be for long-term purposes, yet seems to be the case.
Vote:November 22nd, 2009 at 8:28 pm
u just cant give them an option. just take our benefits off them bludgers and tell the media to piss off.
Vote:November 22nd, 2009 at 10:27 pm
You would not get this from the Labour Party. They were always looking for ways to increase the tax take so they could spend more on cultural safety officers and the like.
Vote:November 22nd, 2009 at 10:41 pm
Robert Winter said onNovember 22nd, 2009 at 5:14 pm
“@Chthoniid: you must be relying on Evans, Grimes etc, and not Treasury, OECD, Dalziel or the WPWG data, all of which show our productivity performance to be poor, even under the ECA (for those who love neo-liberalism)”
Do I take it that you are follower of neo-socialism Komrade Winter?
As for your pooh poohing of the tax working groups recommendations while crying that NZ’s productivity performance is sub-par, erm, is your solution more social welfare and higher taxes?
What I just don’t get is a bunch of ‘neo-socialist’ lefties running interference on any type of modernisation of NZ’s nearly bankrupt welfare state economy regurgitating adhom attack lines such as ” ‘neo-lib’ infidel running dogs”.
Where do you think the money is coming from to pay for your socialist utopia, EPMU union fees?
Vote:November 22nd, 2009 at 10:46 pm
There are ways to cut tax and government size and please the people but first national need to talk to Roger Douglas.
Hand the money back to the parents to spend on their children’s education
Introduce compulsory health insurance
Make kiwi saver compulsory
Each one of these can be done as a tax cut although at first it would appear to be a transfer of responsibility from the stage to the individual but as efficiencies set in as the business changes from public to private sector the costs would come down and the tax cuts would become more apparent.
John Key is a coward who is more about appearance then action. Their only plan is to dig up oil and gold to sell so they can still keep the public sector unchanged and everyone happy.
Vote:November 23rd, 2009 at 4:24 am
What was true was that the group was concerned about holes in the tax system, particularly around the $200 billion of rental properties from which the Crown lost $150 million in revenue.
No it didn’t!
To have “lost” something first you have to own it.
We should ideally have a tax structure that maximises economic growth, and then use the welfare system to deal with inequalities that need addressing.
NO!!!
We should have a tax system that takes just enough to support vital government functions and that constantly looks for ways of reducing those functions and therefore those taxes.
ANY other tax system inhibits economic growth.
Vote:November 23rd, 2009 at 7:40 am
@expat writes:
“Do I take it that you are follower of neo-socialism Komrade Winter?
As for your pooh poohing of the tax working groups recommendations while crying that NZ’s productivity performance is sub-par, erm, is your solution more social welfare and higher taxes?
What I just don’t get is a bunch of ‘neo-socialist’ lefties running interference on any type of modernisation of NZ’s nearly bankrupt welfare state economy regurgitating adhom attack lines such as ” ‘neo-lib’ infidel running dogs”.”
Yep, a social democrat who sees other social democracies doing as well as, if not better than, neo-liberal-run economies, who was talking about the Brash group on productivity (not the tax group, though its suggestions are predictable) and said nothing at all about running dogs, was not in any way ‘ad hominem’ and is simply reminding us that we had one of the most comprehensive neo-liberal models in place for 15 years and it failed to produce the economic turnaround that it touted.
My point is simple. Reducing taxes and state expenditures does not automatically create improved productivity and growth. For example (and it is simply one illustration), given NZ’s poor private sector R&D performance, reduced government expenditure in R&D would have serious adverse effects on our economic perfromance. Reduced taxation leading to consumption behaviours that do not promote saving or productive investment might well have adverse long term effects. And so it goes. The silver bullet brigade in economic policy is always shown to be wrong. So it is with the simplistic ‘cut taxes and government expenditure’ tradition.
Vote:November 23rd, 2009 at 9:46 am
There is overwhelming evidence that lower taxes helps growth. BUT:
Vote:1) It is not simplistic. The structure of the tax system has a huge impact. What mix of taxes you use and how efficiently they are organised is critical. It is critical that taxes are cut in the right ways – and this may even mean putting up some taxes to (partially) offset reductions elsewhere. Just cutting taxes any old how may not actually work.
2) Lower taxes and therefor lower Govt revenue have other not-directly-economic implications. There may be social or environmental costs that we as a nation are not prepared to pay. Fair enough, but if that is the case let’s be explicit about.
November 23rd, 2009 at 10:24 am
I think the argument that we ought not to change any fiscal setting unless it automatically leads to desired outcome is disingenuous. I’m surprised Robert is trying to push the debate into that corner. Nothing Labour did for instance, would have survived that hurdle.
The issue is what kind of fiscal settings will give us the best chance of growing the economy faster- and in a sustained way.
In terms of the effect of taxes, there is certainly a lot of work being done by the likes of Gemmel and Arin that show that taxes do matter for growth. The interesting thing about such research is that it shows that different taxes matter differently- cutting an indirect tax is not the same as cutting say, an income tax. But the tax settings do tend to matter. If we want to achieve a higher growth rate, then taxes will be one policy instrument that will be relevant. And that means tax cuts.
Getting back to the NZ experiment, I am astonished that Robert has the chutzpah to presume what I have read. That has the uncomfortable aroma of zealotry.
The information we have on productivity statistics generated by the NZ Dept of Statistics are as follws:
Vote:In the 1990-97 cycle, mulitfactor productivity grew 2% pa
In the 2000+ cycle, multifactor productivity grew 0.4% pa.
November 23rd, 2009 at 10:29 am
@DPF:
Where does the government get the money for welfare, if not from the tax structure?
Vote:November 23rd, 2009 at 10:30 am
@MT_Tinman:
Is education a vital government function?
Vote:November 23rd, 2009 at 10:41 am
If we don’t have taxes how are supposed to pay for all the extra prisons that we will be needing as a result of longer sentences?
Vote:November 23rd, 2009 at 11:16 am
Repton (267) Vote: Add rating 0 Subtract rating 0 Says:
November 23rd, 2009 at 10:30 am
Is education a vital government function?
The most important government function.
Vote:November 23rd, 2009 at 11:45 am
@S.Russell: not so sure about the ‘overwhelming evidence” – eg Myles Fiscal Studies 2000 21/1 pp 141-168, who argues in a detailed study that theoretical models and their construction are very diverse in their understanding of the relationship, and the empirical data suggest that the effect of taxation on growth is ‘relatively minor’. However, you are spot on in that Myles and most thinking says that the structure of taxation is important. I see that Chthoniid, in a somewhat less polite manner, understands this point. Before we swap lots of references, my point is simply that there is no consensus on the theoretical and empirical relationship, but something close to one about tax structure’s significacnce.
Vote:November 23rd, 2009 at 12:03 pm
RW,
Have economists been able to quantitify the psychological effects of what their leaders are telling them? .
Seems to me that the Wests debt problem began in the 1980s when Reagan pronounced the evil of taxation and government spending versus the purity and idealism of private consumption.
Vote:The result of his tax cuts was to create both public as well as private debt. I’m no behavioural expert, but my guess would that tax policy has a bigger pyschological than fiscal effect since the money not spent by the government is compensated by private consumption, whereas debt levels can be a result of personal choice
November 23rd, 2009 at 1:33 pm
@bchapman – have a look, for example, at Congden et al (2009) at http://www.nber.org/papers/w15328 I’m not personally wedded to their view, but they are arguing about the impact of the configuration of tax measures on individual behaviours, suggesting that the standard ‘design’ of tax packages (specifically tax cuts) may have unexpected or perverse effects and may not have anticipated positive efects.
I date the shift slightly earlier to aspects of the Washington Consensus (that is, from the 1970s), but there is, I believe, no doubt that Mr Reagan contributed significantly ideologically to this outcome. The problem for a social democrcat like me is that SD (or purportedly SD) governments did not attack that view; rather in general they bought into it..
Vote:November 23rd, 2009 at 10:06 pm
Yes, those Norwegian run such a good ‘neo-socialist’ utopia that everyone is taxed within an inch of their lives, have their income published for all to see, oh and also have huge oil revenues.
I love your last line, tax cuts create perverts, nice.
LOL.
Ideologically opposed to a reduced role for the state me thinks.
Vote:November 24th, 2009 at 6:06 am
“”the welfare system to deal with inequalities”"
I always thought the welfare is to help those who are unable to earn for a living.
What is wrong with inequalities? It is natural.
Vote:Soviets tried to remove inequalities and we know how it ended.
November 24th, 2009 at 12:06 pm
@expat: a quirky reading of what was written – the conflation of perverse economic outcomes with perverts must reflect a deep inner-working beyond my understanding. If one were to look at Finnish, Swedish, Norwegian and Danish standards of living, education, health provision and social provision, political stability, R&D records etc, and compare those with NZ, One might be chastened, Just to give a taste, World Bank Figures per capita income data for 2008 (adjusted US dollars) rank Norway third at $58K, Sweden 9th at $35k, Denmark 11th at $35k, Finland 16th at $34k, and NZ at 27 with $27k. Lots more data show that they consistently do better than we do (and they don’t all have oil, which explains Norway’s extraordinary figure). Social democratic economies (and societies) work successfully when it’s done well!
Vote: