Fallow on Tax

December 3rd, 2009 at 6:56 am by David Farrar

Brian Fallow writes:

There was a whiff of incrementalism, even complacency, about Finance Minister Bill English’s comments to the working group’s conference on Tuesday. …

Had he been able to stay for the rest of the conference and listen to the presentation by some of the working group’s members he would have got a clear message that the tax system has deteriorated beyond the point where tinkering and tweaking are enough.

I hope the Govt does more than tinker.

From the standpoint of maximising economic growth and living standards, the worst things to tax are those which can up stakes and leave, like capital and labour.

Labour sees lowering the top tax rate as opportunity for the politics of envy. But it is about getting the incentives right.

Taxing consumption is better, but tends to be regressive.

Actually over someone’s lifetime, GST is not as regressive as people think.

The best, least-distortionary thing to tax is something which is immobile and the supply of which is not sensitive to taxation, like land.

If it allows income tax to be lowered, I support a land tax. Not only does it provide an incentive to get better economic use out of land, it also brings foreign land owners into the tax base.

One feature of the status quo English singled out as unacceptable is that, within little more than a decade, fiscal drag will have pulled someone on the average wage into the top tax bracket.

Our top marginal tax rate cuts in at a massively low level compared to other countries.

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26 Responses to “Fallow on Tax”

  1. Danyl Mclauchlan (1,069 comments) says:

    Our top marginal tax rate cuts in at a massively low level compared to other countries.

    Easily fixed, let’s bring in even higher marginal tax rates, like most other countries.

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  2. wreck1080 (3,917 comments) says:

    I’m not sure why they say the current tax system is broken. It is essentially the same since I started working. Are they saying it has always been broken or out of control government spending has caused this?

    Labour increased the top rate, but I haven’t seen national reverse that.

    What is certainly broken, is the way in which they spend the money.

    For example. I see todays headlines that kiwis are exercising less than ever. “How could this be?” cry the bureaucrats, “We spent millions on the Push Play campaign to encourage Kiwis to excercise more. Lets increase the budgets to fix this once and for all!!”.

    My ideal, is to increase gst, and flat tax of 25%.

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  3. Pete George (23,562 comments) says:

    Yeah, haha Danyl. The bare minimum with tax next budget is to bring the top rate and trust rate down to match the company rate. Better to go a couple of % lower.

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  4. Chthoniid (2,047 comments) says:

    The two main problems comparing our top marginal tax rate to other countries Danyl, is first, you don’t take into account when the top rate kicks in. Our top tax rate kicks in relatively soon.

    The second is we have a fairly clean tax systems, with few ways to avoid those high marginal taxes. Many countries have far more exemptions that allow the effects of higher marginal taxes to be softened.

    The broader problem is why high marginal tax rates would do anything to increase investment and productivity in the economy? It effectively is a tool to punish people for attempting to lift their productivity and incomes.

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  5. Redbaiter (13,197 comments) says:

    The elephant in the room is the size and style of the NZ government.

    NZers only earn so much, and to spend such a large part of what they earn on a Rolls Royce style government (operated in Lada mode) at the expense of so many other things, like the material well being of themselves and/ or their family, is a baffling folly.

    Keeps Bill English employed I guess.

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  6. Chthoniid (2,047 comments) says:

    wreck1080- it’s broken in a number of areas.

    First, by pushing the top tax rate to 39% and the company tax to 33 (then 30) you have created a raft of incentives for people to exploit lower tax structures (e.g. through trusts). The problem now is that you have signalled that economic activity should be directed away from productive areas, to tax-minimising.

    The biggest change has actually been with the introduction of WFF. This means middle-income families now face very high effective marginal tax rates. Every dollar you earn, you lose some in tax and some in WFF payments.

    The problem has also been exacerbated by fiscal creep. A lot of people have been carried into higher tax brackets just through cost-of-living adjustments (to offset inflation). But taxes are based on your nominal, not real income, so you are made worse off. I think the number people on the 39% tax rate basically tripled over Labour’s tenure, and that was basically these households being made worse off.

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  7. george (388 comments) says:

    Danyl – you are more intelligent than that. Those are just the headline rates. The issue is effective marginal tax rates and NZ has the highest in the world – over 90% in some cases – as I am sure you well know. John Key once knew this too when he called Working for Families “communism by stealth” – see http://www.nzherald.co.nz/fiscal-policy/news/article.cfm?c_id=203&objectid=3571934&pnum=0

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  8. malcolm (1,952 comments) says:

    One feature of the status quo English singled out as unacceptable is that, within little more than a decade, fiscal drag will have pulled someone on the average wage into the top tax bracket.

    But Bill has a plan to solve that particular problem. By eliminating economic growth, fiscal drag will be neutralised and the integrity of the tax system will be restored.

    John Keyless also favours this bold plan, as it fits in with his main economic strategy, which is to do f**k all, and be the most popular PM of a sinking country.

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  9. s.russell (1,642 comments) says:

    wreck1080 –
    Is it broken? Not exactly. It is more like a Model T Ford that still goes well. There are essentially two problems with it.

    One is that the rest of the world has changed. Globalisation has, for example, made people and capital far more mobile, which means that built-in disincentives which once mattered little now matter a lot.

    Secondly, the envelope has been pushed too wide. A low rate of income tax is an excellent way to raise revenue. But rates have become progressively higher and thresholds (in real terms) much lower. Because of this the cost to the economy as a whole is far greater – more than just proportionally to the tax. It is a bit like a road that can carry a certain amount of traffic: at 250 cars an hour traffic moves along just fine, but at 400 capacity is exceeded and it becomes jammed.

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  10. Tauhei Notts (1,713 comments) says:

    Taxing land!
    Beware the awful troll that awaits you. It is the vast amount of Maori land that earns very very little but has big potential. And how do I know? Well, I have been doing the accounting work for lots of those incorporations for many years. If a government taxes that low earning Maori land we we might have the 1860’s land wars all over again. And keep in mind, that in the 1860’s white motherfxxxxxs saw all that waste land and wanted to do something about it.
    The Maori Party have been strangely silent on this matter, but will become boisterous when they wake up. This would be labelled a racist tax on Maori Land, even though it would apply to all land.

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  11. Matt Long (90 comments) says:

    For our primary indutries which are land extensive, a land tax is more likely to deliver less productivity and land use efficiency simply because more capital would be directed to the government and less toward improving productivity.
    Also I already pay 10k in land tax, which is unrelated to income, and cannot be minimised in years where my business makes a loss.
    In my view a land tax is a lazy approach to taxation choosing easy targets, but would have serious implications for productivity and make the goal of parity with Australia even more of a fantasy.

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  12. malcolm (1,952 comments) says:

    The elephant in the room is the size and style of the NZ government.

    Too true. And yet the saviours of NZ, the jovial John and Bill Morning Breakfast Show have done sweet FA in this regard. And Labour didn’t exactly make it hard, with their spending spurge in the last term. But even getting back to that level of spending is just too hard for these two. Too upsetting. Too much effort. Too radical. Too aspirational.

    Much easier to piss off to Trini and talk about the succession of the British Royal Family. Much easier to send Don Brash et al on a fools errand to make a strawman and then push it over before it’s even finished. Much easier to convene a tax working group and pooh pooh anything and everything they suggest.

    Maybe I’m being too hard on John Keyless. Perhaps the trip to Trinidad and Tobago was also a fact-finding mission. After all, it’s not that different from NZ. Our per capital GDP is only 50% higher.

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  13. Crampton (215 comments) says:

    DPF: In an ideal world, I’d agree with you. Knocking back the top marginal rate, flattening things out, and making up the lost revenue by a land tax is almost certainly more efficient than the current system. Problem is that if National hasn’t the balls to cut spending, the only result will be that we stick at government spending around 34% of GDP until the next Labour government, who’ll then re-institute the 39 cent rate on the “rich pricks” and hike spending up to 38-40% of GDP. And the subsequent National government would deem any cuts from 40 back down to 34 as being “too radical”.

    We can’t give a new margin on which to tax unless spending comes down.

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  14. Redbaiter (13,197 comments) says:

    Core Government spending has increased by 45 per cent since 2005.

    Trying to loot the productive sector to pay for this irresponsible squandering of a country’s financial resources is futile. Sure adjustments are needed to the tax system, but this is like putting an ambulance at the bottom of a cliff.

    The key problem is over spending by unprincipled vote buying amoral politicians ever ready to put their own careers before doing what needs to be done to save this country from an extremely deep and prolonged financial collapse.

    Cutting the size of government may be extremely unpalatable to a lot of people, but it has to be done, and if it isn’t done by design, it will be done anyway as the country inevitably collapses into an economic black hole.

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  15. Camryn (543 comments) says:

    Re: GST not being regressive… it’s because consumption is a better indicator of wealth than income is. If you want to target tax at the wealthy rather than those that happen to be currently high earning (which does less damage to incentives) then tax consumption.

    Roger Douglas has it nailed down: http://www.rogerdouglas.org.nz/?p=425

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  16. malcolm (1,952 comments) says:

    Well said, RedBaiter.

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  17. Redbaiter (13,197 comments) says:

    Thank you Malcolm. The whole tax argument in this case (IMHO) is futile, because attempting to extract the money from the productive sector (to pay for this gross and irresponsible extravagance), will kill it.

    Just as any parasites will kill any host if their numbers and appetites become too voracious.

    The task of paying for NZ’s bloated, inefficient and largely unnecessary government is a burden that will bankrupt this country.

    The mechanics of tax collection therefore becomes a secondary issue.

    First, get the cost of government down to a manageable and sustainable level, and then redesign the tax system.

    For myself, I have always seen the only solution as a poll tax. One cheque per annum from every person and all equal in amount.

    There is no reason whatsoever why one man should pay more to run the country than any other man. (unless he might want to, and then he would of course be free to make additional contrributions whenever he might want, but not to force others to do the same)

    This way, the true cost of government is always known exactly to each and every person contributing.

    That this cost is today camouflaged by a myriad of unfathomable transactions is the main reason why government and government spending has got almost completely beyond control. People on an individual basis, remain largely unaware of what government is truly costing them.

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  18. wreck1080 (3,917 comments) says:

    @Tauhei Notts

    No doubt our brown cousins will receive dispensations , just look at the ETS deal with respect to maori forests.

    Did you also know, some councils do not charge rates on maori owned land? I think that is wrong

    @Chthoniid: the problems with the top 39% rate and fiscal creep reveals an issue with thresholds / rates rather than indicating some deeper structural problems. Tinkering (eg, top rate of 33% for all, and inflation indexed thresholds) can easily fix those issues.

    WFF is a ‘benefit’ aimed at easing burden on families, not part of the tax system.But, it should be abolished in coordination with tax changes as all aspects of the economy are interrelated.

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  19. malcolm (1,952 comments) says:

    WFF is a ‘benefit’ aimed at easing burden on families, not part of the tax system.

    Semantics. It’s a negative tax for some people with kids. And it will ultimately increase the marginal tax rate on anyone who receives it. As they earn more, the WFF falls away, so it’s equivalent to paying a higher rate of PAYE. So it has the marvellous side-effective of reducing the incentive to work more or more productively.

    And all because Cullen couldn’t countenance a tax-cut.

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  20. Pete George (23,562 comments) says:

    Redbaiter, when your opinion is humble it can really make quite a bit of sense. I don’t agree entirely, I don’t think a poll tax has a hope of happening or working, but it’s good to hear your thoughtful side, neither attack or defence.

    And I agree with Malcolm, WFF is a sad distortion of tax seemingly concocted so Cullen wouldn’t have to admit to agreeing with a tax cut.

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  21. malcolm (1,952 comments) says:

    First, get the cost of government down to a manageable and sustainable level, and then redesign the tax system.

    That would be the sensible thing to do. But it would also be too hard, too radical and frankly too aspirational for John and Bill. Their aspirations lie elsewhere. And lie they will. 2025? Sorry that was just an aspiration.

    By restricting the tax group to revenue-neutral options, John and Bill are biasing the outcome towards a system required to support the excessive spending levels which required the high taxation which partially caused the deterioration of the tax system, in the first place.

    And even with that hobbled and vision-free criteria, they’re still pooh-poohing most of what has been suggested to date by the group.

    What a depressing state NZ has come to, under our bold new leadership.

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  22. bka (135 comments) says:

    A poll tax implies an absolutely untrammelled right of the government to take money from people. Also, practically, there are a whole bunch of people who would simply be unable to pay it.
    If tax in general was voluntary then no sensible person would pay it before they had first fed themselves, got some accommodation and so on. I don’t agree with progressive tax as a means to hit wealthy people over the head, but the progressivity that occurs, either with a zero rate up to a threshold and a flat rate above that or else the scheme Gareth Morgan recently put forward, more closely approximates how people might behave if they had a choice about tax, and if they were all publicly spirited.
    If this view is correct, then we are probably overtaxing low but liveable incomes, which means people on them have an incentive to seek government entitlements to supplement or supplant what they earn.

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  23. Redbaiter (13,197 comments) says:

    “A poll tax implies an absolutely untrammelled right of the government to take money from people. Also, practically, there are a whole bunch of people who would simply be unable to pay it.”

    WTF?

    Even if one accepts this drivel as half logical, in what way is it different to the situation today???

    The country may cost x to run. Giving the number of potential taxpayers the value of y, the formula to arrive at the cost to each taxpayer is x divided by y. If the cost is too great for some taxpayers, then the cost of government must be lowered until it is affordable by all.

    Progressive taxation is the biggest confidence trick around today (well, at least equal to climate change) and allows venal politicians and ever burgeoning government to continue without any control or restriction. Not the least by (as I said above) keeping the true collections/ expenditure by government, and the cost of running it, hidden from the taxpayer.

    If the average taxpayer, the man whose efforts finance government, was made aware of the true excesses and cost of government, there would be an automatic limit on government spending and growth, for the taxpayer would be outraged at any unwarranted increase that might occur at the time of year he was obliged to write his cheque.

    And this is how it should be.

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  24. lastmanstanding (1,297 comments) says:

    The 1st priority must be to reduce government waste. IMHO this is at least 10% to 15% of actual expenditure given total spend has increased 45% since 2005.

    Just as the greenies speak of 1990 levels as regards to carbon emissions we need to set a starting point.

    Again IMHO the 10 year goal must be 20% of GDP and capped at that level. Its called living within your income something pollies and civil servants just dont get.

    Tell me the family that can go on borrowing to buy the weekly shopping as English is doing right now.

    At the rate we are going well before 2025 we will be subject to foreign fiscal controls with our government mere puppets or should they be muppets.

    Already we are substantially foreign controlled Dont tell me Key and English get to make all the decisions they make the little ones. Others make the big ones for them and us.

    Time to pull head out of arse and decide do we want to be free to control our destiny or ruled by overseas interests

    Your call folks

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  25. Viking2 (11,471 comments) says:

    http://www.nzcpr.com/forum/viewtopic.php?f=3&t=18&p=26625#p26625

    Wither New Zealand?
    By Mike Moore
    Former Prime Minister of New Zealand
    Former Director General of the World Trade Organisation

    I’m struggling to think of another country in history that has lost about twenty per cent of its population, unless there has been extreme poverty, a famine, war or ethnic violence.

    Why, then, have so many left New Zealand? Migrants from any society are normally the most energetic, desperate and highly motivated of people.

    I recently visited the Middle East, went to Holland, Switzerland, and to the celebrations in Berlin marking the fall of the Wall. At every place up came a smart Kiwi with a huge smile and a hand outstretched.

    Why have they left New Zealand and how do we get them back?

    Our tax regime is hostile. We are the only country in the OECD which taxes the movements on your foreign currency accounts. Australia now has the same tax advantages as London, Geneva or Hong Kong. You are only taxed on the income you receive from the country you are based in. NZ taxes income from any source. If you are on $100,000 a year, you pay up to $40,000 in tax; you can’t do much with that. But if you are on a $1,000,000 a year, you could save up to $400,000 a year and that’s why many on our rich list live elsewhere.

    When I was an MP, I didn’t understand this, I’m sure my eyes would glaze over and I would think; you are earning it, you should pay your share because tax is the price of civilisation. Now I know these policies actually cost the government revenue.

    However the Kiwi malaise is deeper than that. Drill deeper and some darker images emerge. One bloke explained he came home and saw tattooed faces, and gangs smoking dope and thought ‘hell no.’ My emails exploded over Hone Harawira’s vulgar outburst, people know that’s his honest opinion. He once said ‘browns’ steal through need, ‘whites’ steal through greed. If what Hone has been saying is not wrong, nothing’s wrong.

    I was asked; can it be possibly true that Maori foresters will get a different deal under the Climate Change legislation than their competitors; after all Maori fishing companies pay a lower rate of taxation than their non-Maori competitors. If our Government puts up with this, what won’t they put up with? Now, anything goes in search of a coalition deal. It’s forgiven, even praised by our media, as smart politics. MMP is not an explanation, it’s a squalid excuse. And am I the only person concerned that NZ is borrowing a billion dollars a month to buy political peace which is the norm with these sordid coalitions?

    After participating in the Cambridge Union debate, a Kiwi asked me why successive governments were so busy telling people how to live their private lives. He quoted the great liberal thinker, John Stuart Mill who, centuries ago wrote, “The only purpose for which power can be rightfully exercised over any member of a civilised community is to prevent harm to others. His own good, either physical or moral, is not sufficient warrant.” He had read my latest book and chuckled about a local paper that had written a sneering item about it.
    I shared the story of a Kiwi who won the Field Medal in Mathematics, rarer than a Nobel Prize. Like us all, he sought recognition from his peers. He went home to the West Coast, stood in the bar and saw some old school mates, after a while one of them came up and introduced himself. “They tell me you have written a book?” “That’s right mate” the laureate responded with some pride.” “Bloody show-off” came the reply. One successful ex-pat who comes home every summer told me small countries are always small countries.

    At the time of the American Revolution, when great minds like Benjamin Franklin, Thomas Jefferson, John Adams and George Washington emerged, the American colonies had a population smaller than ours is now. True too of Scotland and their period of enlightenment when the great economist, Adam Smith, and poets, engineers, architects and thinkers like Robert Burns, James Watt and David Hulme prospered.

    I wrote a paper for Labour MPs on our constitutional arrangements because I think our problems are systemic. It was headed; “Is it our destiny to become just another couple of Pacific Islands?” A gentle reminder that at the time the Treaty was signed, Alaska was part of Russia, there was no Germany, and slavery was not to be abolished for another quarter of a century in the US. Be proud that we are confronting the demons of our past, but please don’t ignore the lessons and heritage of our European experience and the age of reason.

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  26. OECD rank 22 kiwi (2,752 comments) says:

    I do believe New Zealand is stuffed.

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