All theory, no reality

February 15th, 2010 at 10:25 am by David Farrar

No Right Turn gives us a great example of the difference between an academic theoretical analysis, and understanding the real word.

So, the median income is around the decile 5 boundary of \$23,000 a year. …

So, 78% of us don’t even pay the middle tax rate, and the top tax rate is utterly irrelevant to 91% of the population. Remember that next time the government or the media talk about “middle-income” tax cuts – they’re not talking about you, or most of New Zealand. Instead, they’re only talking about themselves.

The Standard have made the same mistake also. You see in New Zealand, we have these things called families and households. What No Right Turn sees as a mass of poor people who will be unaffected by tax cuts, are spouses, older children, many students and even parents of those who do earn more than \$23,000 a year, or even \$48,000 a year.

If a family has one parent earning \$60,000 a year, and one on \$15,000 part-time, they both benefit from a change to the 33% tax rate. Because they are a family!!

Likewise most students still get some support from their parents. The income deciles are for adults aged 15 and over, so that covers Year 11 to 13 at school plus full-time tertiary students. And many of those students will have higher salaries once they are not studying.

There are also those on benefits who don’t pay any net income tax. Remember 76% of net income tax is paid by 10% of the population.  But if you are retired and earning just \$25,000 a year, that doesn’t mean you are against tax cuts, because you are happy that your adult children will benefit from them.

So ignore the stupid stats and graphs about individual incomes. They are relevant to academic theory, rather than the real world. Household Family income is what affects most people. Now as of June 2009, the median household income was around \$64,000. 30% of households have income over \$93,000.

If a household is a couple with at least one child, the median annual household income is around \$75,000.

Here is what would be a more useful stat. Of households or families that have at least one adult in full-time work, how many of them have at least one adult earning over \$48,000 (the threshold for the 33% rate).  It will be a lot more than 22%.

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34 Responses to “All theory, no reality”

1. Manolo (9,881) Says:

Welcome to the world of lies, fabrications and distortion propagated by the left. Their objective is to instill fear in people’s minds, to make them afraid of any initiative that will reduce the importance of government and state in their lives.

Liars like No Right Turn and The sub-Standard thrive on that rubbish. Their progressive agenda can only be advanced through lies and deception, that’s why they fear freedom and individual power.

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2. burt (5,930) Says:

If you don’t allow comments you can say whatever you want… I/S once again shows what a coward he is – too scared to stand up on his own blog and defend his prep-school level spin.

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3. stephen (4,063) Says:

I like to think I read most of the posts on Kiwiblog but i can’t say i’ve ever seen a pro-tax cuts post with this angle in it!? Seems pretty obvious now but really surprised I don’t see it around the traps more often.

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4. stephen (4,063) Says:

So ignore the stupid stats and graphs about individual incomes. They are relevant to academic theory, rather than the real world.

Whatever that means. ‘Academic theory’ seems to be whatever one wants it to be these days.

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5. RainbowGlobalWarming (295) Says:

Labors flunkies are ideologically opposed to any type of tax cuts and this is another revolution in the left leaning spin against what the majority of New Zealanders voted for in the last election.

Anyway, tax PAYERS get tax cuts, not tax beneficiaries, perhaps NoRightTurn could graph this.

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6. pollywog (1,122) Says:

Would you mind dumbing it down for a poor working polynesian who makes less than the median on a single income, has a few kids and will have to pay more for everything due to inflation and rising GST not to mention the gouging that retailers will put on prices as an admin fee for repricing everything.

I mean, if you could ditch the theoretical babble, the left/right sniping and in real world speak tell me what’s in it for me and my household by way of tax cuts and compensation ?

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7. Pete George (17,596) Says:

As I understand the intentions pollywog, the lower income tax rates will be reduced so that you will probably get enough more in the hand to cover the increase in GST. It is unlikely you will get a significant increase this time round – Working For Families was your turn to get a boost – but you shouldn’t be worse off.

Each time there is a change to tax and/or benefits it is not possible (and far less practical) for everyone to get a big increase in disposable income. That seems to be what a lot expect.

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8. dave (968) Says:

What No Right Turn sees as a mass of poor people who will be unaffected by tax cuts, are spouses
many of whom, of course do not register on unemployment benefit figures because their partner earns too much

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9. cha (2,323) Says:

Remember 76% of net income tax is paid by 10% of the population.

But what percentage of the gross national income do the ten percent earn?.

[DPF: A bit under 40% IIRC]

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10. burt (5,930) Says:

But what percentage of the gross national income do the ten percent earn?.

Who cares – they are paying 76% of the tax we need to provide social services, many of which they have no access to because they earn too much. Policies of envy would want to see them pay more – fairness says they should pay less.

The country finally got over it’s love afair with policies of envy when Muppet Cullen and “can’t touch me” Clark got the boot.

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11. pollywog (1,122) Says:

yeah thanx Pete… it’s nice to think i shouldn’t be worse off, but the pessimist in me says i will be if i’m to rely on the goodwill of retailers not to hike up the prices of everything even more if GST increases.

But please bear with me, if the scheme is to fund the personal tax cuts by increasing GST such that they even out each other and no one loses out. Why not just keep things as is ?… save the bureaucratic hassle and cost of tweaking and paper shuffling and look to create jobs by some other means than the incentive for the wealthy to possibly invest in job creation schemes with their new disposable income while dis-incentivising them to buy luxury items by having to pay higher GST ?

I dont like being subject to the sense of fairplay and dependence on the generosity of the wealthy. They just dont seem that empathetic ?

…and if it turns out i do become worse of, then tough titty ? I suppose i could get me some mining skills at night class but thats a whole nother story

[DPF: Increasing GST and reducing income tax rates is not about redistributing income. It is about changing incentives, so we have a stronegr economy. Reducing taxes on income incentivises labour to stay in NZ. Increasing a consumption tax incentivises people (on average) to save more, leading to more investment]

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12. Grendel (787) Says:

Idiots post makes more sense when you realise he is totally not connected to reality.

Malcolm has never had to work for a living, he either sponged as a long term student to avoid getting a job, or now lives off his partner, turning down jobs he is qualified becuase (and this is a direct quote), “i wouldn’t want to be the kind of person who has to do that” (an IT job, hardly something needing conscience clearing). he would rather live off others.

Malcolm is a leech plain and simple, and a coward, which is why he turned off comments on his soapbox.

Pollywog, whats in it for you? hopefully the aspiration to earn the income to get into the higher tax bracket. yes i know that WFF has made it pointless to bother pushing for more income becuase the marginal change you get after a payrise and a WFF cut is miniscule, but surely the pride of living off your own efforts, not taking from others must be worth something?

You cannot give back tax that you are not actually paying, so no surprise its going to go to the people paying the most. that said, i am surprised they did not add in a tax free threshold instead. to my mind its politically easier (how does a lefty argue against something that everyone gets) and it would undercut the greens as its their only non crazy policy.

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13. Pete George (17,596) Says:

…and if it turns out i do become worse of, then tough titty ?

Yep. There is a lot of tough titty in life, no matter how poor or rich you are.

And remember, the best most enduring wealth you can have is family.

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14. stephen (4,063) Says:

Why not just keep things as is ?

There’s been a whole lot of stuff written about evening up the distortions created by having varying personal/company/trust tax rates and the behaviour this encourages. There’s probably an explanation in DPF’s ‘tax’ posts in the past few months.

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15. pollywog (1,122) Says:

“hopefully the aspiration to earn the income to get into the higher tax bracket ”

…would require taking on some serious retraining, upskilling and higher education debt which i just cant take on, what with the family and all. and forget venture capital for any risk taking entrepreneurial self employment scheme i might have, i just dont have the guarantees.

“… but surely the pride of living off your own efforts, not taking from others must be worth something?”

sure, but its not worth anything i can sell. as a virtual polynesian underclass, we just cant live on hope and pride and it eats away at us to be welfare dependent.

personally, i’m past playing the victim and i dont want anyones sympathy, just some understanding that it’s not all cut and dried economics and academic theory. there is a real cost to pay in my real world and its a hell of a lot different to most of your worlds cos for every rise in disposable income for the wealthy i’d expect to see a rise welfare dependence at the other end and even worse in crime stats.

Hmmmm…Maybe i should become a prison guard, there’s bound to be some job ops there

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16. kaya (1,360) Says:

pollywog – “if the scheme is to fund the personal tax cuts by increasing GST such that they even out each other and no one loses out. Why not just keep things as is ?… save the bureaucratic hassle and cost of tweaking and paper shuffling…”

That’s a big part of the problem identified right there. Let’s make it LOOK like we are doing something. Oh you’ll hear some bullshit about how this will reduce consumption and encourage saving – bollocks. It keeps the machine called the public service busy and looking like they are actually doing something.
If National took to the shiny pants brigade with the knife that they deserve (and which was indicated pre election) and fairly taxed the property “investors” they could do the tax cuts and leave GST as it is. Mr Key is too scared to upset anyone who might vote for him to actually do anything relevant. If the lower socio economic groups get hit a wee bit harder (I’m not saying they will) it will cause less damage to his core voter base than say – a capital gains or land tax.

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17. eszett (2,020) Says:

So what your are saying that a lot more people will be benefiting from a reduction of 33% tax rate than actually pay that rate, because they may happen to live in the same household with someone that does. Since the household income benefits, so do they.

Two points:

A) The benefits then need to be distributed amongst the household members, so they are lower per head than for an lone individual paying that rate.
B) The very same argument can also be made for 12.5% and 20% tax rate. Only that even more people will benefit from them and thereby even more households. Some households will even reap double benefits.

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18. YesWeDid (883) Says:

‘If a family has one parent earning \$60,000 a year, and one on \$15,000 part-time, they both benefit from a change to the 33% tax rate. Because they are a family!!’

But you are taxed as individuals (not as a family) so if only the top rate is cut then the part time worker on \$15K a year receives no tax reduction however they will still have to pay the extra 2.5% of GST.

‘But if you are retired and earning just \$25,000 a year, that doesn’t mean you are against tax cuts, because you are happy that your adult children will benefit from them.’

I guess your adult children will be sending you a cheque each week to help with the extra GST on food and electricity etc that you will need to cover on your fixed income, I don’t think they will be too happy then.

Honestly DPF is this all part of the softening up process before National only drop taxes for middle and high income earners and not for low income earners?

[DPF: God try reading what I said. No one but you is saying only the top tax rates will be lowered. The point I am making is that lots of families benefit from a reduction in the 33% tax rate]

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19. Grendel (787) Says:

so pollywog, now you are talking about choices. you have the choice to do something about it, you seem to have decided that its too hard or can;t be done.

that does not mean its not doable, or that the people who pay most of the tax should not get more of their money back.

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20. Pete George (17,596) Says:

Honestly DPF is this all part of the softening up process before National only drop taxes for middle and high income earners and not for low income earners?

I think Key has made a clear assurance that most people won’t be worse off – it’s just that those on lower incomes and beneficiaries shouldn’t expect much.

And most of those that will end up paying more (or getting less handouts) are currently unfairly getting too much or are getting away with too much.

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21. burt (5,930) Says:

YesWeDid

I guess your adult children will be sending you a cheque each week to help with the extra GST on food and electricity etc that you will need to cover on your fixed income, I don’t think they will be too happy then.

You seem to have forgoten that years and years of Labour govt said to these people that if they pay the high taxes now they will be looked after in retirement. Oh, sorry I forgot – every generation needs to pay high taxes for some future benefit that Labour just never get around to delivering.

And muppets like you still believe them that they are looking after more than just their own election outcomes…. unbelievable.

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22. pollywog (1,122) Says:

If only it were that simple Grendel. In making choices we, my lady and i, as a household have to prioritise who gets what and if it means we have to grind away to keep the family fed and clothed at the expense of bettering myself so that they may have a chance at bettering themselves then yeah thats the choice we make cos the alternative is that all my family suffer…not much of a choice eh ?

And Sorry Pete, but could you please elaborate on this, its a bit too cryptic for me.

“And most of those that will end up paying more (or getting less handouts) are currently unfairly getting too much or are getting away with too much.”

The thing with Keys assurances is, he assured us previously that he wouldn’t raise GST . There seems too many variables at play for him to be giving assurances with any confidence and i’m not expecting much, to be honest i’m expecting a turn for the worse as witnessed by this…

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23. burt (5,930) Says:

pollywog

Key’s assurance of not lifting GST was on the back of Labour’s assurance the economy was in great shape….

Of course if Key had balls and went in pursuit of seeing key liars in the Labour govt charged under the Fiscal Responsibility Act rather than awarding them plum jobs in SOE’s then he might have had some high ground for his apparent flip-flop.

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24. Pete George (17,596) Says:

“And most of those that will end up paying more (or getting less handouts) are currently unfairly getting too much or are getting away with too much.”

Property investors that have been creaming off the rest of us, it’s fair they should pay something to tax.
High income earners “structuring” (fiddling) their incomes to get Working For Families or qualify their kids for Student Allowances should be honest about what they earn and not filch off the rest of us.

That sort of thing pollywog.

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25. tvb (3,303) Says:

A household of 2 “kids” getting the minimum wage earns \$50k a year. And it goes up from there. Of course those kids aspire to do better and want to keep as much of their increase in income. The Labour Party does not get this. They say you can get better by applying for welfare top-ups as your circumstances change. Just stay on the minimum wage – and we will increase it year by year. As for those that get lucky – rich pricks we will tax and tax them.

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26. pollywog (1,122) Says:

Thanx Pete, couldn’t agree with you more.

To be honest burt, i’m not really up on what sort of shape Labour left the economy in but whatever, it seems Key hasn’t changed up his gameplan to allow for the effects of the recession which, would i be right in saying, Labour couldn’t predict ? Maybe as a finance and money guy, Key could have predicted the banks crash that dragged the economy down with it, i dont know.

But for all that, it still seems like he wants to give out tax cuts based on election promises he made and prioritised that by any means neccessary with the easiest option being, raise GST. I just dont see the value in pointing the finger of blame anywhere else if it is him who is doing the damage now. Surely he needs to step up and own this shit.

I’m not opposed to raising GST if it was to generate money for jobs. It’s just that the evidence for those who will benefit most from tax cuts to invest their windfall in job creation schemes is missing, are under no obligation to and so probably won’t, yet i’m supposed to put my faith in Key and his plans that they will, based on what…faith ? hope ? assurances ?

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27. Anthony (622) Says:

What Labour’s hike in the top tax did was cause a whole lot of wasted effort and distorted investment decisions as people reorganised their affairs to stop paying 40 cents in tax for each extra dollar they earned (the extra cent is ACC). Raising GST and reducing tax rates – preferably equalising top rates for a lot of people and companies – should lessen the amount of administration and inefficient paper shuffling going on.

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28. pollywog (1,122) Says:

“Raising GST and reducing tax rates should lessen the amount of administration and inefficient paper shuffling going on”

meaning there’ll be less work for accountants and lawyers who are already on a good wicket and can absorb the GST rise cos their tax cut from being in a higher income bracket will offset it…

…but for the working poor there’ll be a flat 2.5% increase across the board on all purchases and for small businesses/ producers there’ll be more of a mark up to offset the costs on raw materials and labour to produce their goods

meaning an even larger hike in prices which tax cuts for lower incomes won’t offset…true or false ?

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29. Eddie (295) Says:

Pollywog. No it will mean that the govt willl extract a better cashflow via gst increases and the net taxpayers will get a little back, the net tax takers will get a bit more wff, hangon, what the F is this supposed to achieve? Less beauracracy not more!

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30. Pete George (17,596) Says:

It’s hard to predict what will happen to prices if GST goes up. There are sure to be pre-increase sales (but that is just another week, another name, same old marketing).

There is no direct reason for a business to increase prices by more than the GST increase.

Some businesses will absorb the increase to remain competitive, for a while anyway.
Some will just increase by the GST increase.
And some will use it as an excuse to put their prices up more and blame it on GST.

Many prices fluctuate more than a couple of percent during the course of a year anyway.

And there won’t be many people who can’t adjust their spending budget to absorb the increase. What will it take to reduce by 2%?

\$4.90 piece of steak instead of \$5.00
One less car trip to the dairy a month
Drink one less bottle of beer every 4 dozen.
One less cigarette every 2 1/2 packets.
One less pay-per view movie on Sky every 3 months.
You wouldn’t notice (or miss) 2% less porridge.

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31. YesWeDid (883) Says:

Pete George: It’s actually a 2.2% increase and if your ‘fixed’ outgoings is \$400 per week (food, power, rates, petrol etc etc) that is an extra \$8.80 per week.

I think you are right in saying that a lot of business’s will sneak up the prices by more and blame it on GST increases.

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32. Response Ability (3) Says:

Actually “Yes We Didi” #44 makes a good point.

If you have two earners in a household, one on 50k and one on 15k, and the middle tax rate of 33% goes down to (say) 30%
The amount of tax they would pay would go from
\$10940.00 + \$2270.00 = \$13210.00

down to
\$10640.00 + \$2270.00 = \$12910.00

So they would save \$300 per year (according to the online ird income tax calculator)

Now, peoples largest single expense is usually rent/mortgage, which shouldn’t attract GST. If people are paying \$300 per week for a family home in a modest suburb, not in an inner city that is \$15,600 per year. Lets say they are putting away 5k a year in savings as well (\$50 per week) then what they are spending is \$31,190 per year on food, clothing, transport, school fees, entertainment, all that sort of stuff. That’s the stuff which will attract GST, (and includes it). The GST-free price would be 27724.44, if GST goes up to 15% their new price is \$31883.11— or nearly seven hundred dollars more per year.

So the example that was given, of someone on 50k and someone on 15k means that that family would spend \$400 more per year on tax.

Is this a purely theoretical argument? Yes, yes it is. Does that mean it’s worthless? Not really, any theoretical argument has more value the closer to reality it is.

And how do you think the government is working out ‘who will benefit’? Exactly through arguments such as these. Theory is important.

Does this mean that that family will be worse off? the answer is “Probably, but maybe Working for families will make up the difference”. So, who knows really? But it’s not as cut and dried as a lot of people are trying to make out.

RA

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33. lyndon (321) Says:

Here is what would be a more useful stat.

Erm. No? That’s just a the-opposite-kind-of-arbitrary stat.

A useful stat from the POV you’re taking would be how many households were better with the effect of all members taken into account. As above.

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34. JonL (3) Says:

“Welcome to the world of lies, fabrications and distortion propagated by the left. ” – as opposed to the world of lies, fabrications and distortion propagated by the right. Strange how the right are full of theory, until it doesn’t suit them, then it’s the left that are full of useless theory unrelated to the “real” world, and they viciously attack the messenger…….grow up people, left wing, right wing, same bloody bird! Surely we should be working for an equitable society for all, not snarling over crumbs like ravenous dogs…..

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