Maxim on Tax

May 10th, 2010 at 12:01 am by David Farrar

have released a comprehensive 102 page report on policy by Steve Thomas. Its aim is a system that maximises economic growth. It notes:

Growth is affected by tax, which is how the government raises its revenue to do the crucial things we need it to, like paying for a police force or a public education system, building roads and supporting the poorest when they need it.

However, when we try to take too much money out of the economy in tax to fund government spending, we risk undermining the very source of that revenue. Also, if government spending is misdirected or of poor value, then we hamstring the economy’s ability to produce what we need and the amount of tax the government is able to collect.

This relationship between tax and the economy therefore needs to be carefully considered. We need to design the tax system so that it allows the government to take the money it requires, while doing the least amount of damage to the economy and so too our potential prosperity.

This is absolutely right. It is a balancing act between economic growth and funding Government services. To take two extremes – an economy with tax rates of 95% would end up like North Korea, while an economy with tax rates of 5% would not be able to fund much in the way of defence, health or education.

Maxim propose a number of policies:

  1. A two step personal tax rate system with a top rate of 27%
  2. A corporate tax rate of 27%
  3. Aligning the trust and PIE rates to the personal and corporate rates
  4. Removing tax incentives for KiwiSaver
  5. No land tax or capital gains tax
  6. GST from 12.5% to 15%
  7. An upper limit for central govt spending of say 30% of GDP
  8. A benchmark for core govt expenditure on welfare of around 15% of GDP

For me the key thing is No 7. If one can limit spending as a percentage of GDP, then you get options around tax reform. Maxim note:

A 2001 OECD study found that about one half of a percentage point increase in government consumption (the expenditure to GDP ratio) could cause a 0.6 to 0.7% direct reduction in per capita output.

If we can limit spending so that over time it is under 30% of GDP, then there will be a very significant boost to incomes and jobs.

What I would like is both National and Labour to outline desired limits for spending as a percentage of GDP – then voters could choose between them. The limits probably need to be soft (non legislative) to take account of recessions etc, but a soft limit would still be a huge improvement over no limit.

One can get to a limit without massive spending cuts. If one can retain discipline over new spending so that it grows significantly slower than the overall economy, the ratio will reduce over time.

A very good report.I suggest people don’t just argue the recommendations but read the summaries of research about why such tax changes will be good.

Tags: ,

24 Responses to “Maxim on Tax”

  1. Viking2 (11,487 comments) says:

    Ha, all good ACT policy David. Why don’t you move on over. You will be much more at home.
    Seriously , though this is what has been advocated for years so its not new.
    The flaw in the argument though is to believe that aligning all the tax rates will automatically remove the shifting of incomes for tax purposes.
    Clearly it won’t for if a person has a company or a trust and has available Govt. subsidies or benefits, say like WFF, then they will pay the tax in the trust and minimize their personal income to qualify for the subsidy or benefit.
    This has been happening since Bill was a cowboy in short pants and before.

    Why would we allow it to continue if we are going to make the system fair and right?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  2. Danyl Mclauchlan (1,070 comments) says:

    And if we were living in 1983 this might all sound pretty sensible.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  3. Swiftman the infidel (329 comments) says:

    ‘supporting the poorest when they need it.’

    This is the red herring.

    I spent 10 days in Hong Kong in 2007. We were approached only ONCE by a beggar – an old woman who was clearly deranged. There is no real government welfare in HK.

    Go to parts of Auckland’s queen St and you will be approached by 10 beggars in 10 minutes. We have cradle-to-grave welfare. NZ style welfare is a big fat con.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  4. mickysavage (786 comments) says:

    30% is a completely arbitrary figure and does not measure what good the state actually does.

    Maxim should look at some of the Scandinavian countries with much bigger GDP tax public spends and explain why they are doing so well.

    I hear that Afghanistan has a very low state to GDP spending proportion.

    There is no correlation between low state expenditure and good economic performance. The debate has to be more sophisticated than this.

    [DPF: You are wrong. There is a huge correlation. Don't cherry pick countries, but examine the data for all OECD countries from 1950 onwards and there is a hugely strong correlation between average GDP growth, and having spending as a % of GDP at relatively low levels.]

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  5. Guy Fawkes (702 comments) says:

    “Maxim should look at some of the Scandinavian countries with much bigger GDP tax public spends and explain why they are doing so well.”

    Er, in what way? Compared to what? With a very pissed off electorate, very unhappy about Immigrants being imported, and not assimilating?

    When was the last time you were in a Skandi country Micky? More bollocks from the apologist for the UNDP bought job creation expert Helen Klark

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  6. Manolo (13,837 comments) says:

    Another report soon to be dismissed by the government, except the 15% GST recommendation which is perfectly aligned with National Party policy of increased taxation, total passivity and lethargy, and inane smiling for the masses.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  7. jinpy (226 comments) says:

    wow, there’s quite a lobby on the right these days eh?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  8. Guy Fawkes (702 comments) says:

    Not that it is sensible, correct or a good plan. The standard VAT/GST is now 21% across the entire Eurozone. There are as always exceptions, but mainly as a result of timing, fiscal drag, or special favours. Spanish Tourism concessions being notable.

    Don’t forget that the UK had a Stimulus rate of 15% for just over a year that finished on Jan 1 this year.

    Whoever gets to get the levers of power or press the tax buttons, then 20% seems to be a given.

    How else are they going to fund the numerous Red Tape Factories with the multiple boss committees. Oh, and the better than everyone else special pension rights.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  9. jinpy (226 comments) says:

    now don’t get me wrong, my mind is not made up on tax systems, I’m usually pretty left and I take that bias into most things but I am open to reasoned argument. The trouble with such reports as that talked about above (strangely not linked to) is they tend to be commissioned by people who have already arrived at their own conclusions about it, which are then supported though the standard human error of confirmation bias. These conclusions are then pronounced without any step-by-step proof of the mechanisms that will lead to the results claimed, or any positive/negative list of possible results. Instead, the reports tend to quote other research as proof in a layered-referencing approach that is supposed to convince us by weight of numbers, and convincing sounding referencing.

    Economics, in fact, is not an exact science, it involves subjective human agents, complex feedback loops and is not a deterministic system, it is in fact akin to climate modelling and so some humility wouldn’t go astray from the ‘experts’ who report on it. Can someone show me a chain of reasoning that goes from flat taxes to economic prosperity that doesn’t involve gross assumptions ? Why do we need to lower taxes to encourage entrepeneurs when people such as Sam Morgan admit they don’t pay any tax at all?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  10. krazykiwi (9,186 comments) says:

    I vote to put Maxim in charge of the Treasury benches

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  11. Bevan (3,924 comments) says:

    Maxim should look at some of the Scandinavian countries with much bigger GDP tax public spends and explain why they are doing so well.

    Bigger picture Micky, bigger picture.

    Country/Debt GDP% 2009)
    Sweden 43.20
    Norway 60.20
    Denmark 38.10
    Finland 46.60
    NZL 29.30

    Maybe you should campaign on raising our debt levels to that of Scandanavian countries as well and see how far that gets you.

    And as a comparison:
    Italy 115.20
    Greece 108.10
    France 79.70
    US 52.90

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  12. Bevan (3,924 comments) says:

    Hey AK1mm – I note you lament using GDP, and suggest a better alternative, then neglect to provide any data to back your assertion…

    Also, what you are proposing sounds more like Communism, – how are those poor people faring under that system around the world? Your post is nothing more than class warfare drivel, you sound like you are just jealous that others are richer then you.

    Why should others get to enjoy the fruits of my labour; if they are not prepared to work as hard as me, as long as me, or risk as much as me?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  13. jinpy (226 comments) says:

    [DPF: You are wrong. There is a huge correlation. Don't cherry pick countries, but examine the data for all OECD countries from 1950 onwards and there is a hugely strong correlation between average GDP growth, and having spending as a % of GDP at relatively low levels.]

    There is also an inverse correlation between the size of GDP and the rate of growth, i.e. smaller economies grow faster. Could it be that the correlation which you attribute to lower govt. spending is in fact due to the fact that smaller economies which grew faster happened to have low govt. spending? Is the growth dominated by the Asian tigers? If so, could there be other factors that more effectively explain their growth than low govt. spending, such as adult survival rate?

    [DPF: Most Asian countries are not in OECD. There is a wealth of evidence that countries with a smaller state have higher economic growth]

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  14. Repton (769 comments) says:

    However, when we try to take too much money out of the economy in tax to fund government spending, we risk undermining the very source of that revenue

    How does taxation take money out of the economy? Teachers have houses, they buy food and have hobbies. Schools and hospitals provide business for tradesmen. Even the big bureaucracies feed thousands of small (and not-so-small) businesses.

    You can claim that some government employees are doing work that serves no purpose, but the money we spend on those employees is not leaving the economy.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  15. krazykiwi (9,186 comments) says:

    How does taxation take money out of the economy?

    Taxation takes choice away from those who produce, and gives it to the government. So more tax = less choice, and less choice = more poverty.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  16. jinpy (226 comments) says:

    DPF: I see, not many asian countries in the mix, so asian tigers hypothesis down the drain… It still doesn’t change the fact that causation does not equal correlation and that the kind of statement you are making (this variable is the cause of this) is by definition reliant on regression analysis that is fraught with complications. I’m sorry, adding “wealth of evidence” doesn’t make something true. I started reading some of the Maxim report and it’s full of so-called truths that could easily be argued, like the assertion that there’s no point in having non-market measures of success because they’re subjective — what about a state of the environment indicator based on water quality, amount of pollutants etc? While the limits could be argued, its no different to arguing what is in the basket of goods in the CPI.

    I’m not saying there might not be some ideal tax package that is different to the current one, but the flat-tax (and lower tax) argument is so dogmatic and obviously in the interests of the more wealthy, who are also the group that propose it, that the natural reaction for someone like me is to disagree with it — I mean, your instant dismissal of my argument that other factors might explain GDP growth is not based on your detailed knowledge of the particular statistical study/studies is it? You read someones conclusion and liked it so now its fact in your mind, perchance….?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  17. jinpy (226 comments) says:

    I must admit I haven’t explored what’s out there in terms of economic research, and I’m sure there is some very good stuff out there, but it just puzzles me that in the commentary that I see no-one even attempts to example logical chains of reasoning to prove their point. I can think of several things that would happen if you lowered the top-rate of tax. How it works out in the end though is far from obvious given that so many things depend on people’s behavior. i.e. if we cut the top rate, presumably:
    — Savings would go up, which is good for economic stability over the long run and means money can be loaned out for investment so that’s got to be good. However, Japan saves a lot and their performance has been miserable–is there a downside to saving?
    — People may choose to spend more of their personal income on productive investment. This sounds good to me, but as I state below, isn’t it just as likely they keep spending it on lower-risk investment like property?
    — Consumer spending will also go up, won’t this be inflationary?
    — As opposed to poorer people who spend most of their money in the local economy, won’t middle income and more wealthy people have a tendency to buy overseas goods, thus worsening our balance of payments?
    — With extra money to spend, won’t house prices go up accordingly if there is no land or property gains tax? Won’t this mean that increasingly some people, particularly in cities, won’t be able to afford to buy property?
    — Won’t the decrease in tax increase income inequality, when you consider all people above the top threshold will improve relative to people on the threshold.
    — Haven’t some studies shown that income inequality is a good predictor of social problems?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  18. side show bob (3,660 comments) says:

    A1Kmm, what a fucking load of commie tosh. North Korea needs you, now.

    Until we get a government serious about kicking wealth redistribution ( socialism/ communism for A1kmm ) in the arse we will remain and continue to sink into societal breakdown and economic ruin. How many years will it take the left to realise they are backing the wrong horse, history has proven it time after after time.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  19. MikeNZ (3,234 comments) says:

    Big state – Small people, Little State – Big People.

    These words of Thomas Jefferson are a stark reminder and warning:
    “A government big enough to give you everything you want is strong enough to take everything you have.”

    Our tax rate should be the least we can afford and that needs a limit on Government spending as Maxim states.
    Personally would prefer tax (total) of 25% with NO Capital gains or Death Duties.

    This is a start.
    Now we get to see whether Key and national have the balls to do the right thing.
    Doubt it.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  20. Repton (769 comments) says:

    Our tax rate should be the least we can afford

    What does that mean? If the tax rate were lower than that, we wouldn’t be able to pay it?

    Personally would prefer tax (total) of 25% with NO Capital gains or Death Duties.

    Ok, how much will that reduce the tax take by? And what services will you cut to fund it?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  21. MikeNZ (3,234 comments) says:

    the tax rate should be the least we can get away with.
    better to put the money in peoples pockets.

    Services?
    Anything that isn’t paid for by the least tax.
    personally prefer either gst or income tax to go too.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  22. bchapman (649 comments) says:

    Surely its the value you and your society get from your tax dollars that counts. If I pay less tax then I know I may have to send my kids to a private school or pay higher health insurance- makes no difference to me whether these things are delivered by the government sector or not. Similarly do I pay tolls for my car or do I pay less tax? Or maybe we could levy congestion taxes to pay for road or public transport improvements constructed by private companies? In the end you still get the same thing for your money. You could find lots of ways of getting to the magical 30% arbitary figure but will NZ be aany better off?

    Pulling arbitary figures out of your bum (why is 15% GST the ideal figure- who decided that?? why not 20, 25, 30% GST) simply ignores the real issue- what should the government provide? How does it provide it? Who pays for it? How does government contribute to a more prosperous society?

    Simply hoping that reducing nominal expenditure will make us more prosperous is hardly a good long term economic strategy. In the end we all have basic needs which we need to pay for- what difference does it make which sector provides it?

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  23. jackp (668 comments) says:

    bchapman, I would say 28 percent of gdp would be a start. But along with that, each department has to cut spending by 10 percent. If I were a civil servant and received an order from the Minister to cut spending, I would cut the middle management. You wouldn’t see the the front line cut because they are the ones doing the work. When I go to school, an administrator doesn’t teach me, a teacher does. When I go to a doctor, an administrator doesnt cure me, a doctor does. Shit, I think there are 2 administrators to one teacher and this is where the damage is done. Helen Clark was a bureaucrat and she expanded the government’s civil servants by 16000… that wasn’t necessary. You can cut the fat without hurting any of the services. Infact this will increase services.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote