Herald against tax cuts

The Herald editorial yesterday:

Six weeks ago, the Prime Minister was in no mood to offer encouragement to those who thought might be in the offing. The Budget would have no plans for such a move, he told the North Harbour Club, while seeking also to dampen expectations of anything significant in the future. It was exactly the right thing to say. Now, however, John Key is singing a different tune. He is talking about as a choice, and they are sufficiently in his mind to to have warranted a mention in last week’s Budget.

It stated: “Operating allowances from Budget 2015 will be $1.5 billion a year, growing at 2 per cent for budgets thereafter. This is a moderate increase that will provide the Government with options around investment in public services and modest tax reductions.” In effect, the growing economy is providing the Government with a bit more freedom. But this does not mean that, for the next term of government at least, they should be at the top of the priority list. Of far greater importance is the need to get debt back to under 20 per cent of gross domestic product.

The Government can do both, and it should do both.

As the editorial notes, any tax cuts would come out of the $1.5 billion operating allowance. So the surplus projections already take into account any tax cuts. It is basically a choice of whether the $1.5 billion goes just on extra spending, or a mixture of extra spending and tax cuts.

People say they want higher after tax incomes. The Government can not directly set incomes. That is between employers and employees. But they can set tax rates. The one sure way to boost after tax incomes for hard working New Zealanders is to give them a tax cut.

There is little to indicate that most people feel they are owed tax cuts. New Zealanders are aware that, while the country has emerged from the global recession in relatively good shape, there are more important priorities.

I disagree. Extra spending benefits the small group of NZers that it goes on. Tax cuts can benefit all working New Zealanders.

The surplus projections take into account the $1.5 billion operating allowances. Now a balanced Government might say let’s spent half on extra spending and half on tax cuts. That would not impact the projected surplus at all.

After three years, that would be $2.25 billion of annual tax cuts and $2.25 billion of annual extra spending. Here’s what you could do with $2.25 billion of tax cuts based on Treasury estimates.

  • Reduce the bottom tax rate (up to $14,000 income) from 10.5% to 4%
  • Reduce the 2nd bottom tax rate ($14k to $48k) from 17.5% to 13%
  • Reduce the third rate ($48k to $70k) from 30% to 26% and the second rates from 17.5% to 14%
  • Increase the upper threshold for the bottom rate of 10.5% from $14,000 to $29,000
  • Increase the upper threshold for the second rate of 17.5% from $48,000 to 67,000
  • Have the bottom 10.5% rate apply to $22,000 (from $14,000), the second rate of 17.5% apply to $56,000 (from $48,000) and the third rate of $30% apply to $78,000 (from $70,000)

The Herald is effectively saying that 100% of the operating allowance should go on extra spending. That should be just as unacceptable as having 100% of the operating allowance going on tax cuts.  What I want is political parties to deliver both extra spending and tax cuts.

The debate should be about what the mixture is, but not about whether there should be a mixture. ACT might say it should be 80% tax cuts and 20% spending. Labour might say 75% spending and 25% tax cuts. National might be 50/50. But I have no time for those who say there should be no tax cuts at all, once they are clearly affordable.

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