Kiwiblog

Quiz for readers. Which of the the following parties is promising, if elected, an income tax cut for some-one earning $150,000 a year?

(a) ACT
(b) Labour
(c) National

The way Labour go on, you would think the only people who got tax cuts in the last three years were the despised “rich pricks”. Now of course when you cut taxes, those who pay more tax get a larger tax cut. Just like how a bank which pays 5% interest on your investment pays mroe money to someone with $10,000 invested than $2,000 invested.

What I thought would be interesting is to look again at the percentage reduction in personal income tax from September 2008 to October 2010.  These include the IETC for people not on WFF.

Anyway you can see how those earning up to $50,000 had had a massive 30% reduction in the income tax they pay thanks to Labour’s last minute grudging October 2008 tax cut and National’s 2009 and 2010 tax cuts.

And you’ll also see the filthy rich pricks earning over $100,000 have had percentage tax cuts of less than 20%.

The TV polls have shown around 60% are against National’s plans to sell part-stakes in some SOEs.

Frankly I thought that was a pretty giood result for a policy which for the last 12 years has been ruled off limits as it is meant to be lethal political poison. The more important indicator was that National’s vote remained high.

Yesterday the polls also showed 60% against Labour’s policy of a tax cut for every NZer by making the 1st $5,000 tax free. Now tax cuts are normally very popular, so it says something about how badly you stuffed up (no way to pay for it) by getting 60% of NZers against having a tax cut.

And Goff’s response to the 60% opposition? He said that those 60% were not knowledgeable about their plan. This 24 hours after he yelled:

Labour says it’s not surprised by the result.

“It shows Kiwis are two-to-one against John Key’s programme,” says party leader Phil Goff.

“Kiwis know that this is bad for them as taxpayers and it’s good for foreign investors. They don’t want it.”

So 60% against a National policy is because Kiwis know it is bad for them, but 60% against a Labour policy is because they are not “knowledgeable”.

Labour’s tax cut for everyone policy was meant to be their big circuit breaker. Instead it has fizzled.

Labour are telling massive whoppers, such as the Government is borrowing $120m a week to pay for tax cuts for the wealthy.

The reality is that National’s tax and spending packages will in fact lead to around $2.8b less debt by 2014, than ehwt Labour were proposing. Bill English’s office has released this table showing the components:

Net fiscal impact of the Government’s tax changes ($million increase (decrease) in the operating balance)

1. Fiscal impact = revenue (removal of R&D tax credit + KiwiSaver changes + cancelling remaining tranches of Labour’s tax cuts) minus costs (personal tax + IETC). Source: Cabinet Paper CAB(08)585.

2. This is not an increase in taxes but the cancellation of future intended tax cuts which were already in the fiscal forecasts. Source: Treasury Report T2009/418.

3. February 2009 SME tax package. Source: BEFU 2009, Table 1.7.

4. Fiscal impact = revenue (GST increase + depreciation + LAQC + thin cap + WFF + GST base + tobacco + increased audit) minus costs (personal tax + company + PIE and savings vehicles + GST compensation). Source: Budget 2010 Executive Summary, Table 1.

The key thing to remember is that the combined tax and spending changes have been not just fiscally neutral, but in fact debt reducing. In the first two years they were slightly expansionary (which is not altogether bad) in a recession, but by the end of next financial year they would have been positive for the Government fiscally..

This week Obama stuck a deal with Republicans which sees him try to revive the US economy with tax cuts instead of extra spending. Labour in NZ should take note. Obama has agreed to:

• Extend the Bush tax cuts for two further years which were due to expire at the end of 2010
• Reduce for one year the Social Security payroll tax from 6.2% to 4.2%
• Increase the threshold for the death tax from $1m to $5m ad reduce the rate from 55% to 35%

It will be interesting to observe the President’s poll ratings in the next month.

Just been looking at an old press release from Bill English. It compares the nine years from Sep 90 to Sep 99, the same period from Sep 99 to Sep 08 and the 21 months since then to June 10.

The average weekly earnings went up 27% in the 90s, 37% under Labour and 7% since Sep 00. The average increase per year is 3.0%, 4.1% and 4.0%.

But if you take account of tax paid, to look at what someone on the average earnings/wage gets to take home, then the increases are 33%, 33% and 11% – or annualized it is 3.7%, 3.7% and 6.3%.

Finally thought you want to look at the purchasing power – has someone earning at the average (mean) had their purchasing power increase during each of those periods, and by how much. Now inflation during each period was 16%, 29% and 2% Annualised this is 1.7%, 3.2% and 1.2%. This is worth remembering when Labour talks about cost of living.

So what was the increase in real after tax average earnings. They were 15.5% from Sep 90 to Sep 99, 3.0% from Sep 99 to Sep 08 and since Sep 08 8.7%. On an annualized basis, real wages went up 1.7% a year under National, then only 0.3% a year up until Sep 08, and a massive 5.0% a year since Sep 08.

This table above shows the difference. I’ll update it after we get the Dec 10 figures which will include the latest tax cuts, but also the GST impact.

The moral of the story is wage growth by itself is not enough. You also need low inflation and tax cuts to offset fiscal drag.

On budget  Day I blogged:

The tax rate changes from 1 October 2010 are:

• Up to $14K – tax rate goes from 12.5% to 10.5%
• $14K to $48K – tax rate goes from 21.0% to 17.5%
• $48K to $70K – tax rate goes from 33.0% to 30.0%
• $70K+ – tax rate goes from 38.0% to 33.0%

Workers earning around the average full-time wage ($40K to $48k) will, over 18 months, have had their top marginal tax rate go from 33% to 17.5% – almost halved.

Two thirds of the “cost” of tax cuts goes to reducing bottom two rates and 73% of income earners will have a top tax rate of 17.5%. You keep 82.5% of every extra hour you work.

And the reduction at each income bracket:

As I commented at the time, the reductions are pretty even, as a percentage of existing tax paid.

And this takes into account the likely impact on prices with the GST increase.

Bill English’s office has put out a comparison of real (CPI adjusted) net (after tax) wage growth for a full-time worker on the average (mean) wage.

The Australian data only goes back to 1994, so the first time period compared is Sep 1994 to Sep 1999 – the final quarter before Labour took office.

During those five years the real net income for a FT worker on the average wage rose 13.2% in New Zealand and 6.2% in Australia.

Then over the next nine years from September 1999 to September 2008, the increase in New Zealand was 3.0% and in Australia it was 19.3%. Yep six times greater in Australia. They had high wages, low inflation and tax cuts. We had no tax cuts, higher inflation and lower wage increases.

From Since September 2008, to June 2010, the increase in New Zealand has been 8.7% vs 4.8% in Australia.

If one translates this to average annual increases, then the comparison would be:

• Sep 94 – Sep 99 – 2.6% NZ vs 1.2% Aust
• Sep 99 – Sep 08 – 0.3% NZ vs 2.1% Aust
• Sep 08 – Jun 10 – 5.0% NZ vs 2.7% Aust

Now the time periods used are slightly cheery picked, in that the latest period includes both the April 2009 tax cuts and the October 2008 tax cuts – so they do not correspond exactly to Government terms. But on the other hand Labour did the Oct 2008 tax cuts most grudgingly, because of the election, and probably would ave cancelled them if they had retained office.

The stat that stands out to me is that during those nine years from Sep 99 to Sep 08, the average after tax income only grew 0.3% a year. Fiscal drag mean someone on the average wage paid more and more tax as their salary increased.

The Herald calls for aligning of top tax rates:

It will lower the top rate of income tax from 38 per cent to perhaps 33 per cent, which would leave it still significantly higher than the company rate of 30 per cent.

Aligning those rates should be a primary aim of tax reform. The top income and company rates should be the same for reasons of social equity and economic efficiency.

It is neither fair nor useful to the economy that taxpayers on the same incomes should pay different rates because one puts some costs through a company and the other does not.

Arguably it is more important to align the trust rate and the personal rate.

I think we should aim to align all three, but a 3% difference between company and personal is not huge, considering company tax is inputted.

The rates were aligned for a long time after the 1980s reforms when incentives for tax avoidance were taken out of the system.

The incentives were restored by Helen Clark’s Government as a byproduct of its determination to “tax the rich”.

It introduced a new top income rate of 39 per cent in its first year of office, 2000, and tax-avoidance opportunities returned.

Chief among them are the use of trust funds and personal investment entities that carry a lower tax rate, 33 per cent.

Yeah, that unnecessary tax increase has been a boon for the avoidance industry. Remember 50 of the 100 richest NZers do not even pay it.

The Government expects to be borrowing $240 million a week for the next four years. Tax cuts must be balanced by spending cuts if the red ink is not to get worse.

The economy would gain as much strength from a balanced Budget as it would from competitive company tax rates.

Whatever decision the Government makes on the alignment of income and company rates it should be guided by the implications for its revenue. But if it can afford to align those rates it should do so.

Alignment is tidy, simple and fairer for everybody.

Can’t disagree with that.

The Dom Post welcomes open justice:

Justice Warwick Gendall, presiding in the High Court at Whangarei, was upholding the concept of “open justice” in another way. He said talented Blues rugby player Rene Ranger had no more right to anonymity than anyone else charged with assault. The charge of injuring with intent to injure dates from October, when Ranger appeared in Warkworth District Court after an incident outside a Mangawhai pub. He was given name suppression at the time, after his counsel argued that naming him might end his contract with the New Zealand Rugby Union. Poor lamb.

Justice Gendall was having none of such nonsense and reversed the order.

It is cheering when judges remember that they work in public courts, on behalf of people who have not only entrusted them with dispensing justice fairly and impartially, but who also must fund much of what goes on within their courtrooms. Open justice needs to prevail as often as possible; the circumstances in which secrecy supplants it should be rare indeed. …

The shape of Mr Power’s bill, therefore, will be interesting. It will, this newspaper hopes, make it much harder for the wealthy, the well-known, and those who can engage a judge’s sympathy to hide from public scrutiny. It is a basic tenet of our justice system that everyone be equal before the law.

Again, I agree.

The Press focuses on rampaging crime:

New Zealanders will be disturbed that crime is continuing to grow at an alarming rate. They have become used to statistics that show increases, but not to the sort of large jump recorded in Wednesday’s figures.

That surprise will be the greater because of the tougher measures implemented by John Key’s Government and touted as a means of reducing wrongdoing.

The Government’s defence – that its measures have not been in effect long enough to impact on crime – is reasonable to a degree. But the trumpeting of its tough measures must have sunk into the awareness of most citizens, criminal and law-abiding, and should already be showing a beneficial result if it is the right approach.

The problem for the Government is that it will be able to use the excuse – that its measures need to be given time to work – only once. If the crime statistics continue to grow in the next 12 months, the Government will have to find a more convincing reason to account for the apparent failure of its policies.

Another increase of this magnitude for violent crime would be a problem.

The ODT discusses the case of the Norweians who hunted protected Kereu:

Most New Zealanders would have been horrified to learn of the incident involving Norwegian tourists who posted on the internet images of shooting at a fully protected native wood pigeon (kereru), the bird falling from a tree, and film of one of the tourists holding two dead birds.

Though heavily dependent on tourism, the country does not need or want visitors such as these, but there appears to be no existing mechanism within the prosecution regime whereby they can be banned from returning.

Yet if the perpetrators were to be charged and convicted under Norwegian law, the punishment would be far more in keeping with the crime – up to six years’ jail for having wilfully or through gross negligence reduced a natural population of protected wildlife in Norway or overseas.

It is ironic that they face greater punishment in Norway for what they did in NZ, than what they could face if they were still here.

Grahame Armstrong in the SST writes:

THE GOVERNMENT is putting the finishing touches to its package of tax cuts and is now confident that low and middle income earners will have more money in their pockets – even after paying a higher GST.

The Sunday Star-Times understands the government has settled on lowering the tax rate for those earning between $14,000 to $48,000 – which represents the bulk of wage earners – from 21% to 19%.

The May budget is also expected to lower the tax rate for those earning up to $14,000 from 12.5% to 10%.

The Star-Times also understands the government will, in one hit, lower the top rate for those earning more than $70,000 from 38% to 33%, rather than doing it gradually.

So that would give up three tax brackets – 10% for low income earners, 19% for middle income earners and 33% for higher income earners.

What would be the reduction in income tax for people at various income levels:

• $26,000 – 13.8% or $590
• $30,000 – 13.1% or $670
• $40,000 – 12.1% or $870
• $48,000 – 11.6% or $1,030
• $70,000 – 6.4% or $1,030
• $100,000 – 9.2% or 2,530
• $150,000 – 10.8% or $5,030

That is pretty well targeted. Those on the minimum wage get the largest percentage increase, and everyone earning under $50,000 a year gets a double figure percentage drop in the tax they pay. And in fact, with WFF, many of these people are net tax recipients anyway, not net tax payers.

What would be the fiscal cost?

• Dropping the 38% rich prick rate  to 33% – $500 million a year
• Dropping the 21% to 19% – $780 million a year
• Dropping the bottom tax rate from 12.5% to 10% – $820 million a year

So total foregone revenue is $2.1 billion.

Now how much extra GST might people pay. Let us assume that on average people spend 90% of their after tax income, and that the GST increase of 2.5% will lead to an average price increase of 2.0% (as estimated by Stats NZ). What is the impact at each income level:

• $26k – $391 more GST and $590 less income tax = $199 better
• $30k -$448 more GST and$670 less income tax = $222 better
• $40k -$590 more GST and $870 less income tax = $280 better
• $48k -$704 more GST and $1,030 less income tax = $326 better
• $70k – $969 more GST and $1,030 less income tax = $61 better
• $100k – $1,304 more GST and 2,530 less income tax = $1,226 better
• $150k – $1,862 more GST and $5,030 less income tax = $3,168 better

So it does indeed look like no one would be worse off (even if you assume 100% of after tax income is spent).

Obviously those at the top tax brackets do best in an absolute sense, but they are also the ones most likely to be property investors, and may in fact end up worse off overall. Also worth remembering two that half of the 100 wealthiest people in NZ do not actually pay the 38% tax rate, so will not in fact benefit from its reductions – they will just not need to operate through their family trust.

I have no idea if this is the package the Government will go with, but it looks pretty workable, and affordable. Most of all, it is not meant to be about just the redistribution of any changes, but the large benefits to the economy of increasing the incentives to work, save and invest and reducing the incentive to borrow and spend – plus the shifting of incentive for investment income from property to other areas.

A lot of the debate at the moment is on the 38% tax rate. Now this rate was introduced in 2000 by Michael Cullen and has led to huge tax avoidance. Few on the right dispute that the 38% rate should go, or at the very least thre threshold for it increase massively.

But I want to focus also on the 33% rate. You see only should people not be paying a 38% rate, most FT workers shouldn’t even be paying the 33% rate. I’ve done a graph to make my point.

The blue line is the threshold at which people reach the 33% rate, and the purple line is the average FT income. When the top rate was made 33% in 1986, the threshold for it was around double the average FT wage.

Now since then, the average wage has increased greatly, but the threshold has only been lifted four times. The end result is that where once you had to earn twice the average wage to pay the 33% rate, under Labour it go to the point where someone earning 80% of the average wage would be paying the 33% marginal rate.

The threshold stayed constant for ten years until 1996.  It then went up to around $34,000 and two years later to $38,000. Then it stayed constant for another ten years until a miniscule $2,000 increase in October 2008. National then increased it by $8,000 in April 2009.

So National has managed to get it back to around the level of the average wage. But it used to be at twice the level. So remember that if National does drop the top tax rate to 33c, so someone earning $100,000 has a top marginal rate of 33% – that back in 1986 someone earning the equivalent of $100,000 (being double the average wage) wouldn’t even be paying the 33% rate of tax.

The 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.

The SST reports:

Finance minister Bill English has signalled the government will next year get tough with tax-dodgers by closing loopholes that allow wage earners to avoid paying their share of tax.

The IRD says the government is missing out on $300 million a year because of wage earners who squirrel away money into trust accounts to avoid paying the top income tax rate. More is lost because of earnings that are “sheltered” by a company created solely to avoid tax.

Not sure how you can legislate to fix that.

The IRD, in its latest submission to the Tax Working Group, says the problem is that New Zealand’s multitude of tax rates is encouraging bad behaviour.

Oh I am sure it is.

It said the trust account and company tax rates were too far out of line with income tax rates. Taxpayers were placing income in a trust account, paying 33 cents for every dollar earned, rather than the top rate of 38c. Another common ploy was for individual taxpayers to “shelter” their money by creating a company so that they paid 30 cents of every dollar earned in tax rather than the top rate.

The preferred solution is to lower the top tax rate – in fact that is the Govt’s official goal – to have a top tax rate of 30% for individuals, companies and trusts.

The IRD says that when the top income tax rate of 39 cents (now 38 cents) was applied to earnings of $60,000+ in 2000, a flood of taxpayers rearranged their finances to avoid the new regime.

I understand the number of people who declared they earned exactly $60,000 increased literally exponentially.

English said large-scale “legitimate avoidance behaviour” by higher-income earners undermined the goodwill of lower-income earners.

“It’s quite telling that there has been virtually no growth in the number of people paying tax on $1 million of annual income, since the 39 cent top personal tax rate was introduced 10 years ago.

So reduce the incentives for avoidance and cut the top tax rate. When Muldoon’s top tax rate of 66% was dropped to 33%, it killed off much of the avoidance industry. Cullen recreated it.

Also some of the reason for no growth in people paying tax on a million dollars of income, is they have gone overseas.

“As a country, we want families, businesses, accountants and lawyers looking at how to unlock greater income and productivity, not working out how to minimise their tax.

“We don’t want people spending their time and resources trying to avoid tax. We also don’t want IRD devoting all its time to chasing tax and compliance issues.”

Then again drop the top tax rate!

Friday’s aren’t very special when you are on the benefit. I mean you don’t work during the week so for me every day is a Saturday. I’ve got no money spare so I can’t go out and even if I could I’d have to find someone to sit the kiddies. The best we get is watching Sky and grabbing some takeaway or looking on the internet.

I sit at my window glancing down the street watching over mortgaged, over financed people arrive home from work after 7pm and I ask myself, why?

If Fridays are a huge relief then what are they a relief from? Working. If working is so horrible then why do people do so much of it? To buy their over priced homes, to drive in their over priced car so they can send their children to over priced schools in the hope they won’t turn out to be like me.

Then we have low income workers always upset about low pay, but what do they do about it? Join a Union to pay for someone else to go and bargain a higher pay rate so they can afford more debt on more things.

I ask Kiwiblog readers, why? Why do you bother working say more than 9-5pm five days a week. Does it get you anywhere? Does it make you more money than standard hours. Does your employer value your extra contribution? Is your small business making you money and therefore worth the effort, or is it all just a giant waste of time and effort?

If it is and you are disciples to the Friday evening, then why do you do it?

And don’t just answer to pay for people like me. That’s a cop out.

If I wasn’t here you’d be contributing to some other taxpayer funded scheme or whim. Because you are all the same. You all like paying tax else you would vote for parties like ACT that would make me get off my backside, hand me a mentor such as Muriel Bloody Newman and monitor my life like Gestapo.

You feel guilt. You feel as though taxation paid gives you cleansing of that guilt.

It shouldn’t. I watch you arrive home at 7pm on a Friday straight from the office and I keep wondering.

Why?

My column at NBR is a Q&A on tax cuts. An extract:

Bill English says the 2010 and 2011 tax cuts has been deferred. What does that mean?

It means they have been cancelled.

Are you sure?

Yes

So we won’t get them at some future point?

You may get tax cuts in the future, but when you do it will be a new package, not the package that was planned for 2010 and 2011.

Comments and feedback can be made at NBR.

Almost everyone is expecting that the tax cuts planned for 2010 and 2011 will be delayed, if not cancelled, in the Budget later this month.

I thought it would be useful to have a look at the tax cuts we have already had, and those likely to be canned, and to weigh up their relative significance. I’m going to look at each element of the tax changes:

Labour’s October 2008 package

This package has an annual “cost” (ie reduced revenue to the Crown) of around $1.826 billion. Note that Labour did not reduce any spending to compensate – in fact they increased it in their last budget by $4,5 billion. Labour did three things:

Bottom tax rate drops from 15% to 12.5% and threshold increases from $9,500 to $14,000.

Annual cost – $1.448 billion

Tax reduction on $30k – $620

Tax reduction on $50k – $620

Tax reduction on $100k – $620

Threshold for 21% rate increases from $38,000 to $40,000.

Annual cost – $0.211 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $240

Tax reduction on $100k – $240

Threshold for 33% rate increases from $60,000 to $70,000.

Annual cost – $0.167 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $0

Tax reduction on $100k – $600

Total October 2008 changes

Annual cost – $1.826 billion

Tax reduction on $30k – $620

Tax reduction on $50k – $860

Tax reduction on $100k – $1,460

Worth remembering when Labour goes on about borrowing to fund tax cuts for the wealthy eh!

National’s April 2009 package

This package has an annual “cost” (ie reduced revenue to the Crown) of around $1.292 billion. Also note National reduced other costs such as KiwiSaver by $1.429 billion – so the tax cuts were fiscally neutral.

National did three things:

Independent Earner Rebate for non WFF recipients earning between $24k and $48k

Annual cost – $0.500 billion

Tax reduction on $30k – $520 (if not WFF)

Tax reduction on $50k – $0

Tax reduction on $100k – $0

Threshold for 21% rate increases from $40,000 to $48,000.

Annual cost – $0.686 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $960

Tax reduction on $100k – $960

Top tax rate drops from 39% to 38%.

Annual cost – $0.106 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $0

Tax reduction on $100k – $300

Total April 2009 changes

Annual cost – $1.826 billion

Tax reduction on $30k – $520 (of not WFF)

Tax reduction on $50k – $960

Tax reduction on $100k – $1,260

So someone on $100k got $200 more of a tax reduction from Labour than National! Those on $50K got $100 more from National than Labour and those on $30K (if not on WFF) got $100 more from Labour than National.

So remember this again when Labour campaigns about tax cuts for the rich.

Now what are we missing out on:

Labour’s April 2010 tax cuts

These were replaced by National, but useful to look at what they would have been.

Threshold for 12.5% rate increases from $14,000 to $17,500.

Annual cost – $0.560 billion

Tax reduction on $30k – $300

Tax reduction on $50k – $300

Tax reduction on $100k – $300

Threshold for 33% tax rate increases from $70,000 to $75,000.

Annual cost – $0.061 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $0

Tax reduction on $100k – $300

Total Labour April 2010 changes

Annual cost – $0.621 billion

Tax reduction on $30k – $300

Tax reduction on $50k – $300

Tax reduction on $100k – $600

Amazed the media keep repeating Labour’s spin about their tax cuts.

Labour’s April 2011 tax cuts

These were also replaced by National, but again useful to look at what they would have been.

Threshold for 12.5% rate increases from $17,500 to $20,000.

Annual cost – $0.359 billion

Tax reduction on $30k – $210

Tax reduction on $50k – $210

Tax reduction on $100k – $210

Threshold for 21% rate increases from $40,000 to $42,500.

Annual cost – $0.240 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $300

Tax reduction on $100k – $300

Threshold for 33% tax rate increases from $75,000 to $80,000.

Annual cost – $0.051 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $0

Tax reduction on $100k – $300

Total Labour April 2011 changes

Annual cost – $0.650 billion

Tax reduction on $30k – $210

Tax reduction on $50k – $510

Tax reduction on $100k – $810

National’s April 2010 tax cuts

These are the ones likely to canned in the Budget.

Independent Earner Rebate for non WFF recipients earning between $24k and $48k increase from $10 week to $15 a week

Annual cost – $0.241 billion

Tax reduction on $30k – $260 (if not WFF)

Tax reduction on $50k – $0

Tax reduction on $100k – $0

Threshold for 21% rate increases from $48,000 to $50,000.

Annual cost – $0.137 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $240

Tax reduction on $100k – $240

Top tax rate reduces from 38% to 37%.

Annual cost – $0.105 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $0

Tax reduction on $100k – $300

Total National April 2010 changes

Annual cost – $0.483 billion

Tax reduction on $30k – $260

Tax reduction on $50k – $240

Tax reduction on $100k – $540

National’s April 2011 tax cuts

These are also likely to canned in the Budget.

21% tax rate decreases from 21% to 20%.

Annual cost – $0.525 billion

Tax reduction on $30k – $160

Tax reduction on $50k – $360

Tax reduction on $100k – $360

So what do all these numbers mean? First let us look at total fiscal costs on an annualised basis

Total Fiscal Cost

• National’s total package – $4.126 billion a year
• Labour’s total package – $3,097 billion a year
• Tax cuts delivered to date – $3.118 billion

So under National tax cuts greater than Labour were promising over three years have already been delivered. And furthermore, by reducing KiwiSaver etc by $1.429b, National has reduced the impact on the books to around half what Labour’s tax cuts would have been.

What are we missing out on with the cancelled tax cuts? Another $1b a year – a fair bit – but only one quarter of the total package.

Total tax cuts for different income earners

Someone on $30,000 (not getting WFF)

• National’s total package – $1,560 a year
• Labour’s total package – $1,130 a year
• Tax cuts delivered to date – $1,140 a year
  

So someone on $30,000 (not getting WFF) has already got in tax cuts more than they would have got from Labour’s total package – but miss out on a further $420 a year.

Someone on $50,000

• National’s total package – $2,420 a year
• Labour’s total package – $1,670 a year
• Tax cuts delivered to date – $1,820 a year

So someone on $50,000 has already got in tax cuts more than they would have got from Labour’s total package – but miss out on a further $600 a year.

Someone on $100,000

• National’s total package – $3,620 a year
• Labour’s total package – $2,870 a year
• Tax cuts delivered to date – 2,720 a year

Interestingly it is only the so called rich pricks on $100k who have recieved less to date in tax cuts than they would have from Labour’s total package.

So remember these facts, when you hear myths:

1. National has not borrowed for tax cuts. National’s additional April 2009 tax cuts of $1.292 billion a year was offset by $1.429 billion of expenditure reductions.
2. Future tax cuts were promised by both Labour and National, and were both around $1b – $1.271 Lab and $1.010 Nat.
3. Labour’s future tax cuts were worth $1,410 for someone on $100k and National’s future tax cuts $900 for someone on $100k.
4. By having an additional round of tax cuts in April 2010 (when the economy most needs it as a stimulus), National has delivered in six months greater tax cuts than Labour were going to deliver over three years.

David Parker manages both with this press release.

The National Government has given its clearest signal yet that superannuation entitlements will be cut in the future, Labour Associate Finance spokesman David Parker says.

Fearmonger No 1

A reminder. John Key has said he will resign his seat in Parliament if he cuts superannuation entitlements. But not even that will stop Labour trying to prey on the insecurity of retired or near retired persons.

“The pensions of tomorrow need to be protected today. National said before and during the election they would continue with payments to the Super Fund, but have now resiled from this.”

And if Parker reads the announcement from Michael Cullen, when the Fund was established, he will see that Cullen explicitly said that contributions are funded out of surpluses and would be suspended temporarily when there is no surplus.

Not even Dr Cullen was foolish enough to advocate borrowing money to save money.

“Mr English argues that he’s not prepared to borrow to fund the investment in the Super Fund, but he’s already done that to pay for his tax cuts – an astounding third of which go to the top three per cent of income earners,” David Parker says.

Then we have the lie – the claimed borrowing for tax cuts. The extra tax cuts by National were fully paid for by reduced expeniture on KiwiSaver. This is a fact. Parker knows this. He just hopes if you repeat a lie enough times, people will believe it.

“Those tax cuts were not just unfair, but they are a substantial cause of the structural deficit New Zealand now faces and are behind the Government’s plan to now cut investment in the Super Fund.

And he lies again. National’s tax cuts are considerably less foregone revenue that the reduction in KiwSaver subsidisies. The structural deficit would be worse, not better, if National tax cuts and KiwiSaver changes had not been made. This is indisputable. The quantum of each is known and the foregone revenue from tax cuts is les than the reduction in KiwiSaver subsidies.

Everytime you hear Labour talk about borrowing for tax cuts – they are lying. They are desperate to have people beleive it, but it is not true, as National reduced expenditure by a greater amount than the tax cuts to pay for it.

If Labour were honest they would campaign on how National reduced KiwiSaver subsidies for tax cuts, and debate the merits of that. Of course they don’t want to, as anyone economically literate now concedes the KiwiSaver subsidies were far too generous.

This week’s Dispatch from St Johnnysburg is online at NBR. Some extracts:

Bill English all but confirmed this week that the tax cuts planned (and legislated) for 2010 and 2011 will be cancelled.

They are a casualty of not just the global recession, but a victim of Michael Cullen’s “Scorched Earth” policy, otherwise known as his 2008 Budget.

Dr Cullen was gleeful in the hours after his final budget. He smirked and gloated that he had left no money for National. In fact he agreed in an interview with Gordon Campbell that his budget was a “booby trap” for National. …

You can reduce taxes if you keep spending under control, but Dr Cullen increased spending in his final budget by a massive $4.5 billion, at the same time as he also delivered (finally) tax cuts which when fully implemented would reduce revenue by around $3 to $4 billion a year.

Comments and feedback can be done over at NBR.

Bill English has sent out his strongest signal that the future tax cuts will not be implemented. I’m going to cover the details of this at a later stage – for now want to look at the overall fiscal situation.

The Herald reports:

Mr English said without a change to the present spending track, preliminary Budget forecasts showed recurring operating deficits of more than $10 billion a year indefinitely.

“Most worrying of all, debt would continue climbing, with no sign of levelling off.”

At the predicted 2023 level, Crown gross debt would equate to about $30,000 for every New Zealander and it would force the Government to pay an extra $8 billion a year in interest costs than forecast in the October pre-election update, Mr English said.

This simply can not be allowed to happen. Every dollar extra in interest costs is a dollar less for health, education, Police etc.

Mr English said his Budget would allow for more spending than Labour’s last year.

But the rate of growth of Government spending in recent years could not be sustained, he said in a speech to business executives in Auckland yesterday.

Core Crown expenditure this year was expected to be $63.5 billion – up $21.6 billion or 51 per cent in the past five years.

He contrasted that to estimates that the economy had grown by just 23 per cent in the same time, and tax revenue by 24 per cent.

Cullen massively increased spending on the assumption that the economy would never falter. They intrdouced interest free student loans, KiwiSaver, Working for Families – and now there is not enough money to pay for them.

The responsible thing to do with a growing economy, is to have every year modest incraeses in spending, modest tax cuts and significant surpluses. Peter Costello did this. But for nine years we had massive increases in spending.

Labour leader Phil Goff said last night that Mr English was “softening the public up” to breach the basic promise National made in the election campaign last year – that people would be better off through tax cuts.

He said National had misled the electorate.

Labour would by now have not only cancelled their tax cuts (I will touch on this at a later stage) but would be copying UK Labour and actually hiking taxes in a recession with a new top tax rate of 50%.

This is the amount of extra money you will get from Wednesday, if you are one of the 80% or so who do not get Working for Families.

As one can see the biggest proportional drops in income tax are those on the fulltime adult minimum wage of $25,000. Their tax bill will drop a huge 12.8%.

Those on the average wage of just under $50,000 will get a 9.1% drop in their tax.

Those on $100,000 only get a 4.4% reduction in their tax.

Anyone who was on the fulltime minimum wage (and not on WFF) will have their income increase by $1,043 and their tax drop by $301 (instead of increasing by $219) which means an increase in take home pay of $1,344 or an extra $25.77 a week.

And contrary to the cries from the left that the tax cuts favour the wealthy, in fact the total share of taxation paid by the those earning over $100,000 will actually grow slightly from 29.5% to 29.6% of personal income tax.

I praised Labour yesterday for their campaign of insulating houses as being a good issue to campaign on. I thought it showed a sign of getting more clever about opposition.

But then Phil Goff attacks John Key for saying those who can afford to do so, should donate their tax cuts to charity, spewing forward class hatred:

“It smacks of the old aristocracy to say ‘we will make things worse for the low-income people and then, out of the generosity of my heart, I will call on other well-heeled people to donate theirs to charity’.”

First of all Goff is factually wrong. No one is worse off due to the 1 April tax cuts. A worker (without kids) on $20,000 gets $10 a week more. A worker on just above the average wage gets $18 a week more. Even pensioners get an increase.

But this is not a debate about tax cuts. It is about perceptions. 90% of NZers will cheer the PM saying donate more to charity if you can afford to do so. And Goff attacks the idea as “old aristocracy” or no doubt Tory charity. Stupid stupid stupid.

What Goff should have done is something like:

“I absolutely support the call for New Zealanders who can do so, to donate more to charity to help those who are struggling. But we should not just rely on philanthropic individuals, and the Givernment needs to be doing more to help those struggling such as adopting our plan to insulate every household in NZ to lower power bills and reduce ill health”.

This would have meant Goff doesn’t look to be sneering at those who do donate. It would have not looked like a petty swipe at a hugely popular PM (you do those when he is less popular!) and it would have looked constructive.

Most of all it would have reinforced the insulation campaign. You need to do more than just have a website. If Labour want it to be effective, they have to repeat it as often as possible so every NZer knows Labour wants to insulate every home in NZ. People only remember something after they have heard it close to a dozen times.

I wish I could invoice someone for this free advice

Bill Ralston writes in the HoS:

The first 100 days programme was all about looking competent and appearing to honour National’s election promises.

Sadly, most of those promises were made in an entirely different pre-election economic climate when it seemed like we could afford them.

Still, Key seems determined to stick by those pledges even if it makes Bill English’s job harder when writing the next Budget.

As long as the Government doesn’t back away from its promised tax cuts it will survive even the blackest budget that English may have to devise.

In these times families are looking forward to even a small amount of tax relief and it is the one promise National cannot afford to break.

The Government can take a holiday on making contributions to the Super Fund. It can even axe the damn thing and nick the fast diminishing $12 billion to further boost the economy.

Most people won’t mind the loss of an abstract concept involving billions of bucks.

They will spit the dummy if they find the Government reneges on giving them that extra $20 a week.

Indeed.

There is of course a set of circumstances, where the out year tax cuts would be reconsidered. When everything else has been tried, spending reduced and the deficit still is unacceptably high, threatening the future.  The OBEGAL needs to be able to move back into surplus over time.

Bit what is pathetic is all the commentators and editorials demanding that the tax cits be surrendered immediately – before the Government has even started to make an impact cutting waste, reconsidering contributions to the Super Fund etc etc.

Even the HoS editorial today does the usual job of advocating they should go, and ignoring the reality that National’s extra tax cuts were fully funded by spending cuts:

It is almost dishonest, when people advocate that the tax cuts can not be afforded, without mentioning that National’s tax cuts were fully funded by cutting spending on KiwiSaver – something which actually will help reduce the impact of the recession as the KiwiSaver subsidies would have removed the money from the economy, while the tax cuts will see most of it spent.

John Roughan writes:

If your income is down in the recession and you are taking on debt to maintain the family’s living standard, would you borrow a bit more to put into a superannuation fund?

Nor would I. Nor would John Key, Bill English, Phil Goff, Jim Anderton or Peter Dunne, I suspect.

Exactly.

Goff, smelling fear, declared Labour opposed to suspension and called on the Government to make its position clear. Anderton called it “raiding the piggy bank”. Dunne, minister of tax collecting, declared it “a very bad idea”.

All of them know it would be sensible.

Yes I refuse to believe Phil Goff is that stupid. He knows it is the sensible thing to do, and why Cullen designed the scheme to allow a contributions suspension. But he is getting a bit desperate with his ratings, so punted for stupidity, even though he knows better.

Deficit adds to the debt loaded on future taxpayers, unless inflation erodes its value in the meantime. Either way, its a thankless legacy.

To increase public debt by a billion dollars and put that money in a superannuation fund risks presenting our tax-paying children with costs that could exceed the fund’s earnings on that sum.

And to date the Fund has generated less money, than if it had been in risk free Government bonds.

Roughan also has a go at tax cuts, saying it is unfair to cut taxes in a deficit. He forgets (or omits) that you can also cut spending to reduce the deficit, and longer term a low tax eonomy will have better economic growth than a higher tax one.

The problem is not the rate of tax. It is that NZ is not producing enough income to generate that tax. And you won’t generate more income by increasing tax rates. You’ll destroy it.

The Herald reports:

Labour leader Phil Goff has offered his party’s support to the Government should it change its stance on tax cuts.

Well that’s a good reason not to change. But nice to see Labour is back to its tax and spend policies.

The Herald editorial says:

Now, as Mr English admitted this week: “We have ended up with the worst of all worlds.” We have Labour’s level of public expenditure and we are about to get National’s level of taxation.

Something has to give. If National will not postpone tax cuts due in April, it must trim some of the programmes it has inherited. The most costly of them, interest-free student loans, free childcare, KiwiSaver subsidies and the upper reaches of the Working for Families grants, should be means-tested more tightly to avoid taxing people to provide benefits they could pay for themselves. None of these would be politically painless and one or two are policies John Key has promised not to touch.

But National needs to cut core public spending to match its tax cuts even as it considers borrowing a much larger amount to fund counter-recessionary spending.

This is just plain misleading. Is the editorial writer not aware that National already cut public spending to match its tax cuts? National primarily cut the KiwiSaver subsidies, to fund the tax cuts. This must be known to the editorial writer (Labour harped on about it non stop during the election), so why is it ignored?

And National’s policy, with the wisdom of hindsight, was 100% correct. Because the billions that were to go into KiwiSaver subsidies would have been locked up for decades. Instead they are adding to the fiscal stimulus so badly needed now.

To clarify what it is doing, its Budget needs to present the public with two accounts: one for the temporary relief it is borrowing, including the cost of capital for infrastructure, the other to bring core public spending into line with the permanent changes to income tax rates and thresholds.

National’s tax cuts have been paid for by reduced spending. That has already been done. The problem is not the level of tax rates, but the level of income earned, and hence the amount of tax collected.

Now I fully agree, we should restrain spending now – but only in ways that do not break election promises. And frankly I am getting sick of Herald articles and editorials continuously calling on National to break its election promises. Because I’m bloody sure there have been a lot of editorials in the past condemning parties that did break their election promises. There is a degree of moral hypocrisy at play here.

I agree interest free student loans is stupidity. However National made a promise not to start charging interest again, during this term of office anyway. I want National to keep all its promises, not just the ones I agree with.