Kiwiblog

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.

Brian Fallow writes how scrapping tax cuts would be bad:

Just for a moment there it sounded as if the Government might be preparing to renege on its promise of income tax cuts over the next three years.

Now that would seriously piss me off if that ever happened.

At a conference on tax policy at Victoria University last week, Finance Minister Bill English was laying out some home truths about how utterly the fiscal backdrop for such discussions has changed – Budget deficits and relentlessly mounting Government debt as far ahead as the eye can see.

The inherited decade of deficits and debt.

“The opportunities to reduce tax rates further will be fairly minimal,” he said.

But when asked if in saying that he was signalling something about the string of income tax cuts National had campaigned on, the answer was a curt “No”.

While I suspect if Labour had got back in, all the tax cuts would have been cancelled by now – and in fact we may have had tax increases.

There are structural problems as well, and the tax system is one of them.

It is, as PricewaterhouseCoopers chairman John Shewan told the conference, not sustainable. “We rely too much on too few taxpayers.”

The left see this as a good thing, If 40% of the country funds 60% of the country, then that 60% will vote for parties that support higher taxes on the 40% to fund the majority.

Nearly half of the tax take is personal income tax and nearly half of that, in turn, is from people in the top tax bracket ($70,000 plus since October).

Meanwhile, for the bottom half of households, ranked by income, net taxes (taxes less transfers received) are negligible or negative, according to the Treasury’s briefing to its incoming minister. And many of those on middling incomes have very high effective marginal tax rates as Working for Families tax credits abate. The IRD reckons over 500,000 taxpayers face marginal rates of more the 40 per cent.

Combine that with the income gap which has opened up between New Zealand and Australia (or indeed most of the rest of the OECD) and “probably the most internationally mobile labour force in the OECD” and you have a situation where a large part of the tax base is globally contestable. It is vulnerable. It is at risk.

In other words if you tax people too much, they leave.

It is not just that the tax base resembles an iceberg heading towards the equator. It looks as if the taxes we rely on most are the ones which are more damaging to economic growth.

An OECD study last year, entitled Tax and Economic Growth, looked at the relative impact of four kinds of taxes on GDP per capita.

Worst in terms of impact on GDP per capita, it found, are corporate taxes, followed by personal income tax. The least distortionary thing to tax is immovable property.

I find that fascinating. I must try and get a copy of the report.

“Particularly recurrent taxes on residential property,” Christopher Heady, one of the report’s authors, told the conference. “But that frightens politicians.”

In the more demure language of the report, such taxes are “very unpopular in many countries” and tend to be the preserve of local rather than central government. But property taxes do not affect decisions to work, or to acquire skills and education, or to produce, invest and innovate, to the same extent as other taxes.

There is a degree of fairness to consider in taxing an asset, as people who are asset rich and income poor may have to sell them. But having said that, it is important to get the incentives right for working, education, investment etc.

I hope the Government looks seriously at how to improve the structure of our tax system.

Fran O’Sullivan calls for National to can its 1 April tax cuts and put the money into boosted unemployment benefits and superannuation.

It’s amazing how so many people keep calling on National to break its election promises within just weeks of the election.

The set of economic forecasts inherited from Labour were bad enough reading last week. But then on Friday, I noticed that Finance Minister Bill English said that the economy is already nearly at Treasury’s worst-case scenario.

So how bad is the now likely worst case scenario:

• Unemployment peaks at 7.5% in mid 2010
• Economy contracts in year to March 2010 as well as March 2009
• OBEGAL deficits of $32 billion from 2009 to 2013 – averaging greater than $8 billion a year
• Gross debt to increase from $35 billion to $82 billion over four years – a $47 billion increase
• Net debt to increase from $6 billion to $54 billion
• Gross debt as % of GDP to go from under 20% to 39% in four years, and to 76% by 2023

This is a worse outlook than Labour left National in 1990. And you can’t even compare to the 1999 PREFU which was:

• Operating Balances growing to almost $2.5 billion
• net debt falling from 22% to 18%
• Economic growth of over 3% a year
• Unemployment to reduce from 7% to 5.7% over two years

Cullen was left with a wonderful set of projections.

So the next few years are going to be a disaster in fiscal terms. So who is at fault? Well of course the main responsibility is the global credit crisis – that goes without saying. But why are our fiscal fortunes so fragile, than a crisis such as this fucks our economy for the next decade or more? Let’s look at some of the possible culprits.

National’s tax cuts

If anyone blames the deficits and debts on National’s tax cuts, then they are incompetent or lying. The tax cuts were 99% funded from changes to KiwiSaver, and other expenditure savings. They have no impact on the deficit or debt.

In fact National’s tax cuts are (in hindsight) an even better idea than when first mooted? Why? Because they contribute towards a total fiscal stimulus package of 5% of GDP – this is one of the largest in the OECD and may help soften the recession.

But even better, the tax cuts are not funded from cutting current spending (which would detract from the stimulus) but by reducing subsidies into KiwiSaver which would lock the money up for decades.

We’ll come back to the issue of KiwiSaver.

Labour’s tax cuts

So how about Labour’s tax cuts? Is all this fiscal doom and gloom because Labour finally gave in and delivered tax cuts? Well it is certainly true that Dr Cullen has indicated he would have not cut taxes to the extent he did, based on PREFU’s numbers. And many people suspect Labour, if re-elected, would have cancelled some or all of their tax cuts.

The cost of Labour’s tax cuts over four years is $10.8 billion. So yes, if Labour did not cut taxes at all in their nine years of office, then the fiscal situation would be slightly better. Of course taxpayers would be worse off, but who cares about them!

But compare that $10.8 billion to OBEGAL deficits of over $30 billion and an increase in debt of almost $50 billion.  If Labour had not delivered tax cuts (and had not spent the money saved – a big if), it would have somewhat improved the fiscal outlook, but left households worse off, and made the recession worse.

Labour’s tax cuts were equivalent to a one off $3.3 reduction in taxation – the only personal tax reduction in nine years, where taxation went from $32 billion to $57 billion.  It is probably the most modest tax reduction program in the western world.

Labour’s Spending

What has really left us with a massive problem, isn’t Labour finally doing a $3.3 billion annual tax cut, but the massive increases in annual expenditure.

Expenditure has increased from $34 billion per year to $57 billion. That is a $23 billion hike – or seven times as great as the belated tax cuts.

Now of course some of this is necessary increases – even Sir Roger advocates you should increase spending in line with inflation and population growth. But off memory that is still $18 billion a year in extra spending.

And this is the problem Labour has left us. They massively increased spending in non-essential areas, on the assumption that we would have record growth and surpluses forever. They didn’t just keep funding and improving existing programmes (schools, hospitals) but they invented new schemes. Now these schemes were arguably good things – but they were funded based on an assumption of growth and surpluses. And together they combine to remove flexibility from future Governments.

Let us look, at just three of them:

The Cullen Fund

The Cullen Fund was based on a premise that as we are going to have surpluses for the next 30 years, then we should save some of those surpluses to meet the future cost of superannuation, so we won’t have to borrow money in the future.

The fatal flaw was always the assumption about surpluses, but as the years went on and they continued unabated, the opposition to the Fund diminished, and even National signed up to it.

But we are now in a very different situation. We have a structural deficit, and face massive borrowing for at least a decade.

So the Cullen Fund is now based on borrowing heaps of money today, so we do not have to borrow heaps of money in 25 years? Anyone else see the fatal flaw? Borrowing money to save money is the sort of stuff that cuased the credit crisis.

The Government should seriously consider suspending contributions to the Cullen Fund. We can’t save money we do not have.

KiwiSaver

KiwiSaver has much the same problem as the Cullen Fund. It is all well and good to help subsidise people’s savings, but not if the taxpayer is having to borrow money to do so.

Because who is going to have to pay back and pay the interest on all that borrowing? Those same savers. So once again we have the stupidity of borrowing money today, to help people save. That is not sustainable.

I like KiwiSaver. If we were going to continue with record surpluses, it would be great to have a scheme which provides massive incentives for people to save. But we don’t. Does anyone think Labour would in 2009 have announced the KiwiSaver subsidies they did in 2007? Of course not.

National has wisely already cut the cost of taxpayer subsidies to KiwiSaver. Arguably they need to go further and also look at whether the employee subsidy is affordable. If we need to borrow to find it, then it isn’t.

You see the employer matching contribution is a 1:1 subsidy already, which is massive. Hell most people are happy to get a 10% return on investment and the employer contribution gets you an instant 100% return. Now the employee subsidy gets you a further 100% return, so those earning up to $52,000 get a 2:1 subsidy or a 200% return on investment.

Unless the fiscal fortune improves, maybe the employee subisdy has to go also. Sure that means only a 100% return instead of a 200% return, but that is a lot better than the standard 10% return and I doubt it would discourage people going into KiwiSaver. Maybe raise the employer contribution rate to a maximum 3% so the total saved isn’t decreased.

Working for Families

This is another major spending commitment that falls into the category of unaffordable with hindsight. Basically whenever Labour had spare cash they hoovered it up into this targeted welfare assistance programme. And now taxpayers are going to have to borrow billions of dollars to fund this programme.

Unlike the other two programmes though, this one can’t be easily reformed. Families have grown used to having the extra cash, and in the midst of a recession, it would be quite wrong to take the money off them.

But what does need to be done, is some medium-term work on a better tax and welfare system that has less tax churn.

A journalist mentioned to me that Sir Roger Douglas has been very effective in countering Labour’s claims over the tax cuts. The Hansard is now out, so I figured I would take a look.

This bill restores the tax threshold position of 10 years ago for those who are on 21c in the dollar or those who are on low to middle incomes. It does not restore the relative position of those on the 33c or 39c index. In other words, those on the higher income are still in a relatively poorer, or worse, position than they were 10 years ago. The arguments that have been put forward by the Labour speakers in relation to the bottom tax rate of 12.5c simply do not hold water. If we analyse the people who pay only 12.5c we find that around 90 percent of that group actually come from high-income families. They are the wives or the husbands of high-income earners. They are the children of high-income earners. What the Labour Government did in its tax legislation of last year was to encourage income splitting so high-income earners who had the capacity to do that said “Thank you very much Labour” and the poor suffered, and the low-income and disadvantaged paid for that.

This sent Labour into full frenzy mode.

I have listened to the speakers from Labour cry wolf about how they want to help the poor and the disadvantaged, but over the last 9 years they took $18.2 billion in extra taxation from average New Zealanders or $1,000 a month. The fact is that had we left that extra $1,000 a month with low-income families in particular, they would be a whole lot better off than they are at the moment. The fact is that Labour spent that extra tax, that extra $1,000 per family, on dubious programmes and failed social experiments that have not benefited New Zealand households by anywhere near the $1,000 a month it took from them. Labour would have been far better to leave the money with them. For families, that $1,000 per month represented books for children, meals in restaurants, carpets, clothes, and extra savings. For the economy it represented lost jobs in shops, factories, and service industries right across the country.

I think we are gong to hear a lot about that $1,000 a month!

Under Labour, we had to wait nine years for tax cuts.

After around nineteen hours of Parliament under National, they have legislated for tax cuts in 2009, 2010 and 2011. They will give a worker on the average wage a whopping $47 a week more.

The third reading passed 68-52 a short time ago.

I’ve said time and time again that NZ Labour was almost alone in the world with its hostility to personal tax cuts. We only got them after nine years of massive surpluses and massive spending increases, and Dr Cullen admitted that he would have made them smaller (if at all) if he had known about the extent of the credit crisis.

Even under Phil Goff, NZ Labour are geared up to attack National’s tax cuts.

So bearing that in mind, let us look at what UK Labour PM Gordon Brown is looking to announce tomorrow:

Gordon Brown has defended as “necessary and responsible” the massive package of tax cuts expected in tomorrow’s Pre-Budget Report.

Yes, UK Labour delivering a massive package of tax cuts.

Australian Labour also doing the same.

NZ Labour though are regretting their tax cuts and are opposing any further tax cuts.

ACT is campaigning on restricting future increases in Government expenditure to inflation and population growth. This means only increase spending by 3.6% a year instead of 6.0% a year. An admirable goal.

Their tax policy, released today, means that in ten years, tax rates will be:

1. 12.5% personal tax up to $20,000
2. 15% personal tax over $20,000
3. 15% company tax
4. 10% GST

If that was possible (and I have real doubts that you can restrict Government spending to inflation/population as it means no new initiatives for ten years – but it is a laudable goal), then we would have a superb low tax environment which would grow much much faster, closing the gap with Australia and the world. And households would have much much more after tax income.

Well done ACT on a great policy.

The Dim-Post announces National’s real tax policies:

1. $50 per week tax cut for every worker in New Zealand – will be accompanied by $50 per week ‘negative salary rebate’ for all workers, adding to a total transfer of wealth of over $5000 per year!
2. ‘KiwiSlaver’, a new employers rights package aimed to stimulate the economy by protecting business owners from nuisance law-suits over trivial charges such as kidnapping and aggrivated assault.
3. Flat tax of 18% to the really hot little red-head who participated in Crosby/Textor market research focus group #5.
4. 5% GST rebate on Playstation 3 consoles; cost to be offset by privitisation of Stewart Island, population of which become legal property of Dow Industrial Chemicals.
5. Free small soda at the movies for all working mothers on middle incomes aged between 25 and 45 living in the Otaki and Hamilton West electorates.
6. Low income earners will be allowed to look behind the couch cushions of John Key’s sofa and keep whatever they find.

Heh I like No 1 and No 3 especially.

The ODT says:

Sensibly, the plan does only minimally reward those already receiving some form of government assistance, particularly Working for Families, who are earning $50,000 or less a year – average wage-earners, for example, will get $36 a week, $4 a week more than from Labour.

National will restore a tax rebate to middle-income earners who are single or who do not have children and who were not included in the Working for Families scheme, which is likely to be a popular, if entirely unjustified, measure. …

A National government would operate a 2 plus 2 scheme, subsidising an equivalent amount of 2% of employees’ contributions, but the subsidy would not rise to 4%.

That decision will be widely criticised as being a disincentive, but the grounds for a government to subsidise personal savings, especially in a scheme which has proved so popular, are weak indeed….

Voters should consider, however, why after 10 years of favourable global economic conditions the country now faces “an ocean of red ink 10 years into the future”, as Mr Key says.

The answer is, of course, twofold but interlinked: the Clark Government decided to spend very large sums on subsidising wages and savings, increasing the bureaucracy and “future-proofing” superannuation, at the same time as a great many wage and salary earners went on a debt-fuelled spending spree.

A pretty balanced editorial.

The Dom Post says:

The  modesty of National’s tax cut plan is smart politics by Mr Key. It is pragmatic and an astute reading of where the election will now be fought, The Dominion Post writes.

As the leaders of the world’s big economies wrestle with how to fend off catastrophe, and as New Zealanders come to terms with the grim news contained in the pre-election economic and fiscal update, the focus has shifted from tax cuts to economic management. That makes its lack of extravagance – it does leave some New Zealanders worse off, rather than borrowing to deliver to all – a virtue rather than a vice. Lavish promises now would be seen as either pre-election rhetoric to be abandoned soon after November 8, or as foolhardy in the extreme.

But will this stop Labour making them?

The package still underlines the fundamental difference in approach between Labour and National when it comes to tax. Mr Key’s philosophy is summed up in his desire to reduce the top tax rate to 33c in the dollar over time. His regret is that circumstances mean he could not now make bigger cuts.

Dr Cullen’s is that he had to make cuts at all.

That is brillant. Key regrets he could not cut tax more, while Cullen regrets he was forced to cut tax at all!!

It is impossible to avoid the conclusion that he offered the reductions in this year’s Budget grudgingly. He is, at heart, a man who regards higher earners as “rich pricks”, and believes those who have succeeded have somehow ripped off their fellow citizens. He and his Labour colleagues believe they know how to spend people’s money better than those who earn it. The “chewing gum” round of cuts promised before the last election and petulantly cancelled afterwards – partly because people had not been grateful enough – is evidence of that.

So true.

Mr Key’s package is modest, credible and affordable. Now it is up to voters to decide whether it is also desirable.

Indeed. And does Labour have an alternative? Are they going to put tax rates up? Are they going to cut spending anywhere?