Kiwiblog

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?

In no particular order.

The Herald Editorial compares the parties:

There has been a striking contrast in the response of the two main parties to the disturbing news that after 14 years of budget surpluses the Treasury now calculates the public accounts are set for a decade of deficits. …

Finance Minister Michael Cullen merely congratulated himself again on having saved previous surpluses for a “rainy day” and looked forward to the problems it would cause for National’s intended tax cuts.

There was evidently nothing he thought necessary to change, either in his own programme of reluctant tax cuts that started this month or in the Government’s spending programmes that might have seemed affordable in better times. If Labour’s “rainy day” could last 10 years, as the Treasury forecasts, Dr Cullen and his colleagues seemed strangely relaxed about it.

In other words Labour has no plan at all.

The fiscal crisis is indeed the first real test of the mettle of leader John Key and his team and it is rare that voters get such a measure before an election.

National could have taken the easy option of confirming its previously indicated tax cuts, offering no specific savings in public expenditure and pretending that tax cuts would actually cure the deficit in quick time. Conservative parties are prone to that belief.

Instead, National has faced the need to balance its tax cuts with specified savings, notably the removal of business tax breaks on research and development and employer contributions to KiwiSaver. The wisdom of reducing the incentives to save is questionable but the courage is not.

And National is willing to take the hard decisions, and not pretend that the decade of deficits is acceptable.

Paula Oliver in NZ Herald:

National has risked alienating people who have embraced KiwiSaver, as the party goes into the election with a tax-cut package that would leave more money in the pockets of most earners – but takes away two business tax breaks to pay for it.

Mary Holm says the changes improve KiwiSaver:

The National Party’s proposed changes to KiwiSaver would considerably reduce two of the biggest gripes about the scheme – that some people can’t afford it and that it ties up savings. …

The contributions of anyone earning less than $52,150 would be tripled by employer and government input. And that means three times bigger retirement savings. …

The reduction of the minimum employee contribution from 4 per cent to 2 per cent of pay means it would be easier to afford KiwiSaver, especially after taking tax cuts into account.

John Armstrong says it is a bit of a fizzer:

The door banged shut in Labour’s face following Monday’s mind-numbingly pessimistic economic forecasts. Labour can thank National’s underwhelming tax package for reopening it at least slightly.

Colin Espiner reports on a snap poll:

A snap poll for The Press yesterday showed National may have pitched the package about right.

The poll of 212 people by Futurescape Global found 43% felt the tax cuts matched their expectations, with 34% feeling it fell short. A slim majority of those polled felt the country could afford National’s package, but people were split over whether they were confident in National’s ability to manage the economic crisis, while 55% said the tax package had not altered their vote. The poll has a margin of error of 6.7%.

Brian Fallow sees a shortage of growth:

National claims its tax package will stimulate the economy in the short term and improve incentives and drive growth in the longer term.

The first claim is plausible, the second not so much.

Reducing the top tax rate faster will be better for growth long term, but quite simply the money was no longer there.

James Weir in the Dom Post surveys business opinion:

Business New Zealand also disagreed “pretty seriously” with the decision to drop R&D tax credits but said the planned tax cuts and target to cut personal tax rates to 33 per cent over time rated a “seven out of 10″ score overall.

The Press editorial is positive:

Even if tax cuts were not on the agenda, there is a case to argue that the levels set for KiwiSaver were too ambitious from the start. As it stands, some young people entering the scheme and earning the average wage throughout their working lives could end up earning more in retirement, when their National Super entitlements were added to their KiwiSaver earnings, than they did in their lifetime.

Yep, and that is daft. The 4%/4% KiwiSaver forced people on the average wage to save too much, taking money they need during their working life.

Clark has said this election will be one of trust. If this is so, then the question for voters will be who do you trust in the turbulent world we now face? With these tax cuts, and with some detail of its longer-term economic plans, National has placed its cards on the table. It has produced figures to show that its plans are fiscally responsible. Voters must decide whether Key and his colleagues can be trusted to deliver on them, or whether Labour can be trusted to manage difficult times as well as good ones.

Will Labour produce a plan? Or is Labour saying it will run a decade of deficits and not make any changes to tax rates or spending?

Tracy Watkins blogs:

A year ago, Key might have risked over promising and under delivering on those amounts.

But that was a vastly different world..

The failure to deliver more may peel off some soft support among those who were leaning toward National but, because of Working for Families, will not be a whole lot better off.

But the rest will probably agree with Key that it’s a package that’s right for the times.

So is it enough? You’d have to say yes.

And finally NZPA reports that least surprising news of all – that unions and political rivals don’t like it. Some get their facts wrong:

United Future leader Peter Dunne, who is minister of revenue, said it was complicated and would be difficult to administer.

“Superannuitants and low income earners are the big losers,” he said.

Bzzt. Wrong. By 2011 superannuitant couples will get $15 a fortnight more.

NZIER have done a very nice excel tax calculator.

This compares the situation at the beginning of the year, to what it will be like in year three of a National Government.

Again any errors are mine. What it shows is a very significant package – earners in the $30,000 to $50,000 range get their tax bill reduced by 20% to 25%. Those on $100,000 get only a 12% reduction – and proportionally less as income grows (8.1% at $200,000).

Now Labour did deliver the first of the four stages of this tax cut package. They should get some credit for it. Sure it took nine years, lots of screaming, a previous package which they cancelled after the election, only did it because National and the public forced them to, and an admission now they in hindsight they wish they hadn’t done it, but for Labour that is as close as you will get

The rates used in this calculation are:

1. 12.5% to $14,000
2. 20% to $50,000
3. 33% to $70,000
4. 37% over $70,000
5. A $520 rebate for incomes from $24,000 to $44,000 then abating at 13% until $50,000

I have done these myself. I think they are accurate but they were done quickly. If people spot an error, let me know.

This shows how much annual tax you pay at income levels as of today (taking into account Labour’s tax cuts) and how much your annual tax will be starting in April when National’s cuts would take effect.

The biggest percentage reduction in tax is those at the lower end of the income scale.

This is based on the following:

1. 12.5% to $14,000
2. 21% to $48,000
3. 33% to $70,000
4. 38% over $70,000
5. A $520 rebate for incomes from $24,000 to $44,000 then abating at 13% until $48,000

Tables for 2011 to come.

The Herald reports:

A National government would introduce tax cuts for average wage earners of around $47 a week by 2011, party leader John Key said today.

Details yet to come. This includes the tax cuts we got last week.

UPDATE:

1. A tax rate of 12.5% on income to $14,000
2. 21% on income from $14,000 to $48,000 (moves to $50,000 in 2010 and rate drops to 20% in 2011)
3. 33% for income from $48,000 to $70,000
4. 38% for income from $70,000 (dropping to 37% in 2010)

Around 80% of taxpayers will pay a top marginal rate of no more than 20%. Hence secondary tax rates will shift to 20% for most.

Also a Independent Earner rebate of $10 to $15 a week for people not getting a benefit, Working for Families, or NZ Super, who earn between $24,000 and $40,000.

The long-term ambition is a top tax rate of 33%, but this will depend on economic conditions improving.

KiwiSaver

National is going to change Kiwi Saver from a 4% employer/4% employee scheme. It is going to make it 2% employer/2% employee and if conditions permit then lift that to 3% employer/3% employee. Note these are just the statutory minimums – employees can still put in more than 2% and employers can agree to higher contributions also.

The current KiwiSaver scheme (which I have often blogged support for) was set too high at 4%/4%. It was soaking up money needed today. As proof it was set too high, consider this. A 25 year old today on the average wage who went into KiwiSaver would have a higher income when they retire (including NZ Super) than they would have had during their working life (on the average wage). Now it is just nuts to have people earning more in retirement than they did while working. The 2%/2% scheme still has the incentive for the employee, but 4%/4% is part of what led to the projection decade of deficits.

Overall Package

The overall package announced by National isn’t just fiscally neutral – it is in fact fiscally positive by $283 million over three years. A small first step towards ending the projected decade of deficits.

But the bigger picture is growing the economy to pull out of deficit. $283 million won’t do it by itself. Putting more money into people’s pockets, rather than forcing it into super schemes that are currently losing money, will help. And moving to a flatter tax rate at the top end will also help economic growth in the long run.

National is also pulling back on its infrastructure package from $4.5 billion over six years to $3.7 billion over six years. That combined with stuff such as cancelling the MFAt expensaion plans will see debt tracking no higher than the status quo.

National have responded to the economic and financial crisis with a credible package that takes account of world events and a plan for economic growth. What is Labour’s response? Are they really saying that they don’t need to change anything from what they announced six months ago? Surely not. Labour need to reveals its policies and plans – if they have one.

News that the Reserve Bank of Australia has dropped their official cash rate by a huge 100 basis points gives some inidcation of how weak various economies are.

NZIER released their quarterly survey of business confidence yesterday. On the basis of it they predict the recession will last for at least another two quarters. A net 32% of firms have reported a decline in trading activity and a net 13% expect trading activity to fall further in the next three months.

It is in that context, and the decade of deficits announced by Michael Cullen on Monday, that National have modified their tax package which will be announced later today. This is both necessary and responsible. The public want a tax package that takes account of the last few weeks, let alone the last few months.

The scary thing with the PREFU numbers is they were finalised five weeks or so ago, so do not include the latest shocks from the US. As the Herald says:

Party leader John Key yesterday admitted that the pre-election opening of the books by the Treasury showed a picture that was much worse than he had expected.

“We’d always expected a slowdown, but I don’t think anyone saw deficits for 10 years and such a deterioration in the accounts.”

The economic and fiscal update showed cash deficits forecast to reach $7 billion and budget deficits for the next 10 years. …

No-one at all was expecting it to be that bad.

Also behind the decision is the fact that the forecasts revealed by the Treasury this week do not take into account the tumultuous events of the past month, in which banks have collapsed, the US Government has approved an enormous bail-out deal for Wall Street, and the flow of credit internationally has virtually seized up.

Who knows where it will end. Now this is no reason not to have tax cuts at all – they are important as one factor in lifting economic growth. But some caution around size and timing is essential.

Prime Minister Helen Clark yesterday cast doubts on National’s statement that it had scaled down its tax cut plan.

“I believe they over-promised on their tax package and they are now using the excuse of the books to try and talk down expectations,” she said.

I am tempted to call the PM a moron for that comment, but I know she is not a moron so all I’ll say is she is playing dumb. If she really thinks a decade of deficits is simply an “excuse” then she is in la la land.

But here is what is really interesting. We have seen National says “Yes we will modify our plans in wake of the financial crisis” while Labour says it is not going to change anything. Dr Cullen ruled out any change to tax or spending in the PREFU lockup. At most they might delay some of WInston’s new bureaucrats. Labour are happy to have ten years of deficits and debt rising from under 20% to 30% of GDP.

Labour have had it easy for the last nine years. They have never had to make tough decisions, and now the economy is in reecession they have no idea and no plan as to what to do to prevent a decade of deficits. Their biggest problem for the last decade has been what new schemes to dream up to spend our money on – hey lets put a billion more into Working for Families, no no lets buy some trains for a billion, no no let’s give pensioners free bus trips, no no let’s give public servants a pay rise but only if they join the PSA etc etc.

Because the economy, helped by strong commodity prices, has been so strong they have been able to say no to measures that would boost labour productivity and economic growth. Many of these measures (such as RMA reform) will be unpopular with some lobby groups, so why bother to take the heat, when hey we have enough money without such reforms.

But now Labour has run out of money. They are content to run ten years of deficits. They are not willing to take any hard decisions about lifting our economic growth, let alone paring back any of their spending schemes.

We’ll hear later today what National’s plan is. I think it will be measured, significant and popular. It will of course be attacked by Labour and the unions. National could announce the second coming, and Labour and the unions will attack it. Hopefully at some stage, somone may ask Labour what their plan is? Their plan is to not change tax rates and not change spending significantly. Their plan is a decade of deficits.

John Armstrong does a nice summary:

It was only a few short weeks ago that Bill English was saying he wasn’t going to be spooked by a little bit of red ink in the Government’s accounts.

The Treasury’s pre-election fiscal update bleeds so much of the red stuff that the document looks like the aftermath of Dracula running amok in the blood bank.

The numbers in this horror story are truly awful. It is goodbye to operating surpluses for close to a decade. The forecasts for the separate cash deficit figure nearly double to $6-7 billion for the foreseeable future. Growth slumps. Unemployment jumps. These numbers will almost certainly get worse. The Treasury’s forecasts were done before last week’s maelstrom on Wall Street.

What a legacy to leave behind.

The update is a brutal reality check for parties making big election promises. In the short term, Labour has already gobbled up the allocation for new spending in next year’s Budget. There can be no pre-election bidding wars to buy votes. Post-election negotiations are now going to be hellishly difficult.

Yes – universal student allowances just died yesterday.

If a Labour-Green-NZ First Government was elected, I think they would find it almost impossible to govern without increasing taxes. There is less than $500 million available next year for new initiatives. Even a centre-right Government will find it hard to cope with that. I think it is inevitable there would be a range of new taxes introduced – they will carry through with the legislated tax cuts, but seek to increases taxes elsewhere – maybe even do another envy tax on people earning over $100,000.

In such an atmosphere of restraint, National’s unveiling of its tax cuts tomorrow seem about as tactful as someone cracking open the champagne at a funeral just as the coffin is being lowered into the grave.

The tax cuts needs to countered by savings elsewhere. A significant increase in the operating deficit is not a good idea. However tax cuts are still important as part of a package to life economic growth – higher economic growth is the way to avoid a decade of deficits.

Having slammed National for setting a debt-to-GDP target of 22 per cent, Cullen’s position has been undercut by the current debt ratio being forecast to balloon from 17 per cent to 24 per cent of GDP over the next four years.

And to keep increasing after that to over 30% of GDP.

If National’s tax cuts are reckless, so, by Cullen’s previous definitions, are Labour’s.

Cullen admitted as much by saying that had he known in advance what was going to happen he would have been more cautious about cutting taxes. However, he is refusing to withdraw the second and third phases of Labour’s tax package.

That was actually my question to Dr Cullen – would he have made the tax cuts he did, if he had these forecasts six months ago. He replied that he he would have been more prudent as he leaves recklessness to bloggers

Cullen is right that he can not directly reverse the tax cuts he has just passed into law. But I just can’t see how a Labour-led Government could live within these fiscal parameters. I suspect there would be a range of new taxes introduced.

That gives National carte blanche to go with its more generous package, which it says will be no more expensive than Labour’s because the extra cost will be funded by transparent savings in government spending.

Yes the key is having the whole package fiscally neutral or very close to it.

The bickering over tax has long made up for the lack of argument over wider economic policy. Yesterday changed everything. The election is no longer about tax. It is about which party can best convince the voters its policies will shorten the length and depth of that recession.

This is absolutely where the debate needs to go. There has to be an real focus on increasing economic growth.

The Herald reports:

After campaigning in Otara on Saturday, Helen Clark told the crowd at the Avondale market yesterday to reject, and laugh at National’s tax policy – regardless of the size of cuts.

Good to see she is keeping an open mind. The tax cuts are bad and evil regardless of how big they are or who benefits from them. Pathetic.

“Every $10 to $15 you add on to a tax cut right now means things you can’t do – for our health system, for our old folks, for our children, and for putting more police on the streets.”

So is she saying Labour’s tax cuts of up to $55 a week for the highest income earners means she has removed potential money from the health system, old folks, children and the Police?

Clark is a fraud – trying to con people that tax cuts if done by Labour are wonderful, but tax cuts done by National are evil. You can’t have it both ways.

A good Herald editorial:

At very nearly the conclusion of three terms in government and after nine consecutive years of growth, the Minister of Finance is giving workers between $12 and $28 more a week in their pay packets as the first round of personal tax cuts. The step is as welcome as it is belated.

Very very belated.

But the economic environment also creates doubt about the extent of the tax cuts. Just as the reductions begin, Michael Cullen has admitted that he is uneasy about the debt level sparked by economic weakness and other factors, such as a higher than expected take-up of KiwiSaver.

The take-up rate is not higher than I expected. The official forecasts were always ridiculously conservative. Many employees get a 2:1 subsidy to go into KiwiSaver, plus it is compulsory in a new job unless you specifically opt out. That was always going to generate a massive take-up rate.

Indeed, Labour may yet have to borrow to fund its tax-cut programme. If so, much of the blame can be apportioned to the generosity of some of its policies, such as those on student loans and free early childhood education.

It’s not free.

Tax cuts, not credits, should have been accorded a far higher priority, given the public’s understandable irritation with bountiful operating surpluses and Labour’s reluctance to acknowledge that the state should take no more of people’s earnings than it reasonably needed.

Labour still do not acknowledge this. They do not see tax cuts as a moral issue (take no more than needed) or an economic issue (tax cuts boost economic growth) – purely as a political issue. Labour sees tax cuts as welfare for the rich – not as something good to do.

Almost Labour’s first act after taking power in 1999 was to raise the top rate of personal tax. This was done for no other reason than to restore the tax scale’s former bite on high earners. Five years on, a farcical “chewing gum” tax reduction was proposed and then abandoned.

Nine years on, a move in the opposite direction has finally been made. It should be greeted warmly. If it is viewed widely as overdue and underwhelming, Labour has only itself to blame.

Indeed.

As we celebrate the first personal tax cuts in a decade, power prices look set to increase 12% for many customers next month. This comes on top of a 48% increase in domestic prices over the last five years.

Bill English has raised the issue of whether Michael Cullen will, if re-elected, cancel the 2010 and 2011 tax cuts.

This is far from impossible. Consider the evidence:

1. Michael Cullen promised tax cuts in 2005 and then cancelled them after the election on the basis of economic conditions.
2. He has said that the level of debt has now passed his comfort zone
3. His party is promising extra spending such as a pay jolt in education, a move to universal student allowances and longer period of paid parental leave, at a time when the economy is shrinking.

They probably won’t cancel them, but one could imagine if Dr Cullen delivers the 2009 budget, him announcing the 2010 tax cuts have had to be delayed due to the weak economy – probably until 2012 – after the next election again.

National have released their first billboard. The PR says:

The billboard, on taxation and migration, was launched in Auckland this afternoon. The same billboard is going up at sites in Wellington, Christchurch, Hamilton, and Tauranga.

“Our first election billboard promotes our intention to introduce an ongoing programme of personal tax cuts. It will be a responsible and a transparent programme,” says Mr Key.

“National will build on Labour’s planned October tax cuts. We will treat those as the first tranche in our tax cut programme. There will be further tax reductions on 1 April 2009, and again on 1 April 2010.

“The billboard also highlights Labour’s failure to stem the tide of people voting with their feet and leaving New Zealand.

“The figures are sky-high. Recent statistics show that more people than ever are leaving. In the year to July, 80,872 people packed their bags and headed overseas for good.

“That’s the highest loss for a year ended July since 1979, and the second highest loss ever. The figure equates to more than 1,500 people per week.

It’s election time alright!

It is disappointing but not totally surprising that National is not making changes to Working for Families in its first term.

There are two aspects to Working for Families which I don’t like. They are:

1. Families with six figure incomes get what is effectively a welfare benefit
2. The overall tax and abatement rate for parents earning above $60,000 is around 89% (39% tax rate, 25% accom supplement abate and 25% WFF abate off memory)

Now the solution to no 1 would normally be to just abate WFF at a faster rate. But that then makes problem no 2 even worse. So the other solution to no 1 is to have it start abateing at a lower level or to reduce the level of payment for everyone.

Now if one pursues the latter possibilities, you want to do it in a way where tax cuts compensate so no one gets a take home income drop. This is not the time to be reducing anyone’s take home income.

I suspect it just got too difficult to try and design such a scheme in Opposition. I actually worked in the early 2000s with Lockwood Smith on some potential tax formulas which could take into account number of children, and hence deliver all assistance just through the tax system. The problem is many families pay negative income tax, so that wasn’t possible. Plus I am not sure IRD would have appreciated having a parabolic equation as part of the tax code

My hope is that if National is elected, they will get officials to look at a way to restructure Working for Families and the tax system, and then go into the 2011 election with that as a policy for which they seek a mandate. The deadweight costs of high income families paying tax which just gets delivered back to themselves as WFF welfare is quite considerable. If we want to grow the economy faster than Australia we do need to reduce this “churn”.