Kiwiblog

The Herald editorial fails the most basic economics test. They say:

In these circumstances, the Government ought to be considering a tax levy for a limited term. The Greens suggest 1.5 per cent on annual income above $48,000 and 3 per cent above $70,000. All middle and higher income earners would feel they were contributing effectively. It is money they might otherwise be saving in the present climate. Put to the rebuilding of Christchurch, a levy could strengthen the faltering recovery of the whole economy over the next year or two.

A responsible government would not turn it down.

First of all, any so called temporary levy will inevitably be about as temporary as the Maori seats, or Muldoon’s temporary surcharge.

But now let’s dissect the Herald’s economci argument. They say a tax increase will strengthen the faltering economy. It will not. In fact it will do the opposite by sucking money out of taxpayers, meaning it can’t be spent.

The Herald suggests the tax increase would go to the rebuilding of Christchurch but it doesn’t work like that. Christchurch is going to be rebuilt regardless of any extra tax.

We’ve just avoided a double dip recession. Over time the rebuilding of Christchurch will boost economic growth – but this will not start for probably a year and stretch on for many years. In the meantime the loss of production from the earthquake will probably push economic growth negative, just as we narrowly avoided a double dip recession. We will never fully recover that loss of economic output, so I expect the economy to remain pretty weak until 2012/13. So again, it would be economic stupidity to increase taxes as we recover from the earthquake.

Bill Ralston has the same suspicions as me:

I have the horrible feeling that Labour, had it still been in government, would have cancelled the tax cuts and thrashed the exhausted middle class for more revenue while continuing to spend big on its pet policies and boosting the bureaucracy to cope the effects of a recession. That would be a sure recipe for disaster.

2011 will be an interesting challenge for Labour. We will still be running deficits, so either Labour will have to promise increased debt or tax increases if it wants to spend more.

Smart readers will have noted Labour have been very careful not to rule out tax increases after the election. They have said they will not reverse their current tax cuts, but they have left open introducing new taxes, or a new “rich rich prick” tax rate of 45c for those who earn over $100,000.

The Herald reports that Labour have basically already spent their contingency spending money for the next three years. This means that if Labour is re-elected they will either have to go through three years of making no spending promises or they will put up taxes.

Yesterday Dr Cullen said strong leadership was needed to ensure the overseas crisis did not lead to a “depression” in New Zealand.

“Labour is simply not prepared to let that happen,” Dr Cullen said.

“We will bring forward spending on infrastructure to create real jobs and build the potential for future growth … now is not the time to slash spending as our opponents are proposing.”

The hypocrisy of these statements are massive. Up until a few weeks ago Dr Cullen was attacking National’s plans for increased infrastructure spending. Cullen and Clark said it was madness and lunacy. They have done the mother of all u-turns.

But he also gets it wrong about “slashing spending”. Yes National will look to eleiminate some low quality spending – but the major change it is making is reducing the amount of money going into KiwiSaver in the short term. Now Dr Cullen is saying that in a recession you need increased activity to help you out of it – well that is exactly what National are doign by temporarily diverting some money from savings into spending and tax cuts – both of which help minimise a recession.

So by Dr Cullen’s own logic, National’s policies will provide a greater short-term stimulus to the economy. You save more in the good times and you save less and spend more in the tight times – exactly what National is doing. Cullen just can not admit that his 4%/4% KiwiSaver policy is nno longer suitable for today’s economic climate – it was a policy for when we had massive surpluses.

Labour have left the economy with a projected decade of deficits and the latest economic news, coupled with Labour’s massive spending promises, could push the country into a structural deficit.

Top tax expert John Shewan has looked at what might have to be done to break out of Labour’s decade of deficits. He says GST might need to go from 12.5% to 15.0% and the top tax rate from 39% to 45%.

Is this what Labour has planned for its December mini-budget?

The Herald starts to ask the obvious questions about Labour’s planned mini-Bduget for December – how much will it cost?

Labour will not reveal how much more taxpayers money they will spend. Labour won’t reveal how much more debt they will incur. And Labour won’t reveal how much they will increase taxes by to pay for it.

You could understand an Opposition newly elected to Office doing a mini-Budget once it finds out how bad the books are. But Labour is in Government – it has daily updates from Treasury and the Reserve Bank if necessary.

Labour had previously accused National of three things

1. A secret agenda
2. Uncosted policies
3. Increasing debt (Clark said it was “mind-boggling stupid” to do so)

We now know that it is in fact Labour doing all these things. They are refusing to give details of some of their spending plans or tax increases (or rule them out), saying we will tell you after the election.

They are making promises (such as superannuation) that have not been costed (the media are having to do it for them).

They are announcing spending bribes everywhere, despite a projected decade of deficits. EIther debt will skyrocket or they will have to put tax rates up. They are incapable of trimming existing Government spending.

Vernon Small from the Dom Post blogs his speculation that Dr Cullen may do what he did in 1999, and bring in a new top tax rate, to help pay for tax cuts elsewhere.

How does he stop the highest paid getting the most? Well a threshold movement is better than a rate cut in that regard. Given that all those above any new threshold will get the maximum benefit, it is still limited. For example, if you lift the top threshold from $60,000 to $70,000 then everyone earning more than $70,000 gets 6c X $10,000 a year = $600. Between $60K and $70k they get lesser amounts. Compare that with a cut to the top rate of 39c where the more you earn the more you benefit.

If you want to cut the rates, then the only ways to limit that effect is to cut a rate further down the progressive scale – either the 33c rate that starts at $38,000 or the 21c (effective) rate below that threshold.

Or – and here’s a bit of speculation to send a chill through the blood of the very well paid. Remember that comment about redistribution and the imposition of the 39c rate in 1999?

What if he introduced a new top rate, to apply after the election of course, say 40c or 42c on income above a new threshold? A threshold of $150,000 might do it, and would annoy precious few voters. That would cap the benefit and even start to claw some tax revenue back. National could fulminate, but might look like protecting “its rich mates” – a trap Cullen is constantly baiting for John Key and Bill English.

There are those who would argue the top personal and company rates should be aligned, but with business tax at 30c and two personal rates higher than that now, the roof hasn’t fallen in. So “why not be hung for a sheep as a lamb?” as my mother would say.

This certainly can not be ruled out. Cullen hates rich pricks, and the thought of taxing them even more is not impossible. He did the same in 1999.

Cullen knows he will probably never get their votes, so you do some wedge politics and take more off the “rich pricks” so you can reduce tax for people who might still vote for you.