Labour needs to be firm on tax

• Eddie
• 14 years ago
• Categories: tax

Marty did some really excellent work last week on the Tax Working Group’s proposed tax reforms last week, which Zetetic summed up as ‘tax cuts for tax cheats’. I think Marty convincingly showed that slashing the top tax rates with all the benefits going to the rich and paying for it by putting the cost on poor and middle class is bad policy. I want to talk about why it would be awful politics.

Let’s check out that graphic Marty made again:

Count that up: 3.2 million taxpayers definitely lose out. 250,000 probably benefit. They say that in politics you can fool most of the people some of the time but I find it hard to believe that you can fool 93% of them into paying for tax cuts for the richest 7%.

Worse, the mechanism of imposing the costs on the poor and middle class is very visible – higher rents, higher prices at the shops – while experience shows that people don’t tend to notice changes in net income because of lower income tax unless the cuts are very large (how many of you noticed Labour or National’s cuts?).

That’s a recipe for major voter discontent. All they need is some way to express it. And that’s where Labour comes in.

Labour needs to come out and say what it would do, and that is:

• drop the idea of increasing GST – its regressive and, after the compensation to beneficiaries and superannuitants, it raises just $200 million in extra revenue.
• keep the proposed changes to property tax – a combination of measures on property would raise $2 billion. It would lower house prices, discourage housing over-investment, and would lift rents.
• use the $2 billion to cut income tax at the bottom end – you could make a tax-free bracket of $5,000, which comes out at a $625 a year tax cut for everyone.

Now, which are people going to support? A wealth grab for the top 7% or an equal tax cut for everybody while easing the investor pressure on house prices that has driven them out of the reach of many Kiwi families?

At the end of the day, I don’t think National is going to be going through with any large reforms. Any changes announced in the May Budget won’t come in till October 1 at the earliest or, more likely, April 1 next year. And, say what you will about John Key, he’s got a good enough sense of self-preservation not to put up GST and rents in election year. But, either way, Labour can make good ground by laying out an alternative set of reforms that benefit everyone and aren’t just ‘tax cuts for tax cheats’.