Nats need to follow Labour’s lead on GST

Written By: - Date published: 12:43 pm, February 11th, 2010 - 9 comments
Categories: labour, tax - Tags:

“Last GST hike had little impact, say tax experts” – Herald

The article is about inflation but it is also true of growth. There is no evidence that increasing GST from 10% to 12.5% and cutting income taxes boosted growth. In fact, the country entered a long period of stagnation and recession.

And why would we expect small changes in marginal tax rates to affect growth? The Right seems to think that if there’s less tax on income people will say ‘whoopee I’ll work more’. In reality, most people don’t have flexibility over their work hours and incomes. Whoever heard of a person saying ‘If my marginal tax rate was 30% I would work more but at 33% I can’t be arsed’ anyway?

So we shouldn’t expect putting up GST and cutting income tax to have any appreciable effect on growth, but it will have effects. For a low-income person it’s like taking one dollar in every fifty away from them. That matters when you’re on a tight budget. Which is why compensation is so important. When Labour introduced GST they cut all income tax rates. And, contrary to what Key claimed in the House yesterday),when they increased it to 12.5% they cut all income tax rates, including the bottom one from 19.5% to 15%.

I don’t support a lot of what the Fourth Labour Government did but it was a good move to take tax off work and onto consumption, and they didn’t leave the poor and middle income earners out of pocket in doing so. I don’t see the same commitment from the Key Government.

So two conclusions:

1) don’t expect shifting a little of the tax burden off labour and onto consumption to create faster growth, it’s not going to happen. Fiddling with the margins of the tax system is not the great leap forward to catching Australia.

2) if there is going to be an increase in GST, the money will have to be directed firstly at cutting income tax for low and middle incomes. Anything else is a money grab for the rich.

9 comments on “Nats need to follow Labour’s lead on GST ”

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  1. Lanthanide 1
    11 February 2010 at 1:00 pm

    It was funny, on Wednesday around 7 am they had an interview on National radio with Key, where he pretty much said that actually raising GST isn’t regressive, because a person on a higher income has more money to spend and therefore spends more on GST.

    Later in the morning they had two tax experts who pretty much rubbished his spin.

    • felix 1.1
      11 February 2010 at 1:55 pm

      Wow. Sounds like wee Johnny hasn’t quite grasped what “regressive” means, don’t it?

      Or he just hopes no-one else has.

      • Lanthanide 1.1.1
        11 February 2010 at 2:02 pm

        He understands it perfectly, he’s trying to bamboozle those in the bottom 60% by making it seem like he personally is going to be more affected by it than they are.

  2. Bored 2
    11 February 2010 at 1:12 pm

    Just read the Fitzsimons valedictory, she has a grip on reality that seems to pass most people by. Her point about continuous growth in a finite system is right on the money. We can return to growth economics, it will work until we wreck the environment. When there is nothing left the “growth” economy wont shrink, it will plummet. It wont have anything left to sustain us. Thats fine for anybody with short term greed as their driver and agenda, like late middle aged grey suits from Orakei Drive. They will be dead by then, having over consumed what they could not take with them.

    As to unemployment, it is never going to go away, it is a cyclical result of the boom bust nature of a materialist economy, capitalist or socialist. Thats where the thinking has to change.

  3. Richard 3
    11 February 2010 at 1:37 pm

    Whoever heard of a person saying ‘If my marginal tax rate was 30% I would work more but at 33% I can’t be arsed’ anyway?

    I agree this seems to be a totally ridiculous idea.

    In fact, *if* anyone truly did analyze their work in this manner, it would seem just as likely that they would say:

    “I have enough to live on at a marginal tax rate of 33%, if the tax rate drops to 30%, then I can maintain the same standard of living by working a bit less.”

    • Bright Red 3.1
      11 February 2010 at 2:11 pm

      exactly.

      Conventional economic theory is that the labour supply curve is backward bending – labour supplied increases with income per hour up to a point, where the value of getting more money is outweighed by the value of leisure time, so they reduce the amount they work while retaining the same income.

      http://en.wikipedia.org/wiki/Backward_bending_supply_curve_of_labour

      The right always assumes that the individual is always at a point on labour supply curve where the curve is outward

  4. Jenny 4
    11 February 2010 at 6:42 pm

    It seems clear that the FTT (or “Robin Hood Tax”) is an idea whose
    time has come.

    http://robinhoodtax.org.uk/

  5. Draco T Bastard 5
    11 February 2010 at 11:40 pm

    Gordon Campell has a good write up on the directions JK and NACT have taken in regards to taxes and mining.

    There was more to it yesterday than tax though. There seemed to be three main components to John Key’s speech : (a) tax cuts largely paid for by a hike in GST (b) mining in national parks and on conservation land, while building more roads. (c) giving firms easier access to the r&d from Crown Research Institutes, so that business can continue to get the taxpayer to pick up the tab for the research that keeps them competitive. After all, corporate welfare is always such a blessed thing its only social welfare that corrodes enterprise and ambition.

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