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On Hickey on tax cuts

Written By: - Date published: 7:16 am, April 11th, 2011 - 24 comments
Categories: economy, tax - Tags: ,

Last year Fran O’Sullivan came clean on National’s tax cuts:

But all the elaborate dancing on the head of the proverbial pin does not disguise the raw reality that English’s billion-dollar bet that his Budget tax-go-round would turbo-charge New Zealand’s economic growth has (so far) proved to be a fizzer.

Now Bernard Hickey has weighed in with his verdict: “Simply put, it’s not working”. Leading up to this conclusion, Hickey sets out the clearest explanation that I have seen of the “theory” behind the tax cuts:

Deeper into mire as tax reforms fail

Back in May last year when the Government announced the biggest tax reforms since the mid-1980s there was plenty of hope. The theory looked good. Cutting the top income tax rate from 39 per cent to 33 per cent seemed to kill three birds with one stone.

Good, three birds, let’s have them:

It encouraged those on middle incomes to strive for higher incomes in the knowledge they would keep more of it.

Sorry, that’s bollocks. Those on middle incomes strive for higher incomes because striving for higher incomes is pretty much what most of us do. If you’re chasing a thousand dollar raise the $60 variation between one tax rate and another is chickenfeed. Does the gap between a $610 net increase and $670 really make a difference to anyone’s motivation? A difference that we can measure in the economy? If so, please show me the proof.

It removed the gap between the top income tax rate and the family trust rate, closing down a big loophole.

If that is supposed to be an argument for growth then it’s bollocks again. Removing that gap stimulates the economy how precisely? If tax avoidance is a problem then fix tax avoidance. If you want the family trust rate aligned with the top tax rate then why not raise the family trust rate? Closes the same loophole.

And those on higher incomes could afford to save their extra disposable income, which would boost New Zealand’s savings rate and give capital markets a kick-start.

That’s not obviously bollocks, but it was pretty clear that the option of saving was going to be competing with two (sadly more compelling) other options. First, paying of debt, and second, buying cheap imported shiny plastic junk. Once again, where is the data on this? Historically what do the middle class do with tax cut windfalls? My guess is that savings and productive investment in capital markets isn’t as big an effect as we would like.

In short, I’m very glad that Hickey set out the “theory” behind the income tax cut. But I find it utterly unconvincing. Tax cuts don’t cause growth. Instead, Nationals cuts favour the rich, increasing the socially damaging inequalities in our country, as well as (obviously) starving the government of income.

On the rest of the Nats tax package, Hickey continues:

The increase in the GST rate was designed to help pay for the cut and discourage consumption, therefore encouraging saving.

The changes to the rules on claiming depreciation of buildings for tax purposes and the removal of Loss Attributing Qualifying Companies (LAQCs) as a vehicle for rental property investors were supposed to take some heat out of the property market, and force investors to look at other options.

The company tax cut was supposed to encourage companies to invest here and employ more people. All these would bring down the budget deficit and transform the economy from a consuming and borrowing junkie into an investing and exporting powerhouse.

Simply put, it’s not working.

The shock of the GST increase, on top of rising food and petrol prices, has forced consumers deeper into their spending shells. GST has hurt a swathe of society that could least afford it. Companies are shedding staff. The tax cuts for those on higher salaries has not been saved and invested in job-creating export industries. Instead, it is being geared up with yet more foreign-supplied mortgage debt. …

The Government would say it’s too early to judge the tax package and also point to the effect of the Christchurch quake on the economy. But the early signs aren’t good. It’s worth asking again: what was it all for?

Come on Bernard, your last question was far too easy. What was it all for? To shift wealth from the poor to the rich. It’s a National government. Same as it ever was.

Update (lprent): Bernard says

This final paragraph was cut out of the column I sent to the Herald. Which answered my own question.

“We have a higher budget deficit, higher debt, weaker growth, a weaker current account deficit and higher unemployment. But a certain section of New Zealand is now much richer in both income and wealth through a tax cut and higher property prices. ”

And here is the piece in full undedited technicolor over here

 

24 comments on “On Hickey on tax cuts ”

  1. marsman 1

    Double Dipper Bill English,Double Fail Minister of Finance.

  2. Good post Rob.

    It is time to review the great lie of the 2010 budget, that tax cuts would cause a “macronomic effect” which would stimulate the economy and increase the tax cut.  Not only is the theory bogus but the addition of a line item in the budget to then claim that the tax cuts were fiscally neutral is also a lie.

    12 months down the line it seems that things are getting worse, not better.

    There is now a greater more pressing need to review and IMHO reverse the cuts.

    • Bored 2.1

      It’s the old hoary “trickle down” theory all over again with the same result, give the rich more and they will take even more.

    • Herodotus 2.2

      MS would you also reduce GST back to 12.5%? Because without the 2nd all you are doing is making life more difficult for kiwis to live. Funny thing when we hear of tax changes from an opposuition we never also hear of reversing where the govt increases its take. Rememebr tax creep and the stingy M.Cullen with his tax cuts … oh was that because his new tax that was to eat more into our take home pay than the cuts were to deliver were not supported. 

  3. Colonial Viper 3

    Historically what do the middle class do with tax cut windfalls? My guess is that savings and productive investment in capital markets isn’t as big an effect as we would like.
     

    NAT tax cuts weren’t aimed at the middle class (those earning $50K to $80K p.a.). They were aimed at the top 5% of the population, those on $90K p.a. plus.
     
    And those are people who engage professional investment advice, use brokerages etc.
     
    That tax cut money flows straight into property investments (useless for creating productive enterprise but great for making housing more unaffordable and jacking up mortgage debts) and also to offshore capital markets (because you have to be a sucker to put your money in the NZX, instead of the ASX or Singapore shares).

  4. vto 4

    Hickey is a lightweight and never particularly stimulating. Always a follower of commentary, not a leader of such or a developer of new ideas. Runs a good website so I’ve heard though.
     
    Nonetheless, another tack for the nat coffin. Latest polls seem to suggest further droopage for them is imminent too.

    • sean 4.1

      Okay, so the general consensus here is that taxing less is not the way to kick start the economy, and doesn’t provide incentives for people to work harder.
       
      So how about some suggestions for what should be done?  The last Labour government rode an economy based on a house of cards built from debt, and a bloated public sector creating the illusion of high unemployment.  That approach didn’t work either.
       

      • Sam 4.1.1

        Well said Sean. Hickey makes perfect sense but being a swing voter I voted for the Nats because it was a convincing economic plan. If u dont like it fair enough but once we have American bipartisanship like I just read we’re all screwed.

  5. Steve Withers 5

    The tax cuts, for me are just one more example of the dangers inherent in faith-based economic policy in particular and faith-based policy making generally.  The Nats are genuine in the sense they (except for the cynical ones who know better) really, truly believe these polices will work. That they don’t doesn’t appear to dent their faith. It just means they need to pray …um….try harder. 

    What annoys me is National are thus rendered poor stewards of our publicly owned assets. Instead of enhancing their value, they are degrading their value…with the stated goal of flogging them off at some point – when they can get away with it. Of course they would be flogged off to people who would naturally support National – or parties like National globally. It amounts to little more than theft.

    From climate change to energy to urban development to taxation to public transport….National is headed full speed into the past, the wrong direction…and WASTING billions of our increasingly scarce dollars in doing it.

    On top of that, they are touting NZ as a low-wage economy to overseas investors….revealing their policy of wage parity with Australia to be more manure for the dumb voters who are suckered by the “Nice Mr. Key” and his crew of scammers.

  6. Afewknowthetruth 6

    The problem is not that tax cut theory is bollocks, but that the entire economic system is bollocks.

    1. Create money out of thin air via loans.
    2. Create the money for loans but not the money to meet interest payments, which then come from dilution of money already in the system, i.e. create inflation.
    3. Make the system dependent on perpetual growth when living on a finite planet on which perpetual growth is a mathematical impossibility.
    4. Make the system almost totally dependent on a resource we have very little of and which is now in worldwide decline, i.e. oil.
    5.Make the system entirely dependent on destruction of the habitability of the planet we live on via pollution.

    It’s only  matter of time now. We may have ten years before it all goes kaput. We may have just a few months.

    I’m sure the elites know the system is doomed, which is why they are looting the till quickly and buying gold etc. before it does all go under.

    • Shane Gallagher 6.1

      Dude – chill out and then read some money theory… Money is “trust” – that is all it is in the end. Is trust a finite thing? No, it is nothing tangible. So in essence money is not tangible. 

      Yes we need to move to a sustainable economy so I agree with points 3-5. The current model needs growth to sustain employment and when it experiences a shock then the drivers of growth also drive the recession. We need to change the economic model – and I do not hear anyone on the Labour side even thinking about that let alone formulating policy around the idea. Stuck in the 20th century, just like NACT are stuck in the 19th century.

      Oh and when is Labour going to stop self-destructing?- I just saw the headline on stuff(fox wants you to know).co.nz Just curious?

      • Carol 6.1.1

        Oh and when is Labour going to stop self-destructing?- I just saw the headline on stuff(fox wants you to know).co.nz Just curious?

        And yet Labour & Goff’s percentage went up in the latest Colmar Brunton.  Meanwhile, none of the MSM are headlining the spat within National over the Rodney selection as presented on The Nation this week; religious fundies & South African, violence-disposed, white supremacist refugees from the post-Apartheid era stacking the National selection process with people from their churches – and exposoing friction and factionalism within the Nats.

      • Afewknowthetruth 6.1.2

        Shane.

        Money is more than trust. It is a medium of exchange for resources and energy. The trust aspect is that it will be exchangeable for goods or energy in the future. The people of Argentina found out how trustworthy money was a decade ago. Zimbabwe a little later. Money can very quickly become valueless, as we are seeing when we go shopping these days.

        Since we cannot get resources without energy (without energy nothing happens), it all comes down to money being an accepted medium for the purchase of FUTURE supplies of energy. That becomes quite a problem if the anticipated future supplies do not exist (which they don’t).

        It is interesting that Portugal is now on the same slippery slope as Ireleand and Greece, with the government digging a deeper hole for the people by the day. Unable to repay loans and forced to take out ever bigger loans to keep the economy afloat just a little longer, but having no significant energy supplies  they have to import the energy needed to maintian economic activity at ever higher cost. The whole thing will spiral out of control until a default occurs, at which point the economy will grind to a halt because there won’t be the energy (oil) needed to maintian economic activity. Spain looks like the next major nation to go under: 20% unemployment and a collapsing property market  -the inevitable consequence of bubble economics.  

        That is exactly where the present government is taking NZ, of course, though NZ is not as far down the track as a lot of countries. However,  NZ is spending the last of its international credit worthiness on ridiculous projects like sports arenas, artworks and motorways, and on imports of gas-guzzling vehicles, motorboats etc.     

        One thing has become fvery clear to me. They’ll just keep doing it till they can’t, whether its the government, the local council or ordinary people.

  7. Rich 7

    Something that I’ve not seen pointed out is that the most popular form of “saving” by affluent NZers, rental property <strike>speculation</strike> investment, actually works out as net borrowing.

    If I have $100k and put it on term depo or buy shares with it, that’s savings.

    If I have the same $100k and put it down as a deposit on a $400k rental property, then I’m borrowing $300k and buying an asset with the $100k. Any capital gain is tax free, so it’s highly efficient tax wise. The only downside is the risk that the price will fall and I’ll be in negative equity, but even in that case, the bank will be very unlikely to foreclose.

    • sean 7.1

      Not as simple as you make out Rich…….
       
      If you borrow money to buy shares, yes, they would be CG taxed when you sold them, IF you made a profit.  In theory, your money should be being used as capital to improve the company you invested in.
       
      Buying a property, and not getting CG taxed on it means you keep it for a while – over that while you have to put thousands into it to cover the rates, repairs, maintenance, upgrades (insulation, heating, kitchen, bathroom etc), as well as providing work and income for property managers, lawyers, tradesmen and accountants.  With shares you just sit there and bank the dividends.
       
       

  8. Steve Withers 8

    sean: For NZ, there isn’t really much that can be done in the short term. What would make sense for the long term would be a huge problem in the short term. The solution I see as being in our long term interest would be to incrementally restore tarriffs in sectors seen as foundations for skills and manufacturing capacity that would support future expansion of the same policy into other sectors. The aim would be to put the economy on an energy and technology footing that makes sense locally, on its own terms. To be more self-sufficient. Why? Because the tyranny of distance will become a greater burden as oil prices climb ever higher in the decades ahead. Both for exporting and for importing. Meanwhile, continue exporting what sells well – and food will always sell well given we’re heading for 9 billion people in the near future globally and the Northern Hemisphere seems intent on risking environmental degradation of otherwise arable land.  We must also reserve agricultural land so we don’t have to requisition it back from under single-family dwellings when urban sprawl has become unsustainable. Another reason for broadening our skills base is to provide opportunities and careers for young people so they can stay here. The current economic polices have severely stunted many careers entirely…literally forcing Kiwis with interests in those area to go overseas to do those things – like manufacturing design and engineering – and since those are declining careers here, they can’t come back.

    But to “kick start” the economy in today’s understanding of it would be difficult and wasteful. China makes everything cheaper than we do, except food…and even there they are moving aggressively to compete in dairy – or just buy ours.

    Also difficult because NZ is sold to people everywhere as a lifestyle choice. People immigrate here to enjoy that better lifestyle. The finer weather. The landscape. The beaches and coasts. They don’t want to  work 80 hours a week. We have invested a HUGE amount of money to attract people who want to just…chill. Secondly, we’re far away and the tyranny of distance will become a greater burden as oil prices climb ever higher in the decades ahead. 

    As long as Kiwis continue to buy into the “global economy” myth…which leaves us with a relatively narrowly based commodity-producing economy largely owned by people who don’t live here, things won’t change.  

    Neither Labour nor National are the party to lead NZ into the future we will face….but the Greens may be. At least they see the problems clearly. The two big parties still – for the most part – are “business as usual” when the writing is clearly on the wall for business as usual.

  9. Galeandra 9

    Nice one, Steve. Takes me all the way back to Bill Sutch’s opinions in Colony or Nation and The Responsible Society in NZ. I agreed with them at the time I read them (late 60’s) and much of what goes on globally today  reconfirms my views. Hunkering down as a society in the sense of self-sufficiency is entirely sensible. We don’t want to many rich kiwitwits from Swissbanksville to join our reverse diaspora though. 

  10. Cheers ROB

    This final paragraph was cut out of the column I sent to the Herald. Which answered my own question.

    “We have a higher budget deficit, higher debt, weaker growth, a weaker current account deficit and higher unemployment. But a certain section of New Zealand is now much richer in both income and wealth through a tax cut and higher property prices. ”

    And here is the piece in full undedited technicolor over here…
    http://www.interest.co.nz/opinion/52986/opinion-bernard-hickey-argues-last-years-tax-package-failing-transform-nz-so-far-it-ha

    cheers

    • r0b 10.1

      Hi Bernard – thanks for stopping by.  I’m enjoying your columns a lot.

      Interesting that the Herald cut your final paragraph!

    • sean 10.2

      Its all very well to criticise – how about a bit of work on how you think our country can get out of this?

      • Colonial Viper 10.2.1

        Maybe you should follow your own advice instead of being such an asshole and do a bit of work to answer your own question e.g.
         
        http://www.interest.co.nz/opinion/52908/opinion-bernard-hickey-details-5-solutions-turn-around-nz-incs-slide-penury-through-fo

        • sean 10.2.1.1

          Because Bernard Hickey is [mind your manners sean] for evaluating the merits of tax cuts after they’ve only been in for 6 months.
           
          What school does he come from where economic policies can impact the economy in a few months?  If that was possible economies around the world should all be booming, if all it takes is a few months to completely change things. [Probably the same school as Bill English and John Key, who promised that the package would trigger an “aggressive recovery” and bring us “roaring out of recession”. — r0b]
           
          I’m not going to look up his other articles when his analysis for the tax cuts failure was that more 800k+ properties are being sold in Auckland than previously and that someone at a bank told him more big income earners are over leveraging themselves.
           
          Total clown.

  11. sean 11

    I think its pretty hilarious Bernard Hickey claiming the tax cuts are a failure after only 6 months.  Since when has an economic policy been able to be judged on its merits after only 6 months of being in action, and not even through one tax return cycle yet?
     
    His proof was that more 800k+ properties are being sold in Auckland and because someone told him that high income earners are approaching banks to over leverage themselves because of their 6 cents in the dollar tax windfalls.  Yep – 6 cents in the dollar is enough to make me go running to the bank and ask for more money so I can negatively gear myself.
     
    Thats about the deepest and most complete analysis I’ve ever seen on the state of the economy, thanks Bernard.  Hickey is still smarting that his claim of a 40% across the board collapse in house prices never came to fruition.  He ended up looking like a total clown.  This just reinforces it further.

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