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…