Polity: English lies on impact of tax switch

Written By: - Date published: 9:22 am, January 15th, 2014 - 15 comments
Categories: bill english, gst, national, national/act government, poverty, same old national, tax - Tags: ,

polity_square_for_lynnRob Salmond at Polity has this post out on the effect of the 2010 tax cuts and the lies about fiscal neutrality that Bill English said then and has been repeating ever since.

Bill English recently heralded his tax switch as making net tax more progressive. He lied. It actually made net tax at least $500 million more regressive.

In October last year, here is what Bill English said about the results of his 2010 tax switch of cutting income taxes and raising GST:

Lower income households are paying a smaller proportion of net income tax than they did in 2008, indicating that the tax system has become more progressive since the Government’s tax changes in 2010, Finance Minister Bill English says.

“This should contribute to improvements in income equality in New Zealand, contrary to the Opposition’s completely false claims that lower income households were disadvantaged by the tax changes,” he says.

It was great to see Bill English saying a more progressive tax system is a good thing. I agree with him.

But I wasn’t convinced his numbers stacked up. In particular I was worried about what shenanigans could be lurking behind the term “net income tax”. Why specify income tax? Why not net tax overall, to account for the Budget 2010 changes in GST, too?

Getting hold of the numbers

Bill Engish has a history of massaging net tax numbers beyond credibility, and I have form in finding him out, both on blogs and in print. So naturally I requested the Treasury advice under the OIA. After some English-orchestrated delays, the documents finally came back to me the Thursday before Christmas.1

Here are the three most eye opening parts of the Treasury’s advice:

This note responds to a request for analysis of the redistributive impact of the Budget 2010 tax changes. Specifically, we have been asked to compare profiles of income tax paid, transfers received, and net tax paid (income tax minus transfers) by household income, pre and post 2010.

This shows that the decision to look at income tax only, and not GST, came from the those tasking Treasury (ie. Bill English), and not from Treasury officials.

However, it is difficult to determine the extent to which these changes in the distribution of net [income] tax paid were caused by the Budget 2010 tax policy changes, as opposed to other factors.

Indeed. For example, tens of thousands of low income people have lost their jobs and now have to take an unemployment benefit because of National’s jobless recovery. (Don’t need to be a rocket scientist to come up with that alternative explanation.) That means those people pay less net tax than they did when they had a job, because now they receive more in transfers. Bill English takes this as a cause for net tax celebrations.

It is also important to note that this distributional analysis does not incorporate GST, which was an important part of the Budget 2010 tax policy changes.

Which shows that the Treasury went out of its way to warn Minister English that the analysis in the paper he ordered up was half-baked and could be inaccurate. But Minister English did not listen.

Accounting for GST

GST is a huge part of the Budget 2010 changes, and a huge part of the tax people pay. New Zealand individuals paid around $46 billion in all taxes in 2011/12, and around $15 billion of that was GST. Doing net tax calculations while excluding GST is like doing calorie counts while excluding nibbles, dessert, and drinks.

Treasury did not account for the impact of GST because Bill English told them not to. But I can, and I have. Here are the results. Some highlights:2

  • English overstates the impact on top earners by a factor of eleven. Yes, eleven. He thinks these households pay 6.7% more of the net tax than before; in fact they pay only 0.6% more.
  • Across the whole income range, English overestimates the distributional impact since 2010 by a factor of between three and four. He says households earning under $70,000 pay 26% less of the net tax than before; while those earning over $70,000 pay 26% more of it. In fact, the difference is only 7%.
  • English says the 117,000 households earning $30,000 to $40,000 take $238 million more in transfers than they pay in tax; in fact those households pay $360 million in overall net taxes than they receive in transfers.

This is embarrassing for a Finance Minister. Armed with an entire Treasury to help get his sums right, he still makes $600 million errors over here, and factor-of-eleven overstatements over there.

Correlation and causation

So, is the tax system more progressive because of the tax switch, or not? This is an issue Treasury raised in their advice to English. And the truth is that the Budget 2010 changes did not have a positive redistributional impact in New Zealand. In fact, New Zealand’s tax-and-transfer system has become more progressive despite Budget 2010’s tax changes, not because of them. Here’s why:

  • The 7% drop in overall net taxes paid by households earning under $70,000 represents around $1.8 billion in total.
  • The Treasury’s advice to English shows that expenditure on benefits for this under $70,000 group grew by $2.3 billion over the period in question.3
  • This means all of the $1.8 billion in net tax savings for low income households, and another $500 million besides, is caused by more of them being stuck on benefits.

Once more for emphasis: New Zealand’s tax-and-transfer system is more progressive now than in 2008because more people are receiving transfers. Not because of the tax switch. For obvious reasons, that is no victory at all. And this answer about causation was literally staring English in the face in the Treasury’s advice, and still he chose to ignore it.

In fact, the changes to the tax system have the effect of making the system less progressive to the tune of $500 million. To the best of our ability to see counterfactuals, if the tax system had stayed unchanged in 2010 then the tax-and-transfer system would today be $500 million more progressive than it actually is.

This shows that National’s tax switch was a failure, even according to Bill English’s own data and Bill English’s own yardstick. He should be ashamed mainly of the regressive impact of his tax policy, and also of the shoddy work he forced his Treasury to perform.

Bill English serially misleads the public on tax, because he does not want New Zealanders to know the truth – that his government enriches its friends at the expense of everyone else.

  • 1. Why the delay in answering my OIA? Well, I requested the information in October from two organisations, Minister English’s office and the Treasury itself. English then took 20 days to transfer my request of his office to go to the Treasury instead, while Treasury gave itself an extension on its OIA to consult-more-than-usual with English’s office. That way, the information conveniently came to my just as everyone was turning out the lights for Christmas. All of which goes to show that Bill English knew he had made some embarrassing errors in these calculations, and wanted to hide it all from the public.
  • 2. I used the decile-based estimates of “GST exposure” from the government’s own Tax Working Group to do this analysis, assigning income bands to exposure levels based on which decile they fall in. I was forced to make some simplifying assumptions, including on the median income in the open-ended top income bracket, because unlike English I did not have the full resources of a government department helping me. I do not think these assumptions drive the results.
  • 3. Most of this is due to unemployment going persistently up under National.

15 comments on “Polity: English lies on impact of tax switch”

  1. Lanthanide 1

    “This means all of the $1.8 billion in net tax savings for low income households, and another $500 million besides, is caused by more of them being stuck on benefits.”

    I don’t follow this conclusion.

    • One Anonymous Knucklehead 1.1

      $2.3B – $1.8B = $0.5B = $500M

    • karol 1.2

      The “net tax savings” are about low income people paying less tax. Many have lost their jobs, lowering the amount of tax they pay. Therefore they’re counted as a saving from paying less tax as a result of the tax switch – actually, they are paying less tax because of a drop in income resulting from losing jobs and becoming dependent on benefits.

      • You_Fool 1.2.1

        better yet for Mr English, because they are receiving benefits they count as reducing the net tax twice, first by not having to pay as much, and second by receiving money from the govt. Win-Win for Mr English! And you thought the high unemployment was a bad thing, it makes the tax system more progressive!

    • It’s a beautiful example of weaselry as a high art. Goes like this:

      if you lose your job, you end up on a benefit and don’t pay so much income tax;

      if a great many people lose their jobs and don’t pay so much income tax (because they’re now eking out a living from the unemployment benefit), the overall share of the income tax take that’s being paid by lower-income earners goes down;

      which means the Minister of Finance can put out a press release saying that his taxation system is more progressive because lower-income earners are now paying a lower share of the income tax the govt receives;

      which makes the Minister of Finance a lying weasel.

    • Will@Welly 1.4

      You also need to take into account the number of people who have had their hours reduced during the financial crisis, thereby reducing their income and the amount of tax they pay.
      What you also find is that when “old jobs that disappeared” are reactivated, they tend to come back on stream at the same or a lesser rate than they were previously. No adjustment is ever made for inflation.

  2. Tracey 2

    All those numbers… people like chris infused and bm will blank it. Say no one cares and then excuse it as a lie cos they dont understand it.

    • infused 2.1

      Which is pretty much what you’ve done. Congrats.

      I only comment on issues I actually have an interest in. Mostly tech related posts.

      This isn’t one of them.

  3. PG 3

    “Most of [the $2.3b increase in benefits to households earning less than $70,000] is due to unemployment going persistently up under National.”

    Rubbish. On comparing Notes 5 from the Crown Financial Statements at 30 June 2013 & 30 June 2010:

    – total transfers increased by $1.8b

    – transfers clearly not related to individuals being out of work (NZ super, family tax credits & student allowances) increased by $1.77b

    – transfers definitely / potentially related to individuals being out of work (unemployment benefit, sickness benefit, invalids benefit, disability benefit & ‘other social assistance benefits’) increased by just $41m.

    • TRACEY 3.1

      I confess that numbers aren’t my thing. Are you saying English’s assertions were correct?

  4. red blooded 4

    An engrossing discussion (bad pun – sorry). Thorough and well argued. Now, how’s this thinking going to be publicised in the wider world? Has this info been provided to opposition parties? I can see a great series of Ministerial questions arising from this.

  5. Stuart Munro 5

    I’d be interested to see a broader view of government finacial performance, because I have a feeling that the tax figures alone produce a misleading impression, and that Bill English has clearly exerted himself to maximise this effect.

    But there are other government mediated costs than tax, and also other sources of government income. Speeding fines, user charges, and so on have proliferated over the last three decades and represent a small but increasing proportion of cost of living.

    And the government exercise of sovereign currency privileges, as in the case of paying off SCF creditors or of creating student loans – are these exercised impartially?

    I might be less critical if his economic management anywhere approached competence, but I’m compelled to notice that on top on these punitive and regressive tax changes, the Gnat hydra under English has consistently failed to achieve even moderate growth. This represents a shameful level of incompetence, and replacing him with someone who knows what they are doing is frankly an urgent national priority.

  6. TRACEY 6

    Funny how all those squealing about brown must go are absent from this thread where, if true, the MOF is proven to be a liar about the impact his policies have had on the economy….

    and funny how all those who said brown mustnt go cos it was sex and didnt affect his job also dont comment on this behaviour which clearly does affect the second most powerful person in NZ’s, job.

    does this suggest some economic illiteracy which makes both supporters and detractors unable to comment due to lack of understanding, which doesn’t usually stop some?

  7. dave 7

    bullshit bill strikes again

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