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?
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.
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
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.
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:
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.
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