Polity: Labour’s fiscal plan: B+

Written By: - Date published: 2:30 pm, June 25th, 2014 - 20 comments
Categories: Economy, election 2014, labour, tax - Tags:

polity_square_for_lynnReposted from Polity.

I’m a glass half-full kind of a guy, so I want to start by emphasising the parts of  Labour’s just-released fiscal plan that I like.

First, the commitment to paying off government debt during economic good times is laudable. In the past, some of our parties have been too quick to demand that any surplus be hocked off immediately in tax cuts or spending binges. Michael Cullen knew the value of paying off debt, and so does David Parker.

The other “fiscal prudence” commitments are also pragmatic and helpful, capping the size of the new spending allowance, and saving again for the future fiscal timebomb with resumed NZ Super Fund contributions.

Second, the tax rate changes are welcome. Everyone knows Labour’s commitment to a CGT which not only makes the tax system fairer, but more importantly it provides an incentive for investors to put their money into productive sectors of the economy, rather than just speculating on capital values of fixed assets. And it is good to see a new tax rate for top income earners, matched to the trust rate to limit opportunities for avoidance. (More on this below…)

Third, targeting tax avoidance by large multinationals is the right thing to do. I have heard some shrug-happy commentators decree that a global race-to-the-bottom on tax rates is inevitable, and that we just have to accept countries like Ireland pulling in tax revenue that should stay in New Zealand. I don’t agree, and I am really pleased to see Labour gearing up for this fight.

So what did I not like? Two main elements here:

First, the top tax rate is still too low. In Australia the top rate (including medicare levy) is 46.5%. In Canada it is around 50% (depending on the Province). In Ireland it is 41%. UK is 45%. USA is around 50-55% (again depending on the State). Ours is 36% + ACC levy, for around 37%.

I think there is room to increase it further, without risking the apocalyptic consequences predicted by the chicken-littles at the Taxpayers Union and other right-wing fronts. Here’s an example for a top-earner. Consider a person who earns USD300,000 (this is the standard KPMG comparison for top earners). In NZD that is around $350,000. How much tax do they pay overall in various countries? Here’s the answer:

Country Overall tax rate at USD300k income
Ireland 44.1%
UK 42.3%
Canada 40.8%
Australia 37.7%
New Zealand (with Labour’s changes) 32.6%
New Zealand (2014 rates) 30.9%
USA 30.5%

As you can see, top earners pay a lot more in most other comparable countries, before and after Labour’s changes.

Second, I am not convinced about the need to signal second term tax cuts. there is a lot of water to go under the bridge until that point, and I think building up expectations this early could be an error. There may also be competing priorities for the money, especially in the education sector.

Overall I would give this package a B+. The big positives are that it is moving in the right direction and is prudent. Smaller negatives is that there are some half measures and some needless populism.

This sets the stage now for a fascinating election campaign where both large parties have well signalled tax-and-spending plans, with pubic costings for people to pore over. That is a whole lot more productive than watching guys in suits excitedly scream “show me the money” at one another.

20 comments on “Polity: Labour’s fiscal plan: B+ ”

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  1. Tom Gould 1
    25 June 2014 at 2:44 pm

    Top marks to David Parker and his team. Now, where’s National’s fiscal plan?

  2. Ad 2
    25 June 2014 at 2:58 pm

    Just great to see Labour in front of a policy story finally.
    And no, I would not change a thing.

    Some will quibble that the top tax rate, trusts rate and company rate should all be equalised. Fortunately Labour are not dumb enough to fall for making companies less competitive here.

    In fact it sends the right signal: it’s more tax efficient to start up your own company, and go out into the world and make something fresh happen.

    And as for there being lower taxes for the top rate than in other countries, well, welcome back you successful New Zealanders. Door is open, and bring all your savings with you.

  3. bad12 3
    25 June 2014 at 3:30 pm

    Marvelous, simply marvelous, according to Labour it is the ”time-bomb” of aging in our country that sees it having to invoke raising the age of entitlement to superannuation,

    Is this Post correct, Labour have signaled tax cuts for the middle class in a second term of Government???

    The two go hand in glove, raising the age of entitlement to superannuation pays for tax cuts, its a pretty simply piece of riffmatic,

    i really enjoyed David Parker’s setting aside of a financial pile with which to directly attack child poverty, you know the stuff, the child poverty that Labour have waved about endlessly during the current Parliament, including in posts here at the Standard,

    Oh right, there is no such monies being budgeted for…

    • tinfoilhat 3.1
      25 June 2014 at 3:34 pm

      @bad12….yes quite true I sometimes wonder why labour and national don’t give up the pretence and just have done with it and merge.

      • bad12 3.1.1
        25 June 2014 at 3:59 pm

        Although the Post identifies Parker as having signaled ”second term tax cuts” i have yet to see confirmation of this,

        Having said that, IF true and ”second term tax cuts” are the agenda then we all are being gamed by Labour, especially so when we care to consider the elongated cries of 280,000 children living in poverty from the likes of Jacinda and (in a post here at the Standard), Phill Twyford,

        What happened in the Governments books last time we faced this so called financial crisis of an aging population time-bomb and resulting raising of the age of entitlement to superannuation, TAX CUTS, the first in the form of Working For Families, the second in National’s Tax Switch,

        i have been in Taiho mode in my comments opposing the raising of the age of entitlement for a while,(since it was pointed out that population expectations pointed to there being less workers in the economy, despite my pointing out that based on historic data GDP will double in dollar terms in the next 30 years),

        But, IF it is true,(and at present i only have this Post to base my comments upon), and Labour are now proposing ”second term tax cuts” then my opinion says we are being ”Gamed” by Labour, not only over its ”concerns” surrounding child poverty but also its ”claims” of unaffordable superannuation in the future,

        The alternative budget from David Parker to me smacks of something Sir(spit) Roger Douglas would have proudly proposed…

    • Colonial Viper 3.2
      25 June 2014 at 3:44 pm

      bad12 you curmudgeon stop pointing out these inconvenient facts

    • Bearded Git 3.3
      25 June 2014 at 3:53 pm

      More policy to be released on this bad12; give them a chance.

      • bad12 3.3.1
        25 June 2014 at 4:06 pm

        The vows of silence are only dished out by the Mods thanks Bearded Git, if David Parker chooses to release economic policy which has no apparent component which directly attacks child poverty then He is asking for criticism…

      • lurgee 3.3.2
        26 June 2014 at 6:25 am

        “More policy to be released on this bad12; give them a chance.”

        Give ’em six more months, you mean?

  4. ianmac 4
    25 June 2014 at 3:42 pm

    Great points for discussion thanks Polity. (But excluding your ” …..with pubic costings for people to pore over. “

  5. Ennui 5
    25 June 2014 at 3:42 pm

    The devil is in the detail. Two bits I really like:

    1. Targeting to get unemployment down to 4%. Really good BUT full employment is a better goal, plus adding making wages livable.
    2. The Kiwi power plan. great to see a recognition that power is made artificially expensive by the current “market”. As it works as a cartel and avoids any “price discovery” it might as well be regulated.
  6. Colonial Viper 6
    25 June 2014 at 3:46 pm

    First, the commitment to paying off government debt during economic good times is laudable.

    So…where exactly are these “good economic times” to be found for the bottom 80% of this country

    • Colonial Viper 6.1
      25 June 2014 at 5:19 pm

      So as 300,000 Kiwi kids live in poverty day to day, and the retirement age just HAS to go up, we’re going to set aside money to pay back the Goldman Sachs and JP Morgans of the world.

      Shit its a hard compromise.

    • Lanthanide 6.2
      25 June 2014 at 6:17 pm

      Looking at the detail, it’s a bit of a hollow promise.

      They are saying they will get to 3% net crown debt, including the superannuation fund, by 2020-2021. This compares to National’s 2014 budget which puts them at 3.7% net crown debt on the same basis in that time-frame. In otherwords Labour are barely doing anything different than National.

      Of course National has racked up such a massive debt the only way to combat it would be to massively cut down on tax fraud (apparently $7b per year) as well as restructure the tax system radically, the latter of which is politically unpalatable and the former of which they have very modest aims for ($200m per year by 2020).

  7. dave 7
    25 June 2014 at 6:44 pm

    i also really like crack down on tax avoidance and since the farmers don’t pay any tax but use all the services the rest of us pay for its about bloody time they paid there share

  8. Herodotus 8
    25 June 2014 at 8:52 pm

    Michael Cullen knew the value of paying off debt,- really citation required, as data below shows that debt levels slightly increased
    http://www.stats.govt.nz/browse_for_stats/snapshots-of-nz/Measuring-NZ-progress-sustainable-dev-%20approach/sustainable-development/economic-resilience.aspx
    http://www.rbnz.govt.nz/statistics/discontinued/
    1999 NZ Govt Debt $17.384b
    2008 Dec $18.86b. It marginally Increased !!!!
    “but more importantly it provides an incentive for investors to put their money into productive sectors of the economy, rather than just speculating on capital values of fixed assets” So if I had the available funds and invested into a business I pay …. 28% tax on the profits and if I invest into property I pay …. 15% CTG so how can being on a lower tax rate motivate me into changing any investment decisions. Especially given that should property inflation cause the RB to consider increasing interest rates I will be instead subsidised with rates NOT increasing but Kiwisaver rates being increased instead – “Instead of paying more interest on your mortgage, a similar amount of extra savings would go into your KiwiSaver,” Parker told an Auckland breakfast.
    http://www.nbr.co.nz/article/labour-use-kiwisaver-instead-interest-rates-drop-dollar-bd-155356
    perhaps a B- would be a more appropriate grade.

    • Lanthanide 8.1
      25 June 2014 at 9:16 pm

      “Michael Cullen knew the value of paying off debt,- really citation required, as data below shows that debt levels slightly increased”

      The point is, Cullen used a lot of the ‘surplusses’ to pay back crown debt, instead of spending it or giving tax cuts, as he was hounded by National and latterly the media to do.

      If he hadn’t, we would have been up shit creek during the GFC and of course the Canterbury earthquakes.

      That’s all the proof you need – that he spent a significant portion of each budget ‘surplus’ on debt reduction.

  9. Jepenseque 9
    26 June 2014 at 6:17 am

    Hi, The proposed capital gains tax is projected to be earning $1.035B by fy20/21. What assumptions for asset price inflation is used to reach these numbers? That implies circa 6.9b in realised taxable cap gains in that year. Particularly interested in what this implies for house price inflation.

    Labours release says modelled by berl but cant find it anywhere. Cheers

  10. Sable 10
    26 June 2014 at 10:59 am

    Would be nice to see something emphatic from Labour on the TPPA and dismantling the spy laws/apparatus. Fiscal plan is a little bland but could be worse….