Polity: Labour’s fiscal plan: B+

• notices and features
• 10 years ago
• Categories: Economy, election 2014, labour, tax
• Tags: polity

Reposted 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:

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.