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Possible $1.5b in tax cuts in 2008

Written By: - Date published: 2:55 pm, December 18th, 2007 - 43 comments
Categories: tax - Tags: , ,

From Stuff:

Cullen said “uncertainties” still existed, but Treasury had “significantly” lifted its revenue forecasts which meant the $1.5b in tax cuts in addition to more spending could be factored in to the budget.

“This figure is very soft as no decisions have been taken on the timing, size, shape or scope of our personal tax cuts,” Cullen said.

Cullen has also reemphasised that:

“I can say, however, that the Labour-led government’s personal tax cuts will meet the four tests that I have previously outlined. We will cut personal taxes:

– Without borrowing to do so
– Without cutting services
– Without exacerbating inflationary pressures
– Without creating greater inequalities in our society”

Cullen’s release is here.

43 comments on “Possible $1.5b in tax cuts in 2008 ”

  1. dave 1

    Heg guys have you seen the polls lately? Key is preferred PM

  2. Tane 2

    Thanks Dave, there’s a thread for that conversation over here:

    Polls

  3. Kimble 3

    Without borrowing to do so – National wouldnt have, the truth nobody has ever suggested borrowing to fund tax cuts

    Without cutting services – National wouldnt have but they would have worked to increase the efficiency of those services so that the money is spent better, something labour obviously doesnt care about, all that matters to them is the amount of money that is spent

    Without exacerbating inflationary pressures – they have as much chance as National would have in this endeavour

    Without creating greater inequalities in our society – Note they didnt say reducing inequalities.

  4. I agree with Kimble that both can hold with tax cuts. In regards to the other two points, I have a couple of questions I would like to be enlightened about.

    “”¢ Without exacerbating inflationary pressures
    “¢ Without creating greater inequalities in our society”

    What do we define as inequalities? How do we achieve both of these by only using tax cuts, or do we require a change in the composition of spending as well?

  5. Sam Dixon 5

    Matt Nolan –
    “”¢ Without creating greater inequalities in our society”

    What do we define as inequalities?”

    Some people have heaps more than others.

    If you cut tax for rich people more than poor people you will increase inequality.

    “How do we achieve both of these by only using tax cuts, or do we require a change in the composition of spending as well?”
    you misconstrue Cullen’s points, he’s not tlaking aobut ‘solving’ inflation or inequality, he’s talking aobut not making htem worse with tax cuts.

  6. Billy 6

    Fuck. United are backtrackingon support of the EFB.

  7. Tane 7

    Without borrowing to do so – National wouldnt have, the truth nobody has ever suggested borrowing to fund tax cuts

    Kevin List: How much will we be borrowing, in a hypothetical universe?

    John Key: We did some calculations prior to the election. You may remember we originally had said we thought over the term of the first, or over the period of the first term of the National Government, we were likely to borrow $3 billion more than what the current projections had been for the Labour Government.

    http://www.scoop.co.nz/stories/HL0606/S00216.htm

  8. “If you cut tax for rich people more than poor people you will increase inequality.”

    Maybe, it really depends on the incidence of tax. The more inelastic demand is for a certain type of labour, then the less of the tax cut that labour group ultimately receives. As demand for highly skilled – highly paid labour is highly inelastic, a greater tax cut for these groups may not lead to higher income groups having a larger increase in income.

    Furthermore, what do we mean when we say cutting taxes more for the rich than the poor. If we cut everyones tax liability by 30%, the rich would get more than the poor (if the incidence of tax was equal between groups), by virtue of their higher income.

    “you misconstrue Cullen’s points, he’s not tlaking aobut ‘solving’ inflation or inequality”

    Fair point, sorry about that. However, if we were define inequality as ‘giving more to the rich than the poor’ then it seems like a difficult task to achieve that and not cause inflationary pressures. This comes from the fact that we keep inequality constant in this case by increasing the progressivity of the tax system (or in a broader sense of inequality we could leave the tax system just as progressive). However, this will increase effective marginal tax rates, reducing firms labour supply.

    Given that people will try to spend some part of their tax cut, and given that labour supply and thereby output have fallen, we will have inflation. As a result, there will by definition be a trade-off between these goals.

    If this is the case, then we cannot have tax cuts under those conditions.

  9. Pascal's bookie 9

    I genuinely don’t understand this ‘not borrowing to fund tax’ cut stuff.

    If a gov’t runs a deficit and cuts taxes such that otherwise there would not have been a deficit, then surely, in any sense other than the semantic they are borrowing money to fund a tax cut.

    I realise that you can put the borrowing in a seperate box marked ‘infrastructure’ or ‘kitten purchases’ or whatever and say that the deficit springs from that, but the fact remains that you have cut taxes now, and borrowed money for spending that will have to be repaid by taxes in the future. eg GWBush.

  10. Pascal’s bookie (great name by the way), I think the point is that we have a structural surplus, which means that in the long-run tax revenue will exceed spending. As a result, we can cut taxes by the size of that structural surplus, and we will not have to ‘borrow’ in order to fund it.

    You are exactly right that tax cuts beyond this, without a corresponding reduction in permanent spending, would require tax increases in the future. However, a tax cut that is the size of the structural surplus is entirely consistent with no long-term borrowing.

  11. Kimble 11

    Tane, was he talking about borrowing to pay for tax cuts?

    Nope, you dirty liar.

    “The postcard says that National would borrow wisely to pay for roading and infrastructure.”

    This is the borrowing he was refering to. Borrowing to build infrastructure is perfectly rational.

  12. “This is the borrowing he was refering to. Borrowing to build infrastructure is perfectly rational.”

    I agree with Kimble. Infrastructure is an investment that benefits future generations as well as the current one. It is fairer to borrow and spread the liability for the construction of these assets over the lifetime of the asset, then to force the current generation to pay the whole cost of the investment.

  13. Matthew Pilott 13

    Matt Nolan,

    If tax levels remained the same, there would be more money around for infrastructure in the first place. Kimble is trying to distort it by saying that on one hand, we won’t borrow for tax cuts, but yes we will borrow to spend elsewhere. This is, of course, saying National wants six, not half a dozen.

    In essence – don’t cut taxes and you don’t need to borrow! Key’s spin was, I thought, a really transparent effort to muddy the waters. Seems to have worked on some…

    Now, I like your point regarding infrastructure. I had not thought of it in those terms before. However (I guess this is where I disagree :)), the cost of borrowing is always greater than that of funding a project outright. It could be construed as burdening future generations with debts to pay for what we need now – those generations will have their own needs to fund, which will only be achievable if we’ve paid our share…

    If NZ can keep up with requirements, there wouldn’t need to be a borrowing cost at all, which benefits everyone, apart from the rich private backers (who would take their cut via tolls or interest payments).

  14. Pascal's bookie 14

    Thanks Matt.

    I understand your point about spreading the cost of the investment over the lifetime of the asset but worry about the moral hazard involved in having politicians making the argument.

    Afterall they are after the votes now, the electorate will have moved on in 5 years (let alone 30) and it is difficult to gaurantee that the loans will always be affordable over their lifetime. Maybe ‘affordable’ is too strong a word but I hope you catch my drift. The pollies have an incentive to spend lots now, and pay for most of it later, whether or not the investment is good will not be known till later, when those pollies are gone baby gone. The electorate has a tendency to fall for it.

  15. Kimble 15

    No Matthew you are once again wrong.

    There are very good arguments for funding infrastructure with debt. Dont blame me for your lack of understanding.

    The fact remains that Key wasnt saying that his government would borrow to turn around immediately and pay it out as tax cuts. Quite frankly it is retarded to even suggest that he did.

    “the cost of borrowing is always greater than that of funding a project outright”

    It depends on what else that money could be used for. If you can invest and get a rate of 10%, why not borrow at 7.5% and get a free 2.5%?

    Pascal, it sounds as if you are talking about climate change measures. Plenty of moral hazard there with politicians pandering for votes now, promising all sorts of reductions in CO2, but having the day of reckoning be well past their use by date.

  16. Pascal's bookie 16

    Except Kimble, in the climate change debate, the pollies are asking that voters face higher costs now for possible future benefits/lower costs. So it’s exactly the opposite. Apart from that, good analogy.

  17. Kimble 17

    Moral hazard is moral hazard. The quibble you have raised over timing changes nothing. Votes now, comeupance later. But hey, you go ahead and keep grasping at straws.

  18. Pascal's bookie 18

    So even accepting your logic, which I don’t for reasons that are obvious, it wasn’t a bad analogy but rather an obvious tu quoque position. awesome.

    Lord, grant me the strength to bear the idiots that can’t be helped, the patience to help those that can, and the wisdom to know the difference. Amen.

  19. Lampie 19

    There are very good arguments for funding infrastructure with debt. Dont blame me for your lack of understanding

    Why borrow if you have the cash?

  20. Santi 20

    “Tax cuts are a path to inequality. They are the promises of a visionless and intellectually bankrupt people” said Helen Clark at the 2000 Labour Party conference.

    Wow. How times have changed! It goes to show that socialist Labour will do whatever it takes to stay in power.

    Corrupt to the bone, these people are contortionists of the lowest order.

  21. Lampie 21

    What year is it?

  22. Kimble 22

    “Why borrow if you have the cash?”

    Because paying for infrastructure isn’t like buying a house, Lampie.

    You will find a better explanation elsewhere than I can give at the moment, just do a little digging.

    The point is, Tane once again relies on misquoting Key in order to find anything objectionable to say about the man.

  23. Lampie 23

    No, it’s not like buying a house but no need to borrow if you budget and still make a surplus is there? If you borrow for other things and still give tax cuts, it really is defeating the purpose i.e. living beyound your means. Only real winner is a short term benefit to the tax payer. If you can fund your expenses within your budget and still have a little left over (well 8 billion sounds more than a little) then revenue could be decreased (revenue is a bit hmmmm wrong to say).

  24. Lampie 24

    mind you depends if we are talking long term or short. Short term yeah, speeding up projects by issuing bonds, too right. long term hmmm nah, mind you define short term 10-15 years is most likely short for a Govt.

  25. Wayne 25

    “Tax cuts are a path to inequality. They are the promises of a visionless and intellectually bankrupt people” said Helen Clark at the 2000 Labour Party conference.

    No she didn’t, she said: “Tax cuts are a path to inequality and underdevelopment in today’s circumstances. They are the promises of vision-less and intellectually bankrupt people”

    [http://www.thestandard.org.nz/?p=643]

    You’re deliberately misquoting Clark for political gain. How hypocritical.

  26. Kimble 26

    Lampie, you are really trying and that is good. I am not going to bother explaining why, as I said, others have done it much better elsewhere. Go find what they have said, educate yourself.

    But let the record show that Tane has lied once again. He has been caught using a quote completely out of context and then lying about what Key was saying.

  27. Wayne 27

    Kimble you’re trying hard with the “lying” tag aren’t you? Follow the link Tane has provided and you’ll find the article is entitled “Scoop Talks To Key About Tax Cuts”. It’s pretty clear any talk about borrowing for infrastructure is being done in the context of tax cuts. Stop trying to label people liars when you can’t even do your basic research.

  28. AncientGeek 28

    Actually I think that Kimble is correct in what he says about raising debt for infrastructure. However he is also wrong at a government level because of the intergenerational issues with the super system.

    The only reason for putting in infastructure is to ensure that there is a return over the longer term. ie that the return off putting it in now will pay off over the long term. Thats a classic Nett Present Value (NPV) calculation against an alternate use of the money. Typically calculating against the cash flows in present values into the safest possible investment – usually calculated as bank interest. The more risky the investment – the higher you make the discount rate.

    Since most of the return accrues in the future, then the costs should also transfer to the future generations. That allows the available cash to be used for things that have more return in the short-term.

    BTW: The reason why governments do this kind of long term investment is because businesses are typically risk adverse past the medium term, and the risk in long-term investment is high – as reflected in discount rates. Look at investments by governments before; Think Big, Marsden B, the tar-sealing of the rural road system, etc. I don’t think any of those paid back the initial investment. Others like Huntly power, the main road network, the phone system, etc have.

    However at present, the opposite applies. Currently we have incurred a future liability with a aging population and our superannuation and health system. These require that future tax-paying generations pay for the current generations when they need those services. At this point this cannot be changed to a more equitable inter-generational basis in less than a 20 years basis (even if you wanted to).

    So the best possible uses of cash now on an intergenerational basis (and NPV) is to put the money into investments that ensure that make sure that the next generations of taxpayers are not too heavily burdened in taxes by past decisions. There is a less altruistic reason for current voters as well – if the burden isn’t reduced by current voters – then you virtually guarantee a tax-payer revolt later, and a reduction in benefits.

    The safest investment is to put the money ‘in the bank’ – effectively something like the Cullen fund. The next safest investment is to do something like KiwiSaver – effectively to reduce the need to increase super because people have their own supporting investment. The risker strategies are to put investment into infastructure that means the economy is more capable of paying for it – ie education, job creation, physical infatructure etc.

    The riskiest investment of cash now is probably taxcuts because until you do it, you can’t really figure out the probable economic effects in 20 years. Therefore you have to put a really high discount rate on it. This is because there isn’t that much evidence supporting the assertion that says a taxcut will be used by the recipients in better investments or savings that benefit the economy in the long term.

  29. AncientGeek 29

    BTW: The all time best government investment in the past has got to have been the water and sewerage systems in the late 19th and early 20th centuries. The nett effect of these has been to increase the effective working life of the whole population, and therefore our ability to pay for everything else since.

  30. Lampie 32

    This is good too

    “New Zealand operates a simple and transparent tax system relative to other countries. Our overall level of taxation – as a share of the economy – is one of the lowest in the OECD.”

  31. Lampie 33

    BTW: The all time best government investment in the past has got to have been the water and sewerage systems in the late 19th and early 20th centuries. The nett effect of these has been to increase the effective working life of the whole population, and therefore our ability to pay for everything else since.

    Isn’t that more local?? As I supply equipment to water treatment which are serviced by Councils.

    Basically Kimble, roads mainly have been disregarded by Govts. past for too long and now we are paying catchup. Been able to increase allocation to these means less borrowings yeah?

  32. Lampie 34

    Or is it local just recently?

  33. Lampie 35

    Crutch of the argument is, why borrow and decrease revenue at the same time? Regardless saying we need to borrow for this or that and also we shall cut taxes at the same time. Your robbing peter to pay paul (however you say it).

  34. Kimble 36

    Wayne, Key would only be talking about borrowing money to cut taxes IF you believe that infrastructure spending should be done using ‘cash’.

    That is a separate argument. Key’s position is that it shouldnt be. This is the context that is important.

    The truth is that Tane has taken what Key said, ignored what Key meant, ignored this vital context, and is going around telling people (though not in so many words) that Key is going to borrow money to pay straight back out in taxes.

    What is that if not dishonest?

  35. Matthew Pilott 37

    Kimble, however you spin it, if he cuts taxes and then borrows to spend on infrastructure the net effect is the same. There is simply no more basic way to illustrate that.

    There are very good arguments for funding infrastructure with debt. Dont blame me for your lack of understanding.

    There’s a critical difference between understanding a concept and agreeing with it Kimble, I can’t see how you would fail to make that distinction and assume you were lying here.

    It depends on what else that money could be used for. If you can invest and get a rate of 10%, why not borrow at 7.5% and get a free 2.5%?” Amusing that you would even suggest this in the same comment in which you called another concept retarded by the way. Given this scenario, can you point me to these lenders? I want to borrow $30 million at 7.5% so I can invest it at 10%. Cheers.

  36. Kimble 38

    The example was simply to illustrate a point Matthew, that debt is not always bad. What you can do with the debt may provide a greater return than the cost.

    The only way Key would be saying what you think he is saying, would be if he believed infrastructure should be paid for using cash. Given that he doesnt, he is not saying what you think he is.

  37. Lampie 39

    Think you may have missed the point of what everyone else is saying.

    why borrow and decrease revenue at the same time?

    We borrow now to spend on infrastructure, we just don’t need to borrow as much. Key suggest $3 billion more than we are currently borrowing to spend on roads as well as reducing revenue collection. He is banking that the infrastructure will deliver the difference (plus other means such as expenditure spending).

    Bit like I cut your income but your expenses have increased while your building your rental.

  38. Kimble 40

    Consider this. Government can borrow at the risk-free rate. The cost of future payments can be brought back to todays dollars by discounting at the risk free rate.

    http://en.wikipedia.org/wiki/Discount

    So $100m borrowed at the risk free rate and paid back over 30 years, in todays dollars, equals $100m.

    So the government can either spend $100m today, or borrow and end up paying back $100m in todays dollars.

    Think about it.

    Captcha: interfering curries

  39. Kimble 41

    Also consider,

    If the discount rate is higher than the risk free rate, then the present value of the project is actually LOWER than the cash amount to be spent now.

  40. Rumpole 42

    Wayne
    Either things have changed since 2000 to make tax cuts appropriate or they havn’t. If they havn’t then Cullens tax cuts are vote bribes. If they have then unless the circumstances changed very recently then Cullen has been lying to us about their affordability or adviseability. Bollard appears to be warning against cuts on inflationery grounds so perhaps dividing the surplus equally between all taxpayeningimmigrationrs and placing the proceeds in a personal retirement account is the way to go. Not sure if pure beneficiaries should be included as they may not have contributed so giving them a share would increase inequality with taxpayers.

  41. Lampie 43

    Still missing the point of the argument with your accounting 101 stuff, I’m sure our friends at Treasury would really have that sorted from day 1. Give them some credit, thought you might had a look at those links with the borrowing programme, even Key mentions it.

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