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Rhetoric and reality

Written By: - Date published: 11:58 am, June 2nd, 2009 - 45 comments
Categories: spin, tax - Tags: , ,

Tax cuts are the right wing’s favourite answer to every question. Before the election, National were promising us that tax cuts were the key to economic growth:

Key: “National will deliver an ongoing programme of personal tax cuts. Fundamentally, National believes in the growth-enhancing power of tax cuts. Labour does not.”

English: “… all the literature tells us, all the analysis tells us that reducing the higher tax rate is the most growth enhancing tax cut you can make.”

Tax cuts were the centrepiece of Nationals economic plan for NZ:

Key: Tax cuts are a top priority for National. They are an essential part of our five-point plan for the economy to make New Zealand a wealthier, more successful country.

This was reiterated after the election in the “speech from the throne”:

Key: My government will therefore, in representing the will of New Zealanders, remain resolutely focused on the issues that matter, pre-eminent of which will be the need to strengthen the economy to ensure future economic growth.

This programme of tax reduction is a central part of the economic plan of my Government, because it believes in encouraging New Zealanders to get ahead under their own steam, and it views personal tax reductions as an essential step in ensuring that can happen.

That’s all pretty clear isn’t it? So why did National, in the recent budget, cancel the their tax cuts? If tax cuts lead to growth, and growth is what we need, why throw away the centrepiece of your economic plan? Why cancel tax cuts?

There can be only two possible answers. One, National has gone mad, and no longer wants to grow the economy. Or two, National knows that tax cuts do not lead to growth and therefore there is no reason to keep them when they have become unaffordable.

In short, if National really believed their own rhetoric they would have kept tax cuts at all costs, because they would have caused growth and paid for themselves many times over. But they didn’t, because they know it’s all a lie (e.g. here, here, here). All their pre-election promising and posturing on tax cuts was just empty rhetoric, and in cancelling the cuts National have just admitted it.

45 comments on “Rhetoric and reality ”

  1. tsmithfield 1

    So, I wonder what percentage of our income actually goes in tax in NZ?

    Income tax approx 25%
    GST on purchases 12.5%
    Tax on petrol and other such consumption taxes (alcohol etc)
    Rates (a local body tax)
    Dividends from state owned power companies that have been overcharging for years
    etc etc

    When all the taxes are added up, I think over half the average income would go towards paying one tax or another.

    And you’re trying to argue that we shouldn’t try to reduce the tax burden?

    • r0b 1.1

      We’re averagely taxed by international standards. But that’s not the point of the post, you’re just trying to threadjack the hard question.

      The point of the post as I understand it is: if “tax cuts = growth” the Nats should have kept them, and let growth solve our problems. The only reason to drop the cuts is if “tax cuts = growth” is a lie.

    • felix 1.2

      “And you’re trying to argue that we shouldn’t try to reduce the tax burden?”

      No tsf, National is.

    • Draco T Bastard 1.3

      The burden of tax is dependent upon the state of the society that you live in. Living in trees where you can get your food from the tree that you live in requires zero tax as everything you do is provided for from nature. Living in a complex society like ours requires that the roads be paid for, public parks to be maintained, etc etc. Basically, it requires that everyone actually contribute to maintain the society that maintains them. There is no getting away from this and the more complex the society the more it costs.

      Without support in the form of taxes society collapses back to everyone living in trees. People like you and NACT who harp on about taxes don’t seem to grasp this – either that or you’re purposefully trying to take us back to Absolutism or even feudalism both of which we got rid of because it was a failed system. We just need to do the same for capitalism now and for all the same reasons.

    • Mr Magoo 1.4

      what a revelation…

      Posted this about 5 times including when it was first mentioned before the election including supporting evidence.

      It was a lie. It is a lie.

      “All the literature” is also a lie.

      A way to grow a strong economy is to invest in some of the things they have cut like research funds.

  2. tsmithfield 2

    r0b

    “The point of the post as I understand it is: if “tax cuts = growth’ the Nats should have kept them, and let growth solve our problems. The only reason to drop the cuts is if “tax cuts = growth’ is a lie.”

    The logic does not quite follow. I don’t think you are seriously suggesting that National believe there is a one-to-one correspondence between growth and tax cuts. The real question is “do tax cuts stimulate growth”.

    Tax cuts might stimulate growth. However, there could be conditions where growth may occur more slowly than the loss of income from tax cuts, thus making the tax cuts unaffordable. This could be especially true during a major recession. In this case, it might be better to defer tax cuts until better economic times when the growth profile and tax cuts might balance out.

    • r0b 2.1

      However, the growth may occur slower than the loss of income from tax cuts.

      That statement makes no sense at all. Want to try again?

      • tsmithfield 2.1.1

        As I understand it, you are trying to show that National believe that the extra tax generated in growth in income due to tax cuts will eventually compensate for the reduced tax take, or perhaps even result in greater income. Therefore, National should slash away at taxes to get the optimal result for income.

        What I have said is that while this may be true in some economic environments, it does not necessarilly follow that it will be true in all economic environments.

        In the current economic environment, the economy may respond more slowly to stimulus from tax cuts, therefore, the additional income arising from growth may not become available as quickly. Thus, tax cuts at the moment might be unaffordable, because, even though growth might be stimulated, it might not be stimulated at a sufficient rate.

        • r0b 2.1.1.1

          That’s quite some convoluted knot you’re trying to tie yourself into there. Don’t hurt your back!

          So tax cuts = growth except in hard times? That’s not what National promised us. Tax cuts were a response to hard times, they were the centrepiece of the economic plan. For example, Key said:

          We are under no illusions. We are in the middle of a global financial crisis and we face the most difficult economic conditions for a generation.

          The best hope for the finances of the Government, the best hope for our young people, and the best hope for the future of our country is economic growth.

          Our plan to get the economy growing again includes, among other steps, an ongoing programme of personal tax cuts…

          If Key was right, why cancel the cuts? They are an essential part of the plan to rescue us from the crisis! Key must have been wrong, so was he incompetent or was he lying?

          • Maynard J 2.1.1.1.1

            Essential Part? Given the only other part is a cycleway, “essential” is an understatement. “They are an essential part of the plan to rescue us from the crisis” That is better!

          • tsmithfield 2.1.1.1.2

            Hi r0b,

            You’re right. It was fairly convulted.

            My point is that why should it be assumed that tax cuts will have the same effect in differing economic environments?

            In a deep recession such as this, as has been pointed out by those on this site already, people may tend to save the tax cuts. Thus the stimulatory effect may be less.

            In an economy that is not yet in recession, people may tend to spend the tax cuts, thus stimulating the economy. Thus, I suggest, the best benefits from tax cuts are most likely when it is obvious to a government that there is a recession on the way. In this case, people are likely to keep spending until they feel the full force of the recession, thus stimulating the economy and perhaps lessening the impact of the recession.

            In the current recession, it hit so quickly and savegely, I don’t think there was really time for tax cuts to have their best effect

          • r0b 2.1.1.1.3

            Hi tsmithfield

            In the current recession, it hit so quickly and savegely, I don’t think there was really time for tax cuts to have their best effect

            It’s not clear to me that there was ever any good evidence that tax cuts cause growth (e.g. the contrary links in the original post). You’ll find a few examples of chance correlation, and plenty of examples of just the opposite.

            But that’s neither here nor there. The Nats sold NZ tax cuts as the central plank of their response to the crisis, at a time when the extent of that crisis was clear. Then they bailed out. Why did they bail? Was there ever a time when they actually believed their own rhetoric, and if so, when do you suppose they stopped believing it? What changed their minds? Do they now believe that tax cuts do not cause growth?

        • Draco T Bastard 2.1.1.2

          Actually, it’s just not true for any economic environment. Growth in the economy requires growth in the population and infrastructure. An increase in population requires more government services so cutting taxes may stimulate growth but that growth will never be high enough to actually pay for the increase in services required.

          This has happened recently in many countries that tried the low tax route to growth. Ireland was one that I recall reading about in 2002, Bangladesh, IIRC, was another.

  3. burt 3

    Clearly tax cuts are the answer to everything or Labour would not have broken with the normal convention of tax rate changes and implemented tax cuts mid way through a tax year.

    There is no way that Labour were simply using tax cuts as a bribe to win an election because only National would do that. So what was so urgent that mid year tax cuts were required must have been mighty important that we got them and given the global economic crisis was well know about in October when Labour implemented their tax cuts we can only assume that tax cuts were required or Labour would have cancelled them before the election.

    • Maynard J 3.1

      By October, there was a slight downturn, it was not a global economic crisis. If everyone knew about it then, then a lot of people decided to do nothing about it.

      Lehman Brothers went down in September, only two weeks before the tax cuts came. That was a big moment, but only because of what came afterwards, so the wtaershed event had no impact on the tax cuts. The tax cuts were touted as something to counteract the downturn. Argue against that reasoning if you will. There was the money to be spent then, and Labour decided to put some money back into the lower end of the scale. With hindsight, perhaps they should not have happened, but I can not see anything that would have meant there was any other reason apart from the ones given at the time. (So no, tax cuts are not the answer to everything as you state but then you made that line up for effect).

      • RedLogix 3.1.1

        Typical burtjack.

        It was National who made tax cuts the prime centerpiece of their policy and rhetoric for almost 4 years from 2004 onwards.

        It was tax cuts that complicit media pundits demanded in column and after column, insisting that only a National govt could be trusted to deliver them.

        It was tax cuts ‘north of $50 per week’ that Mr Key personally guaranteed the electorate… that only he could be trusted to deliver.

        When Dr Cullen carefully stated that he didn’t believe the past surplus’s were structural, and he outlined a set of prudent conditions around which cuts were possible…. you all used this as evidence of his perfidy. And when Dr Cullen did deliver a measured cut that in retrospect was plausible and sustainable, the right howled mightily how he didn’t really believe in them…. and only a National govt could really be trusted to deliver.

        Turned out he was perfectly correct, and this so painfully sticks in your collective craw, does it not?

        • burt 3.1.1.1

          I think you are confusing me with a National supporter.

          There is a way you can tell if somebody is a National supporter. They defend National party policies and MP’s.

          Feel free to post links where I do that.

        • burt 3.1.1.2

          RedLogix

          Think carefully about this;

          When Dr Cullen carefully stated that he didn’t believe the past surplus’s were structural, and he outlined a set of prudent conditions around which cuts were possible .

          So surplus’s were required because only an irresponsible govt would borrow to fund tax cuts… yet a three year program for tax cuts was legislated against knowledge that the surplus’s were not structural…

          I think you are confusing what Cullen said he would do with what he actually did and because you can’t accept he sold out to try and win the election you are blaming National.

          • mickysavage 3.1.1.2.1

            On you redlogix

            Very succinctly put.

            I am amazed that there is this attempt to rewrite history. All that we had for the past few years is “tax cuts good, Cullen bad” and now with the benefit of hindsight National’s position on both has been reversed.

            I think of all of the emotive language used about how Labour was corrupt, and stealing money from ordinary kiwis and installing a bloated public service.

            National promised a tax cut. They knew that the economy was diving and it could not happen. Labour told them this and cancelled all of its election promises but National did not.

            They lied, they lied, they lied, they lied and they stole the election.

            I do not think we should be too civilised in the way that we say this.

      • burt 3.1.2

        Maynard J

        Well that’s interesting. The other day rOb was busy telling me that at the time National made their tax cut election promises they knew they would not be able to afford them yet that was before the Labour tax cuts were introduced.

        Of course according to rOb National should have cancelled the tax cuts (including Labour’s) so I guess if National should have cancelled them you can’t blame Labour for implementing them. Labour did after all have an election to try and win.

        • Maynard J 3.1.2.1

          I think you are not keeping any track of the times these things were said, and what they were said in relation to, which would explain your confusion. National were talking about their tax cuts after the election as the saviour to our economic woes – this at a time when they would undisputedly be very much unaffordable, unless they generated some income. Then they were cancelled. Draw the obvious conclusion there, if you will. I am not sure how much that first National tax cut stimulated the economy. Any thoughts?

          Labour announced tax cuts in the April 2008 budget, is that right? I think so. Things were good at the time. The October ones went through – things were looking a bit grim. After then, I do not recall much from Labour about the next two rounds of tax cuts, so I can not argue either way for their post-October comments. Perhaps you have some links to shed light on them. Actually I recall Phil Goff saying he would not blame National if they cancelled their tax cuts, also after the election of course. So that all seems to be in order too.

          Rob, OTOH, had some choice quotes from National, from after the October tax cuts, were they not? And they were also talking about different tax cuts, at different times. I know that is what the last post link in this one is about. I can not really see anything in any of the comments that should have you so confused. October 2008 – ok but maybe poor with hindsight. 2009 – not smart, unless you believe tax cuts are good economic stimulus (recall that these are contributing to our current deficits, unlike October this was known at the time and they still went ahead), 2010 and 2011 – cancelled. Which is good, unless you believe they are economic stimulation. Like National must have, to have gone ahead with 2009 tax cuts. So why did 2009 ones happen? You can’t even try to blame that on an election like you are doing, it is unfathomable.

          • burt 3.1.2.1.1

            What is unfathomable is tax cuts 1 month before an election (mid tax year) after 9 years of saying tax cuts are bad.

            What makes it even more curious is that after years and years of surplus when we couldn’t afford them Dr. Cullen claimed the surplus’s were not structural and gave them 1 month before an election, having announced them at a time when were in a domestic recession.

            Like I said earlier (which I think you don’t want to hear) – Labour had an election to try and win.

          • Maynard J 3.1.2.1.2

            “What is unfathomable is tax cuts 1 month before an election (mid tax year) after 9 years of saying tax cuts are bad. ”

            No, unless you unquestioningly accept the premiss that if you do not cut taxes for 9 years then you will never ever have an economic reason to do so. Most would call that premiss a pointlessly absurd reduction.

            There is something neither of us are willing to accept Burt. Only one of us is attempting to justify why they do not accept it. I have explained why I do not accept your reason for those tax cuts.

        • mickysavage 3.1.2.2

          Burt

          Labour’s tax cuts were aimed at the poor.

          National’s were aimed at the rich. The top 3% took a third of the total amount.

          There is this real rewriting of history in relation to tax cuts. In the previous (2007) budget Labour gave a huge amount to small businesses. This is always ignored but is there for all to see. Key’s statement that they took 9 years to cut taxes is a lie. There is no other word for it.

          And I look at NZ 2 years ago and wish I was still there.

          • The Baron 3.1.2.2.1

            What is this “poor” and “rich” nonsense, Micky – you keep on spouting it off like the classic class warrior you are… there is nothing intransigent with those labels, so I don’t know why you bandy them about so sanctimoniously.

            it isn’t hard for the top 3% to take that much when they pay a far larger proportion of total tax. Hell, they are still paying a massively larger proportion, even despite this cut.

            Oh, and looky – labours adjustments benefited the “poor” as well as the “rich” to the same degree – A POX ON THEIR HOUSES!

            Seriously though, tax equity is one of the things that is likely to draw widely divergent views. I myself think that those in higher brackets should benefit from such adjustments sometimes – after all those tax cuts for lower brackets, surely the higher brackets can get some too. Or is equity only for those that meet your definition of “poor”?

          • mickysavage 3.1.2.2.2

            The Baron

            The rich are those declaring income of and paying tax on $200k plus per year. Let us define the “poor” as being those on half of the average wage.

            A tax cut for the rich will result in more overseas holidays, more imports and more savings, precisely the things we do not want now.

            A tax cut for the poor has two essential benefits. It helps those who need it the most. It also puts money in the hands of people who will pay off debts to local businesses, buy some more food for the kids, contribute something to their local communities, buy locally sourced products.

            From both a moral and economic point of view the Labour tax cuts were far better.

            Equity? The wealthy already do fine. There is this suggestion that “fairness” is all about receiving a “share” rather than measuring the absolute amount that a person is receiving. For me “fairness” is all about ensuring that everyone can enjoy a reasonable amount rather than insisting that some can enjoy extreme wealth because it is their “right”. Besides the tax system does not prevent the extremely wealthy from being extremely wealthy.

  4. There is pretty good evidence that the correlation between marginal tax rates and growth is highly dependent on other circumstances – see here for example.

    http://www.clangmann.net/2007_July_13/Tax_Rates_Economic_Growth.pdf

    Maybe National’s rhetoric is inconsistent, maybe they place too much value on tax cuts. But the implication in this piece that either tax cuts always stimulate growth or they do not is simply wrong.

    • The Baron 5.1

      Am I reading this the wrong way, Tom, cos this seems pretty clear to me:

      Page 7, Part IV: Conclusions:

      “Our analysis of a cross-section time-series panel of 23 OECD countries for 1950s-1980s decades show that high marginal tax rates and tax progressivity are negatively correlated with long run economic growth”.

      • burt 5.1.1

        The Baron

        Yes you missed the footnote in 1 point text. Actual results may vary and what ever the NZ Labour party say is the correct answer. What the NZ Labour party do is not to be considered appropriate for analysis because National made them do it.

      • Quoth the Raven 5.1.2

        Next sentence: This finding contrasts the previous empirical literature, which concludes that there is no significant correlation between taxation and economic growth.
        Being a bit selective weren’t we, Baron?
        Whether or not this particular paper says it doesn’t matter, but I couldn’t agree more with Tom’s assertion: that either tax cuts always stimulate growth or they do not is simply wrong. I think no matter your views on the taxation it would be absurdly irrational to disagree and it seems that National used to disagree.
        Now an argument along the lines of workers are entitled to the full product of their labour would be better and that has much wider implications than tax cuts. It seems to be that the left rarely applies that argument to taxation and the right only selectively apply part of it only ever to taxation.

        • The Baron 5.1.2.1

          Fair enough, QoR – it then also goes on to point out the flaws of those earlier studies. Given that I was typing it out myself, I chose laziness over a fulsome repeat of the paper.

          As for workers and their full product of their labour… I think that idea has been tried, hasn’t it? How did that work out?

          • Quoth the Raven 5.1.2.1.1

            No, it hasn’t. Are you saying there was no taxation in the historical example you’re using. I think we both know which.

      • Tom Mathews 5.1.3

        Re-reading my comment, it is not nearly as clear as it could have been.

        Baron – you’re quite right, the study finds that ceterus paribus, lower marginal tax rates are correlated with growth (or as they put it, marginal tax rates are negatively correlated with growth, but obviously it’s the same thing). Yes this contradicts other literature, but their conclusion is that the other literature was wrong. That may or may not be the case.

        However, what I really meant to refer to was the appendix – you can see there that the effect of tax rates on Government revenue was highly variable. So the cost of tax cuts varies substantially, and thus so should their desirability. It might be that tax cuts on their own stimulate growth, but that in certain circumstances, what you have to do to pay for them more than cancels it out. I’m not sure that that is true right now. But it is concievably true, and so I think this post is a bit unfair.

      • r0b 5.1.4

        Am I reading this the wrong way, Tom, cos this seems pretty clear to me:

        Yes you are, no it isn’t.

        You missed the bits before and after your quote: “ after improving the estimates of the effective marginal tax rates and the specification of the model […] Our analysis of a cross-section time-series panel of 23 OECD countries for 1950s-1980s decades show that high marginal tax rates and tax progressivity are negatively correlated with long run economic growth. This finding contrasts the previous empirical literature, which concludes that there is no significant correlation between taxation and economic growth“.

        In other words, after massaging the data enough they reached a conclusion that no one else agrees with. Hmmmm. Not impressed!

        Here’s a simple graph of actual data on tax rates and growth in the OECD. No correlation.

        • Quoth the Raven 5.1.4.1

          Yep, a flat line.

        • Tom Mathews 5.1.4.2

          By ‘improving the estimate’ I’m pretty sure they just mean trying to obtain more accurate results. If you think that they ‘massaged’ them, you’re welcome to explain how. To me the test seems pretty well carried-out.

          Also it’s very sketchy statistically (although also very popular) just to look at an scatterplot of two variables and conclude a relationship (or not). The reason in this case is that GDP is something determined by heaps of variables and by just looking at two of them you are going to miss a lot of important information which could conceivably change your conclusion. More technically, you violate Gauss-Markov assumptions about the error term in an OLS. That’s why, if you read the study, they do a multiple regression of GDP against a whole lot of things that they are not actually interested in.

  5. Redbaiter 6

    Leaving aside his motives, I have to agree with the writer of this post. Its pretty clear.

    National, when in opposition advocated for tax cuts on the grounds that they produce growth, but now they’re in power, and growth is sorely needed, they go back on what they advocated.

    They are socialists. Just like Labour, and will only bring us more destruction, just at a slightly slower rate.

  6. “Or two, National knows that tax cuts do not lead to growth”

    Can you give your references to the economics literature that backs up this claim?

    • Zetetic 7.1

      Paul, did you never study logic? You can’t ask people to prove a negative.

      Why don’t you neolibs start proving your positive? You’re the ones you’ve turned politics and economics into nothing but mindless bleating for taxcuts. Prove they work. Then, once you’ve done that explain why they were cancelled if they’re so fantastic.

      There’s no real evidence that tax cuts work. The billions we’ve just wasted on tax cuts in NZ have done nothing for us in this recession.

      • Tom Mathews 7.1.1

        You can definitely show that a null hypothesis can’t be rejected on a given set of data, though. This isn’t quite the same thing, but in these circumstances wouldn’t be too bad.

    • r0b 7.2

      The original post contains three quick links to web friendly summaries. If you want to get more formal here’s a digestible version of the work of Nobel Prize winning economist Paul Krugman.

      Here’s another couple of quick examples:

      http://www.brookings.edu/views/Articles/20041018orszaggale.pdf

      http://www.ctf.ca/pdf/ctjpdf/2000ctj2_jackson.pdf

      To search the academic literature go to
      http://scholar.google.com
      and enter your favourite key words. You’ll find plenty of debate on the issue. In my (limited) experience all of the examples of “proof” that tax cuts = growth are based on very limited data – likely to be correlation not causation. Those arguing that tax cuts do not = growth look at broader data over decades or over many countries, in short they are much more convincing.

  7. Ed 8

    I’ve raised this before in another discussion, but my understanding is that National did not cancel the tax cuts that they had introduced in December 2008 that took effect in April 2009.

    If I am right then the following is misleading:
    “That’s all pretty clear isn’t it? So why did National, in the recent budget, cancel the their tax cuts? If tax cuts lead to growth, and growth is what we need, why throw away the centrepiece of your economic plan? Why cancel tax cuts?”

    What was cancelled were future promised tax cuts. By encouraging everyone to talk about cancelling the tax cuts, National is trying to have its cake (literally for the people on the top tax rate) but have many people think that those tax cuts had been cancelled.

    It seems more likely that National knew that the tax cuts to be effective after April could never be afforded. They gave many people nothing, but benefited many of National’s supporters. The other tax cuts would have evened this out a bit, so that the package looked more reasonable, but we are now only looking at the results of the first cuts _which have not been cancelled_.

    Of course National lied before the election. Of course they knew there was not really room for any further tax cuts. But they had to give the promised pay back to wealthy donors, so they took tax cuts back off the lower paid and gave it to the wealthy. They dressed it up with fictional future (promised) cuts which were of course cancelled.

    National probably also knew that the April (not cancelled) tax cuts were unaffordable; hence the softening up regarding whether New Zealand Superannuation can be afforded. They will hope to put Labour in a position of having no option but to reduce payments.

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