Tax reform: tax cuts for rich, paid for by poor

Marty G
14 years ago
Categories: economy, national/act government

The Tax Working Group has given its recommendations for tax reform to the Government. It predictably recommends:

Dropping the tax income tax rates to 30% in line with the corporate tax rate.

Dropping the corporate tax rate (and presumably the top income tax rate) further in the future.

Paying for this with 15% GST, a land tax, a tax on investment properties, and closing the tax advantages for housing investment

In judging these recommendations, the first question is: will this lead to better economic incentives and the second question is: who will end up paying more, and who will end up paying less?

A tax on property investment and closing the loopholes has a lot of positive elements to it – it should discourage over-investment in housing and make home ownership more affordable – but it’s not the landlords that end up bearing the cost. A large part will be passed on to renters, who are mostly low income. So, this will result in a decrease in disposable income/standard of living for the poor.

As will increase in GST. People on lower incomes spend a higher portion of their incomes and pay GST when they do.

These tax increases for people on low incomes need to be balanced with a cut in income tax at the bottom. Say, a tax-free bracket that would see each taxpayer get exactly the same size cut to their income tax bill.

But the Tax Working Group hasn’t even looked in that direction (none if its scenarios even contemplate retaining the 38% rate). Instead, they’ve insisted that income tax cuts must go to the few people on higher incomes by reducing the top tax rates. In what surely must be a coincidence, that means big tax cuts for the members of the Tax Working Group, the economists who advised them, and the politicians who employed them – paid for mostly out of the pockets of the poor.

Fixing the tax loopholes that has caused over-investment in property and even a GST increase are ideas with merit that could make for a better economy but only if the money raised is redistributed fairly. The Tax Working group has failed to do that. They have taken a wonderful opportunity and turned it into a money grab for the rich.