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The 40 cent tax cut

Written By: - Date published: 1:37 pm, May 6th, 2008 - 17 comments
Categories: assets, national, tax - Tags: , ,

National and some of the more wacky commentators are complaining that the $655 million used by the Government to buy back the rail stock should have been used, instead, to fund tax cuts.

Now, there’s a crucial difference between a tax cut and a one-off capital purchase. And it’s that you only pay once for the rail stock but the tax cut remains forever.

How much is $655 million today worth in permanent tax cuts? To calculate this we use an economic formula called net present value. NPV recognises that a dollar today is worth more to you than the promise of a dollar tomorrow. We take the future tax cut payments and adjust their value by the interest rate to get their present value.  Nothing controversial in that, it’s Econ 101.

Do the equation using a 10% interest rate and turns out that a one-off payment of $655 million today is worth the same as a tax cut of $65 million a year forever. $65 million a year split between 3.2 million taxpayers is worth 40 cents a week each.

So, let’s get this straight. The Government has brought back a vital piece of our transport infrastructure which, with upgrades, will form the backbone of our low-carbon transport future. And National’s offer is 40 cents a week in tax cuts instead?

A couple of months back Key was offering a 50 cent tax cut by capping the core public service. Add to that another 40 cents and you’re nearly half way to that litre of petrol you’ve always wanted. And you’re only down a well-staffed public service and the railways.

17 comments on “The 40 cent tax cut”

  1. Billy 1

    So $655m is all we’re going to have to spend on the railways, Steve? Last time the government ran it it lost about $50m a year.

  2. big bruv 2

    Wow Steve, you really are desperate if you try and justify this extraordinary waste of public funds in this fashion.

    Klark and Kullen have committed economic sabotage much like Labour did in 1990, you simply cannot trust them.

  3. Steve Pierson 3

    I’m simply explaining that the opportunity cost of buying the rail stock was not $655 million a year in tax cuts as National and others would have you believe.

    it was $65 million only in tax cuts (or operating spending, NPV applies to both). And that’s 40 cents each a week.

  4. Patrick 4

    Billy, you should note that Toll have managed to make the railways break even, which is quite an achievement given the asset stripping that National’s croneys did to it in the 90s. However the government does want to pump more money into it and upgrade it, but it certainly looks a lot more commercially viable now than it did 10 years ago.

    I don’t suppose you heard the CEO of Fonterra saying they now want to transport up to 80% of their product via the railways?

    So, what would you prefer, a well run, economically viable public asset, or an extra 40 cents in your pocket each week?

  5. Once again the left thinks, Aunty Helen knows what is best for us. How about letting the public decide what to do with OUR money. You see a taxbreak is not giving people a LOLLIE. A taxbreak is the government, not taking as much money as you have in the past.

  6. Billy 6

    Patrick, I’ll bet you that 40c that the taxpayer has to subsidise rail for as long as it owns it.

  7. Steve Pierson 7

    Brett, don’t roll out the taxation is theft line unless you’re arguing against all taxation and the government services it pays for, we are just arguing over whether or not a particular piece of spending is better than a tax cut.

    As the tax cut would be 40 cents a week and this is a major piece of infrastructure that can (and does) pay for itself, as well as having the potentional to provide huge benefits to the broader economy, it’s pretty clear that it’s better to have rail than the 40 cents.

  8. Patrick 8

    Just like we subsidise trucks?

    I’m sorry, but I really have no problem with the government investing money into long neglected infrastructure that is vital to this country, and will be increasingly vital with the onset of peak oil.

  9. Steve: Statistics New Zealand reports 1.4 million FTE employees for the March 08 quarter : http://www.stats.govt.nz/products-and-services/hot-off-the-press/quarterly-employment-survey/quarterly-employment-survey-mar08qtr-hotp.htm so presumably given the number of children,unpaid house people, retired and beneficiaries the number of ‘biological’ taxpayers is probably around that level, not 3 million.

    [ There are 3.2 million taxpayers, 3 million of which earned over zero dollars last year (and, so, actually paid tax). Unlike you, I don’t just guess on such numbers. Retirees and beneficiaries pay tax. ‘Biological taxpayers’ takes the phrase for most silly phrase of the day. Get your figures from authoritative sources rather than tying to guess them yourself. http://www.treasury.govt.nz/budget/2007/taxpayers/01.htm. SP]

  10. Matthew Pilott 10

    Brett, do you mean a tax cut, as opposed to a tax break? They’re significantly different. Maybe you need to slow down a tad before pounding that keyboard.

    mawgxxxxiv, there are a lot of part-time workers – i’m guessing steve’s figure was an average over the range of employed people. So, for example, the tax cut you’d get would only be three cents for a part time minimum-wage employee, and maybe fifty-five cents for a full time worker on a higher salary.

  11. Steve: surely NPV calculations are used for depreciating projected & monetised benefits from investments to determine if the project is worth more to the investor than ,for example, leaving the cash in the bank. So what you are saying is that investing $655 million of taxpayers money into a non-essential project Helen Clark has said won’t be commercially viable is better than taxpayers using that money to retire debt at a time when interest rates are climbing inexorably into double digits. If as Helen Clark has said the project is not commercially viable then surely there are no monetisable benefits to feed into your NPV calculation?

  12. Steve: the ‘meta issue’ is not so much why Labour has chosen to spend taxpayers money unnecessarily on a rail network but why they have failed to reduce the tax burden with this and other expenditure. The tax burden fell from 160 days in 1990 to 140 days in 2000 but has risen rapidly under Labour back to 160 days while the tax burden in Australia has flat-lined. http://www.interest.co.nz/ratesblog/index.php/2008/01/06/chart-tax-burden/

    Furthermore Labour has been running a burgeoning surplus in addition to a massive increase in government spending: http://www.interest.co.nz/ratesblog/index.php/2008/01/06/chart-government-surplus-in-nz-billion/

  13. BeShakey 13

    Of course a huge part of that ‘burgeoning surplus’ is the Cullen fund and Student loans. I’d love to see National announce that one: ‘Tax cuts for all! (note that there will no longer be long-term security for older people and all people with student loans will immediately have to pay them back)’.

  14. When the right belly on about tax cuts, the type they envisage does not involve a simple dividend which would return the money to all those in paid employment.

    Their tax cut involves giving the bulk of the money to six-figure earners, and a pittance to everyone else. National has talked up its plan for tax cuts so much, it is at risk of underdelivering, considering that people on $25,000 to $35,000 p.a. are expecting up to $70 p.w. in tax cuts.

    Anything much less than that will mean they’d probably vote Labour, because the difference between that and what Labour will offer next week will be small, and will force a greater user-pays on most Kiwis.

  15. Rocket Boy 15

    It funny all those people who say the government can’t run a profitable railways were the same ones saying the government couldn’t run a profitable bank.

    How is Kiwibank doing these days?

    Or shouldn’t own a big chunk of Air New Zealand.

    How is the Air New Zealand share price these days?

  16. Dim (was dime) 16

    nothing wrong with capital exenditure..

    when ya spend it on something worthwhile and dont over pay by 200 mil!

    but as helen says “we dont expect to make a profit”

    thats just awesome!!

    there goes rocket boys theory of air nz and kiwibank

  17. And in a stroke of genius MIchael Cullen (well the taxpayers have really) has given Toll the money to buy up more of New Zealand:

    “Transport and logistics company Toll Holdings has signed a conditional deal to buy Northland trucking company United Carriers for an undisclosed sum.

    Toll, which this week sold its New Zealand ferry and rail business to the Government, had expressed interest in expanding in the trucking sector.”

    http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10508714&ref=rss

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