The 40 cent tax cut

Steve Pierson
16 years ago
Categories: assets, national, tax
Tags: economy, railways, tax cuts

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.