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The other great tax lie

Written By: - Date published: 8:47 am, November 10th, 2010 - 11 comments
Categories: budget 2010, Economy, national, tax - Tags: ,

The Nats promised us that after the Budget 2010 tax cuts / rebalancing the “vast majority” would be better off. That was a lie. High income earners are better off. Over a million low income earners effectively got nothing. This lie is now well known.

But they also told another lie about tax. That the package would be “broadly neutral”. It still astounds me that the Nats were able to get away with simultaneously promising two incompatible outcomes. How can the “vast majority” (actually the rich minority) be better off but the costs of the exercise be neutral? That’s simply not possible, and some of us said so at the time.

The extra money for the tax cuts has to come from somewhere. Where? Not enough commentators were asking the question. The excellent Keith Ng at Public Address was one of the very few who did. And he found National’s answer entirely unsatisfactory:

This is actually a tax cut. It will cost $1.085b in the next four years. The only reason they can say it’s ‘revenue positive’ by 2013/14 is by adding a line called ‘Adjustment for macroeconomic effects’. That is, they argue that tax cuts will spur economic growth, and therefore the economy will grow faster, and so it’ll be revenue positive by 2013/14.

It would be unfair to call this magic money, but at the very least, it’s entirely theoretical money. Not only can we not know whether it’s real or not now, but we won’t know whether it’s real or not in 2013/14.

In other words, the only way the Nats could claim to balance the books was to invent a fudge factor — an unknown and unknowable boost to “growth” — to cancel out the cost. So how’s that growth working out? So far, not so good:

Govt’s $2.2B shortfall: taxpayers aren’t spending

The latest look at the books has revealed a $2.2 billion shortfall in budgeted income. The blame is being put on taxpayers for failing to spend up large before GST went up.

Treasury says the figures show the economy isn’t recovering as aggressively as expected. It’s no secret the retail sector is hurting – the evidence is everywhere and because people aren’t spending, the Government isn’t earning.

New figures out today show its tax take is down by $1.1 billion. That amount is made up mostly by GST which is $600 million less than originally predicted.

In other words, the projections of extra growth are failing right out of the gate. Longer term growth prospects are not looking good, and there are fears of a double dip recession.

What a surprise. Tax cuts don’t cause growth. The Nats’ story that the generous tax cuts for the rich would be paid for by magical extra growth was always a sleight of hand at best, and a complete fantasy at worst.

There are no free lunches. The tax cuts have to be paid for. We’re currently paying for them by borrowing, and looking at the start of a long downward spiral as a consequence. Is that “Ambitious for New Zealand”? Are we going to buy any more lies from National?

11 comments on “The other great tax lie ”

  1. Actually I would call the trickle down lie what it is: a great big lie and one the really knew about. Bush did it and the US is collapsing while the top 1 percent is so decadently rich it almost cries out for a good old Guillotine party.

    • Lanthanide 1.1

      I don’t think Bush’s taxcuts are the primary cause to the US’s destruction. More a symptom.

      • Colonial Viper 1.1.1

        Bush’s taxcuts were just the latest insult to the working class in a long line of insults since Reagan came into power.

        And the backdrop: the unending greed of Corporate Boards and Institutional Investors for ever higher and higher return on capital regardless of societal and local community costs. This allowed justifying keeping real US wages static, offshoring millions of US industrial jobs for cheap labour, destroying home grown industries, and then paying the resulting increased corporate profits to the top 1-2% of the population.

      • ghostwhowalksnz 1.1.2

        The US is now more like a banana republic in its wealth distribution with the top 1% having 24% of the income ( up from 9% in 1976)
        http://www.nytimes.com/2010/11/07/opinion/07kristof.html?scp=1&sq=wealth%20distribution&st=cse

        As we know the wealthy are able avoid a lot of taxes with both simple and complicated strategies, and even GST can be avoided for large transactions.
        With rich paying less of their share the burden falls on middle income taxpayers or reduced services

    • Vicky32 1.2

      As the saying goes, the only thing that trickles down is urine! 😀
      Deb

  2. Herodotus 2

    How can the “vast majority” (actually the rich minority) be better off but the costs of the exercise be neutral? That’s simply not possible, and some of us
    ROB I will give you an example where this is the case and perhaps opening your eyes.
    International Tourism contributed $9.5b, increase of GST = $237.5m. Then we \”give\” in tax cuts $200m above that which we tax in increases of GST, everyone could get more from the added take form overseas tourists and the NZ govt has $37.5m additional funds to benefit NZ. So it can in theory work and thus is possable !!!!
    http://www.stats.govt.nz/browse_for_stats/industry_sectors/Tourism/tourism-satellite-account-2010/summary-results.aspx

    • Draco T Bastard 2.1

      That’s if tourists continue to pay GST.

    • r0b 2.2

      Nice example, but a drop in the bucket compared to what is required to pay for the tax cuts. Along with the risk that the increase in GST will mean some fall in tourist visits or spending, and the point made by Draco. So sorry, no magic bullet there…

      • Herodotus 2.2.1

        Just trying to show that it could be done, even if we have to visit fairyland or utopia !!! 😉

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