National have dug us in to a deep economic hole. We’re borrowing $380 million a week, and looking at a record budget deficit. Against this backdrop Bill English delivers his third budget this week. All the softening up and punditry so far has been about cuts. How many? How deep? Kiwisaver? Working for Families? What is going to go?
Like lemmings we’re accepting National’s framing of the budget, and marching even faster to our economic doom. Very few economists or commentators are questioning the slash and burn mind set, and looking at the alternative. Yes, there is an alternative. We can reject reductions in spending, and look at raising government income instead. Raise revenue how, I hear you cry?
1) Reform the tax system. Start by reversing National’s unaffordable tax cut bribe. It didn’t stimulate the economy, and it only benefits the very well off. It costs at least $2.5 Billion a year (or by some estimates $15 Billion over 4 years), and that is money we could well put to better use right now. In fact, go further, make the system more progressive up to and including matching Australia’s top rate of 45% for income over 180,000. Take GST down to 10%. Bring in Labour’s $5000 tax free. Hmmm, by the time we’ve done all that we probably won’t have increased government revenue will we. But we will have put money into the hands that need it, and will spend it here in NZ, thus “simulating the economy” much more effectively than “trickle down” nonsense ever did.
2) Tobin tax. The Tobin tax (Financial Transactions tax) is effectively just GST on on financial services transactions (which currently don’t attract GST – why not? ). We’ve covered it here before, when 1000 economists (including four from NZ) wrote an open letter to the G20:
This tax is an idea that has come of age. The financial crisis has shown us the dangers of unregulated finance, and the link between the financial sector and society has been broken. It is time to fix this link and for the financial sector to give something back to society.
Even at very low rates of 0.05% or less, this tax could raise hundreds of billions of dollars annually and calm excessive speculation. The UK already levies a tax on share transactions of 0.5%, or ten times this rate, without unduly impacting on the competitiveness of the City of London.
The Tobin tax is part of the economic policy of both the Green and Mana parties. I’ve found it difficult to source an estimate of how much it could raise in NZ (any links much appreciated), but there is some talk of it replacing GST:
It’s time to drop our goods and services tax and adopt a financial transactions tax. This was not an option proposed by the 13 comfortable men on the Government’s Tax Advisory Group but it’s an idea whose time has come.
We all know GST disproportionately hurts those on low and middle incomes who work hard, live week to week and spend most of their income. An FTT, on the other hand, would impact most heavily on the likes of currency speculators and similar financial wheelers and dealers who gamble with wealth created by others.
This form of tax will be more effective if it can be imposed in all major economies, but it is the way the world is moving.
3) Crack down on tax cheats. Bernard Hickey tells it like it is:
Havens for rich tax avoiders will cripple NZ
Avoiding and minimising tax is almost a national sport in New Zealand. There has been a grudging admiration for those who can get away with sticking it to Te Tari Taake. Among the professional and entrepreneurial classes it is seen as par for the course to shelter assets and income in family trusts and company structures that help reduce or avoid tax.
Many of the multi-national companies operating in New Zealand funnel income, assets and debt through various tax havens and vehicles that keep tax paid here to a minimum. Most of our politicians, city councillors, bankers, accountants and judges use such vehicles to protect their assets from the prying eyes of Inland Revenue, creditors, ex-spouses and, ultimately, the courts. New Zealand now has up to 400,000 family trusts.
It means the vast majority of taxes are paid by the mugs on PAYE and by those who have to pay GST for their goods and services. The policy-making classes believe this dual tax system will not change because they run it.
But the game is coming to an end, and it must if New Zealand Inc is to have any chance of balancing its books and avoiding national bankruptcy. …
International pressure is growing on countries such as Ireland that are seen to be trying to “beggar thy neighbour” by offering tax havens. Companies such as Google that channel their GST-free revenues from the “cloud” and through low-tax vehicles in Ireland are now facing growing scrutiny.
So what are New Zealand’s policymakers doing? Our Government is about to quietly drop its tax on gifting assets into family trusts, which is expected to unleash a wave of transference of assets into these trusts. This week the Government agreed to try to set up a tax haven for the administration of pension funds.
Well worth reading the whole of that piece by Hickey. Why are the Nats taking us in exactly the wrong direction on this issue? Sorry, that’s a rhetorical question, we all know why.
4) Capital gains tax. Hello government – are you listening to your own advisors?
Background documents to the May 2010 Budget disclose that the Inland Revenue and Treasury consider that the tax base needs to be broadened, even beyond the reforms in the 2010 Budget. They concluded “at a theoretical level, there is a strong case for a comprehensive capital gains tax. It would broaden the income tax base and make it more comprehensive”.
So there’s four suggestions on raising government revenue. What they all have in common is that they take money from those that have money. But that’s National’s constituency, so don’t expect to see any of these in the budget. Ignoring a mountain of Keynesian economic theory and evidence, the budget will all be about cut cut cut, and driving us deeper into an economic death spiral.