October 1, 2008 8:35am by David Farrar

Herald on tax cuts

At very nearly the conclusion of three terms in government and after nine consecutive years of growth, the Minister of Finance is giving workers between $12 and $28 more a week in their pay packets as the first round of personal tax cuts. The step is as welcome as it is belated.

Very very belated.

But the economic environment also creates doubt about the extent of the tax cuts. Just as the reductions begin, Michael Cullen has admitted that he is uneasy about the debt level sparked by economic weakness and other factors, such as a higher than expected take-up of KiwiSaver.

The take-up rate is not higher than I expected. The official forecasts were always ridiculously conservative. Many employees get a 2:1 subsidy to go into KiwiSaver, plus it is compulsory in a new job unless you specifically opt out. That was always going to generate a massive take-up rate.

Indeed, Labour may yet have to borrow to fund its tax-cut programme. If so, much of the blame can be apportioned to the generosity of some of its policies, such as those on student loans and free early childhood education.

It’s not free.

Tax cuts, not credits, should have been accorded a far higher priority, given the public’s understandable irritation with bountiful operating surpluses and Labour’s reluctance to acknowledge that the state should take no more of people’s earnings than it reasonably needed.

Labour still do not acknowledge this. They do not see tax cuts as a moral issue (take no more than needed) or an economic issue (tax cuts boost economic growth) – purely as a political issue. Labour sees tax cuts as welfare for the rich – not as something good to do.

Almost Labour’s first act after taking power in 1999 was to raise the top rate of personal tax. This was done for no other reason than to restore the tax scale’s former bite on high earners. Five years on, a farcical “chewing gum” tax reduction was proposed and then abandoned.

Nine years on, a move in the opposite direction has finally been made. It should be greeted warmly. If it is viewed widely as overdue and underwhelming, Labour has only itself to blame.

Indeed.