Fallow on Tax

Brian Fallow writes how scrapping tax cuts would be bad:

Just for a moment there it sounded as if the Government might be preparing to renege on its promise of income tax cuts over the next three years.

Now that would seriously piss me off if that ever happened.

At a conference on tax policy at Victoria University last week, Finance Minister Bill English was laying out some home truths about how utterly the fiscal backdrop for such discussions has changed – Budget deficits and relentlessly mounting Government debt as far ahead as the eye can see.

The inherited decade of deficits and debt.

“The opportunities to reduce tax rates further will be fairly minimal,” he said.

But when asked if in saying that he was signalling something about the string of income tax cuts National had campaigned on, the answer was a curt “No”.

While I suspect if Labour had got back in, all the tax cuts would have been cancelled by now – and in fact we may have had tax increases.

There are structural problems as well, and the tax system is one of them.

It is, as PricewaterhouseCoopers chairman John Shewan told the conference, not sustainable. “We rely too much on too few taxpayers.”

The left see this as a good thing, If 40% of the country funds 60% of the country, then that 60% will vote for parties that support higher taxes on the 40% to fund the majority.

Nearly half of the tax take is personal income tax and nearly half of that, in turn, is from people in the top tax bracket ($70,000 plus since October).

Meanwhile, for the bottom half of households, ranked by income, net taxes (taxes less transfers received) are negligible or negative, according to the Treasury’s briefing to its incoming minister. And many of those on middling incomes have very high effective marginal tax rates as Working for Families tax credits abate. The IRD reckons over 500,000 taxpayers face marginal rates of more the 40 per cent.

Combine that with the income gap which has opened up between New Zealand and Australia (or indeed most of the rest of the OECD) and “probably the most internationally mobile labour force in the OECD” and you have a situation where a large part of the tax base is globally contestable. It is vulnerable. It is at risk.

In other words if you tax people too much, they leave.

It is not just that the tax base resembles an iceberg heading towards the equator. It looks as if the taxes we rely on most are the ones which are more damaging to economic growth.

An OECD study last year, entitled Tax and Economic Growth, looked at the relative impact of four kinds of taxes on GDP per capita.

Worst in terms of impact on GDP per capita, it found, are corporate taxes, followed by personal income tax. The least distortionary thing to tax is immovable property.

I find that fascinating. I must try and get a copy of the report.

“Particularly recurrent taxes on residential property,” Christopher Heady, one of the report’s authors, told the conference. “But that frightens politicians.”

In the more demure language of the report, such taxes are “very unpopular in many countries” and tend to be the preserve of local rather than central government. But property taxes do not affect decisions to work, or to acquire skills and education, or to produce, invest and innovate, to the same extent as other taxes.

There is a degree of fairness to consider in taxing an asset, as people who are asset rich and income poor may have to sell them. But having said that, it is important to get the incentives right for working, education, investment etc.

I hope the Government looks seriously at how to improve the structure of our tax system.