Maxim on Tax

Maxim have released a comprehensive 102 page report on tax policy by Steve Thomas. Its aim is a tax system that maximises economic growth. It notes:

Growth is affected by tax, which is how the government raises its revenue to do the crucial things we need it to, like paying for a police force or a public education system, building roads and supporting the poorest when they need it.

However, when we try to take too much money out of the economy in tax to fund government spending, we risk undermining the very source of that revenue. Also, if government spending is misdirected or of poor value, then we hamstring the economy’s ability to produce what we need and the amount of tax the government is able to collect.

This relationship between tax and the economy therefore needs to be carefully considered. We need to design the tax system so that it allows the government to take the money it requires, while doing the least amount of damage to the economy and so too our potential prosperity.

This is absolutely right. It is a balancing act between economic growth and funding Government services. To take two extremes – an economy with tax rates of 95% would end up like North Korea, while an economy with tax rates of 5% would not be able to fund much in the way of defence, health or education.

Maxim propose a number of policies:

1. A two step personal tax rate system with a top rate of 27%
2. A corporate tax rate of 27%
3. Aligning the trust and PIE rates to the personal and corporate rates
4. Removing tax incentives for KiwiSaver
5. No land tax or capital gains tax
6. GST from 12.5% to 15%
7. An upper limit for central govt spending of say 30% of GDP
8. A benchmark for core govt expenditure on welfare of around 15% of GDP

For me the key thing is No 7. If one can limit spending as a percentage of GDP, then you get options around tax reform. Maxim note:

A 2001 OECD study found that about one half of a percentage point increase in government consumption (the expenditure to GDP ratio) could cause a 0.6 to 0.7% direct reduction in per capita output.

If we can limit spending so that over time it is under 30% of GDP, then there will be a very significant boost to incomes and jobs.

What I would like is both National and Labour to outline desired limits for spending as a percentage of GDP – then voters could choose between them. The limits probably need to be soft (non legislative) to take account of recessions etc, but a soft limit would still be a huge improvement over no limit.

One can get to a limit without massive spending cuts. If one can retain discipline over new spending so that it grows significantly slower than the overall economy, the ratio will reduce over time.

A very good report.I suggest people don’t just argue the recommendations but read the summaries of research about why such tax changes will be good.