Herald fails Economics 101

The Herald editorial fails the most basic economics test. They say:

In these circumstances, the Government ought to be considering a tax levy for a limited term. The Greens suggest 1.5 per cent on annual income above $48,000 and 3 per cent above $70,000. All middle and higher income earners would feel they were contributing effectively. It is money they might otherwise be saving in the present climate. Put to the rebuilding of Christchurch, a levy could strengthen the faltering recovery of the whole economy over the next year or two.

A responsible government would not turn it down.

First of all, any so called temporary levy will inevitably be about as temporary as the Maori seats, or Muldoon’s temporary surcharge.

But now let’s dissect the Herald’s economci argument. They say a tax increase will strengthen the faltering economy. It will not. In fact it will do the opposite by sucking money out of taxpayers, meaning it can’t be spent.

The Herald suggests the tax increase would go to the rebuilding of Christchurch but it doesn’t work like that. Christchurch is going to be rebuilt regardless of any extra tax.

We’ve just avoided a double dip recession. Over time the rebuilding of Christchurch will boost economic growth – but this will not start for probably a year and stretch on for many years. In the meantime the loss of production from the earthquake will probably push economic growth negative, just as we narrowly avoided a double dip recession. We will never fully recover that loss of economic output, so I expect the economy to remain pretty weak until 2012/13. So again, it would be economic stupidity to increase taxes as we recover from the earthquake.