Tax and the Cultural Cringe

Comparing the US and New Zealand tax systems is comparing rotten apples with quality kiwifruit.
Listener: 14 August, 2004.

Keywords: Regulation & Taxation;

Far too much of the New Zealand economic debate is overwhelmed by the colonial cringe, an obsequious respect to overseas economics, with a failure to recognise that New Zealand circumstances are frequently different. Each May, a Business Roundtable press release, dutifully reported in the business pages, announces “Tax Freedom Day”, the day up to which – so it says – everyone is paying taxes to the government and after which all one earns is tax-free. The idea comes from the US right-wing think tank, the Tax Foundation, and is strongly contested in the US as misleading, because it ignores the fact that one also gets benefits from paying those taxes.

The Business Roundtable imitatively lifted the idea, without noticing that because the New Zealand tax system is pay-as-you-earn, one pays taxes all the year. Tell your Business Roundtable employer to stop deducting PAYE from your wages after the day his lobby group announced as Tax Freedom Day or tell your Business Roundtable supplier you don’t have to pay GST on your purchases after that date. Both will think you are crazy – like the idea of Tax Freedom Day.

The Business Roundtable is so slavishly imitative that it has not even noticed that the US tax year starts on January 1, but the New Zealand one starts on April 1. If a NZ Tax Freedom Day made sense, it would be in August not May. Members of the Business Roundtable seem so ignorant about taxation that perhaps they do not pay taxes.

Because of constitutional differences, the US tax experience is even more irrelevant to New Zealand and much of the rest of the world. The US parliament does not have highly disciplined political parties. The New Zealand Government knows that it can enact any tax measure it introduces because it has the votes in Parliament, whereas in the US, there is no such guarantee because each congressman votes independently of party affiliation. In order to get each congressman’s vote for a tax bill, there has to be something in it for her or him. So every US tax bill has special provisions to gather sufficient congressional support: typically, special exemptions for projects, industries and enterprises.

Thus, a particularly key but obstinate congressman may get a special depreciation deal for the mining in his district, tax exemptions for his farmers, and a billion-dollar rort for some corporation – Enron was an example – that contributed to his election campaign fund. The resulting US tax system is erratic and inefficient, much less coherent than even the one we had before 1984 under Robert Muldoon.

In his book Growing Public: Social Spending and Economic Growth Since the Eighteenth Century, Peter Lindert points out that European countries have much more efficient tax gathering systems, so they are able to raise higher taxes to fund a more comprehensive welfare state than the US. On the basis of the evidence, he concludes that their “net social costs of transfers, and the taxes that finance them, are essentially zero. They do not bring the GDP costs that much of the Anglo-American literature has imagined.” He goes on: “High budget democracies show more care in choosing the design of taxes and transfers so as to avoid compromising growth … Broad universalism in taxes and entitlements fosters growth better than the low-budget countries’ preferences for strict means testing and complicated tax compromises.”

New Zealand’s tax system is more like the European ones in terms of coherence, so, if we want to, we can raise more revenue and spend more on education, health, social transfers, the environment, recreation and culture and whatever we think socially desirable, compared to what Americans can.

Comparing the US and New Zealand tax systems is comparing rotten apples with quality kiwifruit. It makes no sense, unless you have a colonial mentality. Not that we should ignore Americans altogether. Lindert is a distinguished US economic historian, who has immersed himself in the data and differences between countries. His book offers numerous insights, with a sensitivity to the differences in circumstances between country and over time. It is not colonial cringe to use overseas research, but it is intellectually challenging to adapt foreign theory and practices to New Zealand conditions.