Let’s Talk About Tax.

Ruth Laugesen, a senior writer for “The Sunday Star Times”, asked me a dozen questions for her article ‘The Truth About Tax’ of 28 August, 2005 (It does not seem to be on the Web). Here follows my full answers to her questions.

Keywords: Regulation & Taxation;

Other articles on the 2005 Election Tax Debate

1. Are New Zealanders paying through the nose when it comes to tax? No. On international measures, the total tax take in New Zealand is not high. I think we are very lucky. We have a reasonable health system, a reasonable education system, a generous minimum retirement income system. They could be better of course, but it is almost a miracle as how good they are, given the little tax we pay.

2. Everyone and his dog says you’re better off in Australia when it comes to tax. Is that true? Precise comparisons are difficult because it is not only what you pay in tax, but what you get in return. There is, however, some evidence that lower income taxpayers are better off in New Zealand and higher ones are better off in Australia. Even here there is the problem of matching incomes. When the tax cuts and other policies of the late 1980s and early 1990s stagnated the New Zealand economy (we lost 15 to 20 percent of income per head relative to the OECD), the more moderate thoughtful policies had Australia powering ahead of us. How do we factor in past New Zealand economic management failures? (Apparently I am neither everyone nor her/his dog. )

3. Why not charge everyone the same tax rate? Most countries, including New Zealand provide more income support for the poor than the rich. This is particularly true where children are involved since they cant earn income themselves (and their parents can earn only as much as parents without children).

4. National says Labour’s family tax package is effectively putting working families on welfare. Is that just spin? Humpty Dumpty said (‘in a rather scornful tone’) ,’When I use a word, it means just what I choose it to mean – neither more nor less.’If we want to describe family support as ‘welfare’, so be it. National has contributed to family assistance packages in the past (including when Bill English was Minister of Finance) with some generosity to children and without compunction about whether it was ‘welfare’ or not.

5. Labour says National’s tax package will mean cuts in health spending. Is that just spin? What we know that the big unbalanced in tax cuts of the 1980s led to significant cuts in spending on health and education in 1988 and 1991 (and major social security benefits cuts in 1991). The 2005 National package is also unbalanced. We dont know how they really plan to finance/rebalance it. They talk about waste elimination and restraining government spending (which are sort of spending cuts). What too, if like the 1980s one they stagnate the economy?

6. Do families get special handouts from the government in other countries? Is the Pope Catholic? I don’t know any rich country that does not offer some family assistance. Some do it badly of course. A few years ago we were among some of the least generous, but I have not seen companions since the working for families package was introduced. .

7. What’s the point of taxing all of us and then recycling it back to some of us in the form of family tax concessions? It is not an exact recycling. Some people are net gainers, some people are net losers. If we knew how to do this without recycling, we would. In the interim the current system is the best we have. (Would that the spin doctors tell us a better one. Have you noticed how critics get vaguer and vaguer as they move from criticism to constructive proposals?)

8. We know there’s no such thing as a free lunch. Where’s the money coming from to pay for National or Labour’s tax promises? We know the Labour promises are coming out of the contingency reserve. There is a worry they have used too much of it, and there is not enough left for real contingencies. National’s promises far exceeds the reserve. As the response to question 5 says, we don’t know how they will really finance it. I expect that when in office they will find that their current financing plans don’t work. I just hope they are courageous enough to admit their error and cut government spending by the required (presumably large) amount. Running a fiscal imbalance will severely damage the economy, as it did in the late 1980s.

9. If tax is government theft, why should we pay any at all? The statement belongs to the same rhetoric as ‘property is theft’, so why should we recognise recognise private property? We pay taxes in order to attain community goals which cannot be delivered by the untaxed market.

10. Has Labour been wasting our tax money? Every government – Labour, National or the dog’s – has some inefficient spending. So does the private sector. Every government – Labour National or the dog’s – does their best to eliminate such waste. They only partly ever succeed. (In some respects the public sector is more vigorous than the private sector in eliminating waste.) As Ex-Treasury Secretary (and ACT list candidate) Graham Scott said, “Designing tax cuts is child’s play. It is on the expenditure side where all the problems are.”

11. Is it true that cutting tax makes people work harder? The theory says it may, but the evidence is surprisingly thin and even contradictory that it does. Even more surprisingly the evidence is that high tax countries do not have an inferior economic performance to low tax countries.(If you are unsure of this, consider how much less contentious is the statement that ‘higher excise taxes on alcohol and tobacco reduces their consumption’. Economists dont argue over this – even those who smoke and drink. They scrap like the deuce over the exact magnitude of the reduction. In the case of income taxes they scrap like the deuce over whether there is any reduction.) Perhaps with lower taxes people are near their income targets, and work less. Perhaps the way the money is spent on public services offsets the income effect. (One argument – based on a Europe vs US comparison – is that high tax economies are more rigorous in their public spending than low tax ones.) Perhaps the economists’ theory of human behavior is too thin.

12. What are the chances either Labour or National won’t stick to their tax promises because they find they can’t afford them?< They wont introduce their tax cuts if: (i). They don’t get elected. (ii). Their coalition partner wont let them. (iii). There is a major crisis which gives them the excuse or requires them to tighten the fiscal stance. However, in the last case: (iv). Labour would first seek minor expenditure cuts and then probably defer the introduction of the tax cuts. (v). National would introduce its tax cuts anyway, but then vigorously go for the major expenditure cuts that would be required. Those are my guesses, but we are moving from the realm of technical economics to political economy. Go to top