PSA Journal, March 2010.
Keywords: Distributional Economics; Regulation & Taxation;
In my Commercialisation of New Zealand there is a chapter on ‘the abandoning of equity’, of how under Rogernomics social fairness went steadily down in the policy priorities. The report on tax reform by the Victoria University of Wellington Tax Working Group (TWG) confirms the relegation. Of course we all pay lip service to equity; certainly the report does. What it does not do is address the issue in any coherent way.
Perhaps that is understandable given the TWG membership of high-income older men with considerable knowledge of the taxes they faced, but little knowledge of the challenges faced by others, and absolutely no expertise in equity. The report does refer to ‘fairness’; saying ‘the tax system should be fair’ but it does not define what it means except by example, and strangely – I am being ironical – its examples are those which affect the members of the TWG.
So they are keen to reduce the tax rates on – well, er – high-income older men. Certainly there is a higgledy piggledy misalignment of rates on their top incomes (38%, 33%, 30% and, not so often mentioned, 0% for tax avoiders). Alignment makes sense since we dont want people choosing their economic activities just to reduce their taxes. But the TWG’s focus is on reducing rates rather than aligning them. They want the top rate down to at least 30 cents in the dollar (and they considered much lower rates – down to 20 cents).
They are very good at telling us what a disincentive to earn high tax rates are – although that is not so evident among members of the TWG. However the highest marginal income tax rates are not paid by those on high incomes but by beneficiaries (who are hardly considered by the report) and by those benefiting from the Working for Families income support package. Some have more than 100 cents taken for every extra dollar earned.
If the TWG really believes that high tax rates are a disincentive, you would expect it to put a lot of effort into thinking about these exceptionally high rates. Wrong. They dont affect HIOMs so their lame conclusion was ‘there should be a comprehensive review of welfare policy and how it interacts with the tax system with an objective being to reduce high effective marginal tax rates’. Bravo, except how come a group purportedly concerned with the tax system could omit such an enormous element of it?
An equity specialist on the TWG would have pointed out that there are interdependencies between these high rates and the overall income distribution. In particular, high effective marginal tax rates are a consequence of high minimum incomes in the community. The TWG does not understand that as it lowers its marginal tax rates on the rich, it either raises marginal tax rates on those lower down the income hierarchy or it reduces the incomes of those at the bottom. (The reduction may not be on private income; it may be a reduced social wage as public services are cut.)
This truth would not have been particularly palatable to the TWG, since it would have forced it to the realisation that not only were they talking about increasing income inequality in New Zealand but they were implicitly advocating reducing the lowest incomes.
Shades of Rogernomics, whose tax reforms transferred considerable amounts from those on low and middle incomes to the rich. It is difficult to give a simple summary but by one measure the net effect was to increase the incomes of the top 10 percent of the income distribution by a fifth between 1986 and 1992, while the bottom 80 percent of the distribution paid an extra $40 a week (in current prices) to fund the tax cuts.
Will that happen again? The big difference is that while the HIOMs are no less greedy, a MMP political system restrains the blitzkriegs of Winner-Takes-All which enabled the selfish few to grab a benefit for themselves. Because the conventional wisdom did not need to analyse equity, and even dismantled some of the machinery to think about it, it has not got the intellectual grunt for the MMP world. Hence the incoherence in the TWG report.
So the tax changes promised in the May budget are unpredictable. The government has to find a way between the contradictory pressures of its MMP voters, and the desires of high-income older males which the TWG represented.