Editorial: Labour tax review a waste of time

Only those who subscribe to the politics of envy believe that a role of the tax system is to redistribute income. Their antediluvian thinking condemns fairness, reasonableness and the country's economic well-being to bit parts in the tax scheme of things. Instead, tax collection is a pretext for assailing the wealthy. Inevitably, this misguided philosophy is counterproductive. Somehow, however, politicians seem unable to resist the redistributive itch.

The Minister of Finance's itch is fast becoming a rash. Not content with raising taxes on income over $60,000 from 33c to 39c, Michael Cullen has promoted the issue of redistribution to the core of a two-stage review of the tax system. The very first question the first-stage inquiry will ask is whether the tax system can be fairer in its role of redistributing income. Using the system in that manner can, however, never be fair. And placing the heaviest burden on those who, theoretically, can most afford it sets the scene for practical calamity.

Many of the skilled people and entrepreneurs who are most needed in New Zealand decide to take their talents overseas. Dr Cullen is apt to wax lyrical on the knowledge economy, yet there is some part of the phrase "brain drain" which he seems unable to grasp. Additionally, many of those who remain divert much of their attention to tax avoidance. A wasteful tax avoidance industry then flourishes. Still others of the most potentially productive people decline to make further effort. They see little point in increasing their incomes for the benefit of the Government. In all instances, the state loses revenue through its own predatory practice. New Zealand has been down that path. Few want to go back there.

Any independent inquiry panel worthy of the name would deliver a sharp rebuttal to Dr Cullen's redistributive urge. The minister, however, is going to some lengths to ensure that does not happen. The yet-to-be-announced, four-strong panel will not, he says, include "flat earthers" and "loopies" who might advocate a flat tax rate. Nor would consideration be given to a growth-maximisation tax rate of about 20 per cent. Such circumscribing of the membership of the panel and its purview inevitably goes a long way towards invalidating its findings. The panel's conclusions will obviously reflect thinking within the ring-fence which the minister has erected.

That is particularly unfortunate because, as Dr Cullen points out, this will be the first full review of the tax system since 1967. Since then the world has been transformed by globalisation, financial sector deregulation, e-commerce and a multitude of social changes. One of the questions for the panel will be whether the tax system and tax rates need to be modified because of new technology and international competition.

The response to such developments will demand a breadth of thought and analysis that Dr Cullen seems determined to discourage. Concepts such as a growth-maximising tax rate and flat tax should not have been cursorily excluded from the debate. To have done so disregards an international trend - embraced also by New Zealand until this year - of countries cutting both their personal and corporate taxes.

The Government inquiry seems programmed to put New Zealand at cross-purposes with that trend, while promoting a misguided and discredited view of the tax system's role. That lends support to claims that it is largely a sop to the Greens and the Alliance - and their proposals for eco-taxes, a financial transactions tax and, of course, a more "progressive" income tax.

Labour has promised that the rise in the top personal rate will be the only tax increase in its first term. Given a similar election outcome, who, however, would bet against more of the same in a second term? And who will not regret the waste of a chance to shape a broad-based and fair tax system that will encourage, not hinder, initiative.