Jordan Williams: Christopher Luxon wrong to U-turn on tax policy

National Party leader Christopher Luxon. Photo / Mark Mitchell

OPINION:

On what should have been a day squarely focused on Grant Robertson’s fiscal mismanagement, the dramatic expansion of government spending, and resulting high inflation, there was instead an awful lot of talk about what seemed to be yet another U-turn by the Leader of the Opposition.

It’s becoming harder and harder to keep up with National’s tax policy. Take indexation for example. In the past year, National has been absolutely committed to indexation, then gone wobbly on it, then reiterated it was a “key commitment of any future tax plan”, then backed down only to say in “principle [it] is really good”, and then yesterday reiterated their commitment to the policy. Clear as mud. But indexation should really be a no brainer – even New Zealand First get it.

For too long politicians – Bill English and John Key included – have got away with stealth tax hikes every year. Inflation pushes people into higher marginal tax brackets meaning they pay more and more of their income to the tax man each year, even if there is no real increase to their income. And without a single vote being cast in Parliament. Indexation simply ensures that if a government wants to increase taxes, our democratically elected representatives have the final say—and bear the consequences of that decision.

But while - this week at least - indexation is now definitely National policy, the entire rest of National’s tax plans are again “up for review”. This includes their previous commitment to scrap Labour’s 39 per cent income tax rate.

As Left-wing parties the world over have done for decades, by introducing the 39 per cent top rate of tax, Grant Robertson set a political trap. Once the bracket was established, Labour could try to portray anyone calling for its removal as promoting “tax cuts for the rich” above help for the struggling middle. It raises very little revenue, but allows the Government to fuel the politics of envy. And National now seem to be dancing to Labour’s tune.

Where is the ambition for New Zealand? We already know that the doctors, engineers, IT professionals and others that New Zealand desperately needs to attract are picking Australia because of higher take-home pay. One of the few areas we can be competitive is in tax rates. This isn’t “trickle-down” – it is the harsh reality that New Zealand cannot compete for the world’s knowledge workers with beautiful landscapes alone.

When the fact that there are almost no exceptions is factored in, New Zealand has one of the world’s highest GST rates. That means that for many of the very people New Zealand needs to attract, more than 50 per cent of their marginal income is taken in tax and then frittered away by a wasteful Government. We might as well put up a sign saying “Higher Taxes Here” for arrivals at our airports.

All serious analysis shows that the main impact of having high personal marginal, decoupled from the company tax rate is to create the incentive for people to avoid it by keeping capital locked up in companies. It damages the key feature of New Zealand’s generally neutral tax system. The National Party caucus of yesteryear was full of business owners who understood the damaging effects of this perverse incentive.

With all this bouncing around, voters must rightly be questioning, what does the National Party under Christopher Luxon actually stand for? Core National Party supporters may appreciate that the National Party is between a rock and hard place. They may give Luxon, and his finance deputy Nicola Willis, the benefit of the doubt that they are clearing the decks politically to make their tax policy less open to Labour’s attacks.

That theory would be more credible if the National Party was solid and consistent on other areas of its fiscal offering – in particular, demonstrating a clear plan on how they will tackle the dramatic growth in Wellington’s bureaucracy and curb spending. After all, it’s the spending that counts – tax policy just changes whether its taxpayer pay today or tomorrow (with debt). Tax relief, or even indexation, is not possible without a credible spending plan, a reform package to make the state more efficient, and not changing course every week. Just ask Liz Truss.

National can have a strong electoral pitch: Making New Zealand a more prosperous country by letting Kiwis keep more of their hard-earned wages and clamping down on government waste and excess. But they can have no credibility on tax policy when that policy changes every week.

• Jordan Williams is the Executive Director of the Taxpayers’ Union.