Editorial: Top-rate taxpayers need to see value

With good cause, Michael Cullen is wary of returning to the well for a second drink. But it must be tempting. Despite the increasing number of New Zealanders ensnared by the lifting of the top tax rate from 33c to 39c in the dollar for annual income over $60,000, the Government is riding a popularity wave. If a poll taken when the tax policy was announced suggested more than 50 per cent disapproval, there is little evidence of grievance now. In the cyclical debate on the level at which the welfare state should nurse its citizens, the case for tender care seemingly holds sway.

But the Finance Minister is adamant that he is not about to "soak the rich" a second time. If that reflects the Government's sound financial position, it also makes sense for other reasons. Not the least is the difficulty of establishing for those hit by the higher rate that the extra money raised - just over $1 billion in two years - has provided good value.

The Labour Party defied a trend when it imposed the rise to pay for promises on its pledge card. Flatter taxes had been the order of the day. Any departure carried the whiff of a return to cloth-cap socialism. But if Labour was keen to differentiate itself from the National Government's practice of cutting taxes, it was not saying so.

It talked, instead, of a crisis in social spending caused by National's policy. The money raised from the tax hike was earmarked for putting things right in superannuation, health, jobs, student loans, crime and housing. Its impact, however, was always bound to be limited. It represented, after all, only 1 per cent of the Government's Budget.

The Herald's tax series has investigated how effectively the tax strategy has worked. The Government has basically met its pledges, give or take a few wrinkles. But the outcome has been patchy. Dr Cullen concedes, for example, that the job-generating Industry NZ project has been slow to get off the ground. Likewise, the fight against crime, aimed at burglary and youth crime, has had limited success. Statistics show a drop in the number of burglaries, but it takes police in Auckland almost three hours longer to respond to a burglary than it did two years ago. Then, as always in health and education, there is the fear that ongoing woes suggest the extra money has disappeared down a black hole.

Effectively, this cannot be established; the money cannot be tracked. But what is known is that no matter how great the spending in health and education, there always seems to be a cry for more. Even higher taxes would not quench that.

The Government is also aware that more and more New Zealanders are being drawn into paying the 39c rate. Labour had expected 5 per cent of taxpayers to be affected, but bracket creep, the process whereby more income earners enter the top tax bracket, has resulted in 7 per cent, or almost a quarter of a million New Zealanders, being involved. That suggests some who would consider themselves middle-income earners - and crucial to the Government's popularity - are being captured. It also indicates that, if sense prevails, Dr Cullen's next course should be to lift the threshold at which the top rate applies. The rate could be triggered by annual income of, say, $70,000 or $80,000. The fact that bracket creep has been instrumental in the Government scooping $100 million a year more from the tax hike than expected mitigates the downside of such an exercise.

Even that would skate around the essential problem raised by the higher tax rate. Those paying 39c in the dollar need to be convinced that their money has been well spent. There is an obvious difficulty if the money cannot be tracked. And that reinforces an inherent danger that the rate is a disincentive to work harder, invest and save - the risk to economic growth implicit in each and every tax rise.

Certainly, high income-earners have every right to conclude that, with the vexing troubles in health and education, they should have been left to spend their own money. That would have better served both their and their country's interests.

Feature: The $1 billion question