Thomas Coughlan: Can Labour afford to cut taxes next election?

Prime Minister Jacinda Ardern and her economic ministers have tough questions to answer on tax. Photo / Mark Mitchell

OPINION

Every election is fought on tax to a certain extent.

One of the most significant things governments do is provide services - the other side of that is deciding who pays for those services and how much it should cost them.

This election looks to be more tax-focused than most. National, effectively neck-and-neck with Labour, has forced the issue onto the agenda by committing to a multi-billion dollar tax cut package, adjusting tax brackets upwards, getting rid of the top tax bracket completely, shifting the bright line test back, and giving landlords the ability to deduct interest costs from their tax bills.

The exact cost of the package will depend on how National chooses to stagger it over the three-year term, but any way the package is implemented it will require a decent chunk of its allowance in each of three budgets to fund tax cuts.

With so much actual capital tied up in the promise, it's a safe bet to assume National will ensure tax is a topic of conversation - it quite literally can't afford not to.

This puts Labour in a difficult position. A progressive would argue that the existing system has people that pay both too much and too little tax.

Bracket creep has unfairly flattened the tax system, forcing people on low and middle incomes into paying too much of their incomes in tax.

At the other end of the spectrum, progressives would argue there are large parts of New Zealand that are not taxed enough.

Last week's tax debacle proved two things: people very much do care about how much they are taxed, and it is very difficult to argue that increasing the tax take is intrinsically good.

Again, progressives - Revenue Minister David Parker possibly among them - would argue that taxation is in and of itself a good thing. High rates of inequality are pernicious to society and harm our institutions and therefore taxation for the purpose of bringing fortunes down to earth is in and of itself a good thing, or so it goes.

Conservatives might counter with something along the lines of former US Supreme Court Justice Oliver Wendell Holms Junior and say that taxation isn't intrinsically good, but rather the "price we pay for a civilised society".

They would argue that there's nothing intrinsically wrong with the tax system not addressing widening inequality so long as there was enough revenue to provide good public services to those who need them.

Taxation, in other words, is to pay for the services that we need for society to function - but the Government really shouldn't take any more than is absolutely necessary.

It's hard to know without detailed polling where New Zealanders line up on this spectrum.

Our tax take as a percentage of GDP is about 32 per cent, a point below the OECD average. It should also be said that the "tax wedge", a measurement of how much tax the average people pays, and the tax wedge minus transfers like Working for Families, shows that the average Kiwi is perhaps not as hard done by as they might think.

While National will be challenged to prove how affordable its promises are at the next election, Labour will equally be challenged to justify why so many people on low and middle incomes pay so much in tax.

The party has a belief that government and therefore government spending can improve people's lives.

It also has a belief - proved by Jacinda Ardern's' swift kicking to touch of the Capital Gains Tax last Parliament and the introduction of a top income tax bracket so high that only a slither of taxpayers actually pay it - that the tax system is about as progressive as it can be under the current political conditions.

Faced with a decision between smoothing out the wrinkles of the world using spending or revenue, Labour has chosen spending, for the most part ignoring questions about whether it is taking the right amount of money from the right people.

This is largely the view of the public sector, with official advice regularly stressing to ministers that they should look at taxation from the perspective of revenue, at the expense of asking questions about who is paying tax and how much. Spending is for addressing social ills, taxation is simply about paying for it.

Again, progressives, including those within Labour, know this puts an unfair tax burden on low income earners because looking at taxation purely in terms of revenue naturally focuses attention on ordinary income earners - people whose income is easiest to get at - and not the uber-wealthy who are more likely to successfully lobby against taxes on them, structure their affairs in a way where they are less likely to pay tax, and put up a legal fight if the IRD finds them anyway.

Labour has, quite fairly, deduced that it's probably not worth the bother and decided to address society's ills through spending on low and middle income people using revenue raised from low and middle income people.

What makes the next election interesting is that this option becomes increasingly difficult for Labour to justify.

Income tax rates are too high - National is right. And yet Labour's spending promises could mean the party has very limited space to cut those rates in a way that makes their offering competitive with National.

The party will be burned by Revenue Minister David Parker's experience with GST last week - but also by former Finance Minister Michael Cullen's experience offering paltry tax cuts in his "chewing gum" and "block of cheese" budgets.

The party probably needs to drop thresholds - and it needs to do them in a way that doesn't have them compared unfavourably with the cost of a block of cheese (an increasingly difficult task, given the skyrocketing cost of cheese).

Labour hasn't ruled out tax cuts - but it hasn't exactly ruled them in either. The party's revenue policy will probably be determined by how confident it feels next year, as much as the broader fiscal and economic conditions.

Parker is trying to slowly shift the needle on this argument. His Tax Principles Bill, which will begin consultation shortly, will likely force public servants to think more about issues of vertical equity in the tax system, meaning, in plain English, that wealthier people should pay more tax.

Progressives might hope that this makes it easier to make the case for more progressive increases in tax rates and, conversely, would make it more difficult in future for conservatives to make the case for flattening the tax system.

Parker's other tax work, derisively but descriptively dubbed the Piketty Unit by National, is an IRD policy unit examining how much tax the uber-wealthy pay in New Zealand and, if they pay very little, how it is they do it.

People to Labour's left might hope this research would make the political case for things like capital gains and wealth taxes - the sort that formed the backbone of the Greens' 2020 revenue policy.

They'd be wise not to get too optimistic. Labour has been burned too many times to head to the election with a truly progressive tax policy. The party, quite reasonably, might ask why it should bother risking electoral ruin on a more progressive tax system that National would repeal as soon as it took charge anyway.

They may have one trick up their sleeve, however - a trick alluded to in Parker's famous tax speech in April. This is the "tax switch" in the vein of Bill English's income tax cut and GST increase. Labour could promise to raise taxes on the very wealthy to offset tax cuts for people on middle incomes - a hail Mary in tax terms, but it might be the party's only option if it wants to relieve people's tax burden while also promising better public services and strong public accounts.

Grant Robertson is fond of joking that National's fiscal plans fall into a fiscal "Bermuda Triangle" of trying to cut tax, increase spending and reduce debt at the same time. This election, more than the last, Robertson will discover that the Bermuda Triangle constrains him too.