Tax is likely to be a significant issue in the lead-up to September's election. Should we be paying more to better fund health, education and other essential services; or are we, in fact, paying too much? Here are both sides of the argument:
Tax the engine that makes society run
By Brit Bunkley
Mark Twain once wrote, "The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin". Twain lived during an era when taxes were minimal and taxation was flat (so that the poor and middle class paid most of the burden).
Poverty was high, and health and education was for a select few. Government benefits were minimal at best. Taxes were universally despised.
This perception changed by the last century.
Thanks to citizen and union action, equality through public participation became the social democratic goal.
Progressive income taxes (in which the wealthiest pay a larger percentage of income or wealth than the poorest) were introduced in order to redistribute wealth throughout society. The top end tax remained high in the developed world. Here it sat at 66 per cent until the 1980s.
Although neo-liberal globalism has taken its toll on all nations, this top rate was not too far off what many European nations still have today. Denmark's top marginal effective income tax rate is 60.4 per cent. Austria is at 50 per cent. Australia is 48 per cent. The economist rock star Thomas Piketty recently argued for an even higher 80 per cent levy on high earner income in a op-ed for The Guardian.
All political parties are now falling all over themselves to either maintain the low tax burden or lower taxes even further.
MIT Professor emeritus Noam Chomsky once explained that ideally "a very good measure of how democratic a society is to ask about its attitude toward taxes. If you had a free, functioning democratic society, tax day would be a day of celebration. The people have saved and set aside a pool of money. Here we are getting together to fund the policies that we decided on".
Tax is the engine that makes modern society run. It pays for roads, police, firemen, the super fund, healthcare, education, relieving poverty, prisons, the arts, film, radio, TV, defence, programmes for mental health and prison, law for those who can't afford it, housing for the homeless, libraries, parks, and many other fundamental aspects of life.
All of these areas have suffered due to defunding due to the dramatic loss of tax revenue -- resulting in high crime, long waiting lists, falling education outputs, and skyrocketing child poverty. Health funding was slashed by $1.7 billion between 2008 and 2014. The latest OECD statistics show New Zealand has fallen to the bottom half of developed nations for investment in primary school education.
The Herald recently reminded us that we in fact have "the lowest income taxes in the developed world" and as a whole the lowest "tax burden" next to Chile and Mexico. "The average married New Zealand couple with two children and one income pays the least amount of tax in the OECD when family benefits are taken into consideration."
We also remain the only developed nation without a capital gains tax, a glaring tax loophole for the affluent whose wealth is created in a large part from capital gains.
Additionally, as warned by the IMF last month, without a moderate capital gains tax (with its "sand in the gears" effect on the housing market) the current housing bubble may well pop.
In 2008, National slashed the upper income brackets.
They increased GST while failing to make up for the shortfall of the income tax cuts. GST's burden falls heavily on the lower and middle classes (the top incomes can only spend so much).
Many nations sensibly adjust spending to annual inflation and increasing population, but not NZ. The cost of living increased 15 per cent since 2008.
The population increased 12 per cent. Our spending for the most part has fallen.
According to Treasury, spending as a proportion of GDP has fallen to below just below 29.4 per cent, tying with Ireland as the lowest in the OECD. National wants to cut it further to just 26 per cent. To put that into perspective most developed nations have government spending levels between 45 per cent -- 60 per cent of GDP.
Mysteriously, and against all facts, many here have the media-spun perception that we spend too much, our taxes are too high and we have too much public debt. It is simply not true.
According to OECD data, we have among the lowest government debt to GDP ratios in the developed world, the lowest taxes and the lowest ratio of government spending to GDP. And our trickle-down economics has done squat for the economy.
Yet, all political parties are now falling all over themselves to either maintain the low tax burden or lower taxes even further. Yes, we now have a small surplus, but it was the last surplus that allowed NZ to sail through the 2008 global crash.
Such market "corrections" are cyclical. In fact, when looking at the average cycle, we are overdue, so complacency on the budget is foolish.
Refusing to increase taxes for the top 10 per cent income earners in line with the developed world is even more foolish.
Brit Bunkley is an internationally exhibiting artist, recently retired from UCOL. He has taught various political science courses.
Bracket creep must be addressed
By Jordan Williams
May's Budget is a chance for a major tax reset to set a course for economic prosperity. Tax cuts incentivise wealth creation and hard work. IN THE next few weeks, Cabinet Ministers will be making decisions on this year's Budget and its tax relief package.
Despite National-led Governments being in power since 2008, the average tax rates paid by New Zealand workers have been increasing thanks to bracket creep -- where inflation and average income growth pushes workers into higher marginal tax brackets.
The average income earner pays $483 more tax per year than in 2010, because of inflation alone. If income tax thresholds had been adjusted with average changes in earnings, so the rate of tax paid stayed the same, they would be paying $1361 per year (or $26 per week) less in tax.
In assessing proposals for tax relief, compensating for bracket creep should be the starting point. Any tax cut up until that amount, is simply a catch up to what was the status quo in 2010.
Last year John Key told Newstalk ZB delivering "meaningful" tax cuts would require the Government to set aside $3 billion. To put that into perspective, since the National Party was elected in 2008, $10.3b (or $6015 per household) has been budgeted as new spending initiatives. Only four per cent of that amount ($415 million) has been delivered in tax relief.
This is from the centre-right party that, according to Mr Key, "philosophically believe[s] in lower taxes and smaller government".
We had our economist model five options for tax relief with fiscal implications of less than John Key's suggested $3b.
They form the basis of a report we published earlier in the week. One option is creating a tax-free threshold of $13,000 -- giving every Kiwi worker earning over $13,000 a tax cut of $1295 per year, or $25 in the pocket per week.
Another option targets middle income earners and would reduce taxes for the average worker by more than $35 per week.
Too often the media describes tax cuts as a "bribe", as if they should be treated as an area of public spending. Sadly, in the political realm public money is for the elite to bestow magnanimously on the people.
In reality, tax cuts are nothing more than a commitment from the school bully to take less lunch money. They are not government spending.
While it is moral for the rich to pay more -- to cover the social safety net and ensure public services and the good infrastructure which the Government is in the best position to provide -- it is morally wrong for the Government to take even a dollar more than is needed. As taxes increase, more and more transactions that would otherwise result in benefits to both parties are foregone.
This shifting of economic activity from higher to lower value uses costs between $13 to $17b. That equates to roughly the amounts spent by government on education ($13.5b ) and superannuation ($12.9 b ).
As the Taxpayers' Union demonstrates by shining the light on government waste, there is plenty more to do before anyone would accept that every dollar being collected is well spent. Until that happens, the Government should be making every effort possible to reduce the tax burden.
Treasury's 2016 Half Year Economic and Fiscal Update shows economic growth is expected to average about 3 per cent over the next five years. Surpluses are projected to rise to $8.5b by 2020. In addition, the financial accounts for the seven months to January show the tax take is tracking even higher than expected.
Prior to the 2014 election Bill English committed to reduce taxes "when conditions allow it". If the current conditions aren't that, what are?
May's Budget is a chance for a major tax reset to set a course for economic prosperity. Tax cuts incentivise wealth creation and hard work. They fuel economic aspiration and growth. Bill English should grab the opportunity.
Jordan Williams is executive director of the New Zealand Taxpayers' Union.
5 Options for Tax Relief in 2017 is available at www.taxpayers.org.nz/5-options