Tax is love

Shamubeel Eaqub on giv­ing back

Sunday Star-Times - - BUSINESS -

There is lit­tle on tax pol­icy in the up­com­ing elec­tion. Na­tional will cut in­come taxes, Labour will not cut and will have a work­ing group to pro­pose poli­cies for the next elec­tion. Mi­nor par­ties have lots of ideas, but it’s hard to see any new taxes be­ing the bot­tom line for coali­tion, or sup­ply of con­fi­dence agree­ments.

Even though tax is largely off the agenda for now, it’s worth­while think­ing about the state of our taxes now, and the pur­pose.

New Zealand is not a heav­ily taxed coun­try. In fact, it is just slightly lower taxed than the aver­age for rich coun­tries.

Taxes as a share of GDP are just be­low the aver­age for the OECD a club of mainly rich coun­tries. We tend to tax work more heav­ily, but have no spe­cific so­cial se­cu­rity con­tri­bu­tions many other OECD coun­tries have, or a proper cap­i­tal gains tax.

We should not start from a po­si­tion that New Zealand is a highly taxed coun­try. It is not. We should not also blindly be­lieve that a lower bur­den of tax would nec­es­sar­ily make the coun­try bet­ter off. Like any eco­nom­ics prob­lem, the an­swer de­pends – and in this case on what you do with the taxes once they are raised.

It is true that taxes cre­ate dis­tor­tions in the econ­omy. If we com­pare a taxed ver­sus a non­taxed sce­nario for a good for ex­am­ple, then the seller re­ceives a lower rev­enue than the price paid by the con­sumer, be­cause the tax goes to the gov­ern­ment. And the con­sumer pays a higher price they would with­out the tax.

The pro­ducer has less in­cen­tive to make the good and the con­sumer has less in­cen­tive to con­sume the good. So, there is less ac­tiv­ity in the econ­omy and we are all a lit­tle bit worse off. The gov­ern­ment has tax rev­enue and whether the im­pact is pos­i­tive or neg­a­tive in bal­ance, de­pends on what the taxes are used for.

Tax rev­enue is spent on a lot of ser­vices such as health, ed­u­ca­tion, po­lice, pris­ons and wel­fare. How much tax we pay is linked to how many, and what level of ser­vice we pro­vide.

At its core, tax is about pool­ing our re­sources and re­dis­tribut­ing, so that so­ci­ety is bet­ter off. Tax is love.

While it may seem like we should all sim­ply look af­ter our own af­fairs, it makes sense to pool our re­sources, and for those able to con­trib­ute more, to pro­vide these ser­vices in a cen­tralised way. Even though cen­tral­i­sa­tion has be­come a dirty word, some ser­vices sim­ply would not be pro­vided if left for us to all or­gan­ise, or would not have the scale to be able to do it well.

Phar­mac is one ex­am­ple of a pooled ser­vice, where we put our medicine buy­ing money into one pot, and as a re­sult we tend to get pretty good value for money. Of course, Phar­mac, or any cen­tralised agency, will not be per­fect. But the com­par­i­son should be the al­ter­na­tive, where we all try to do that in­di­vid­u­ally and with­out nec­es­sar­ily the ex­per­tise, pur­chas­ing power or abil­ity to co-or­di­nate. The al­ter­na­tive is not bet­ter.

When it comes to in­come in­equal­ity, the big dif­fer­ence across coun­tries is how the wealthy are taxed and trans­fer the pro­ceeds to the less well off. New Zealand has slightly higher in­come in­equal­ity than the OECD aver­age.

When we look at the long term his­tory, in­come in­equal­ity fell in the post-war pe­riod and stayed low un­til the 1980s. The eco­nomic re­forms of the 1980s opened the econ­omy up, lead­ing to sig­nif­i­cant dis­place­ment in jobs and in­dus­tries, re­formed wel­fare and re­formed taxes. In­come in­equal­ity rose and the eco­nomic growth of the last 30 years has not im­proved in­come in­equal­ity at all.

Other coun­tries also have in­come equal­ity, but their dis­pos­able in­come in­equal­ity is much lower be­cause of re­dis­tri­bu­tion. Swe­den for ex­am­ple, has what we might con­sider typ­i­cal lev­els of in­comes in­equal­ity, but very low dis­pos­able in­come in­equal­ity be­cause of a gen­er­ous wel­fare sys­tem.

Taxes may not be on the agenda for the vote on Septem­ber 23. Be­cause there is not much in any of the ma­jor par­ties’ poli­cies. But we should not start from a ba­sic mis­un­der­stand­ing about taxes.

We are not a highly taxed na­tion. We pay tax to pool our re­sources for ser­vices we all want and to re­dis­tribute to make our coun­try bet­ter off. How much tax we want to pay is di­rectly linked to what kind of New Zealand we want.

There is no magic way of hav­ing lower taxes, bet­ter public ser­vices and a fairer New Zealand.

123RF

Tax is pos­i­tive or neg­a­tive de­pend­ing on how a gov­ern­ment spends the rev­enue it col­lects.

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