Tax is love
Shamubeel Eaqub on giving back
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.
Tax is positive or negative depending on how a government spends the revenue it collects.