How Labour could outflank Nats on tax

‘To tax and to please, no more than to love and be wise, is not given to men.’’ So wrote the 18th-century Anglo-Irish statesman Edmund Burke, and if the postwar embrace of high taxes seemed temporarily to contradict his claim, the last few decades have given it proof. Certainly no modern-day Labour Party likes talking tax.

After autumn’s intense debates, the tax conversation has been more muted, but we can expect it to flare up again – and perhaps even dominate next year’s election campaign. If so, questions of fairness will be central.

National’s plans to axe the top tax rate and reinstate interest deductions for landlords are not, I suspect, especially popular; they look too much like a handout to Christopher Luxon’s rich cohort, and he now seems to mention them less. But even his call to adjust the tax brackets suffers from the same problem.

Luxon would raise the thresholds, so that the 17.5% rate applied only to income above $15,600 rather than $14,000, as currently; the 30% rate would kick in at $53,500, not $48,000; and the 33% rate at $78,100, not $70,000.

But even these changes, though superficially aimed at middle New Zealand, would benefit high earners the most. The saving for a public-sector manager on $120,000 would be $1042, but for a minimum-wage checkout operator just $112. From a fairness point of view it is unfathomable.

Labour’s response could be to simply deny the need for any change. The typical

Kiwi is not overtaxed: far from it. According to the OECD, just 19.4% of the average New Zealand salary goes in taxes, the lowest in the developed world except for Colombia and Chile.

If middle New Zealanders are struggling, it is rather because wages are low, firms that face little competition can raise prices sky-high (hello, supermarket duopoly!), and public services are patchy. (If anything, average Kiwis would be better off paying slightly more tax, as long as they got significantly better public services.)

Labour could take this line, and hope that cost-of-living payments and wage rises can ease middle New Zealand’s inflation anxieties, especially if any coming recession is relatively mild.

If, though, people feel themselves to be overtaxed, the clamour for change may continue. Labour may then need to contemplate tax reform – but the kind that favours the bottom and the middle, not the top.

One must park, for a moment, the problem that New Zealand simply does not raise enough revenue. If we taxed like the European countries whose public services we admire, the Government would have another $20-$30 billion a year for education, welfare and health. But having ruled out a capital gains tax, and being disinclined to implement levies on wealth or inheritances, Labour has few options there.

It can, though, fix the tax system’s tilt against the poor. GST hits low earners hard, and they are taxed on every cent of income. Conversely, many of our multimillionaires pay a lower tax rate than people on the minimum wage. Labour could take the $1.7b cost of Luxon’s threshold adjustments and – as former party staffers such as Clint Smith have suggested – redirect it towards more progressive tax cuts.

For the same cost, Labour could make the first $5000 of income tax-free. This would save a minimum-wage worker 10.5% of $5000, or $525 – nearly five times Luxon’s offer. Average earners would get the same tax cut.

But so too would the very wealthy. And losing $1.7b in revenue would be a blow for Labour. Could it recoup the tax cut from the rich?

It has promised no further taxes this term, but could make pledges for 2024 onwards – lowering, for instance, the threshold at which the 39% rate cuts in from the current $180,000 to $120,000, and introducing a new top rate of 45% on income over $250,000, similar to Australia’s. That could recoup roughly half the $1.7b cost.

Labour would then need only another modest proposal – a levy on unimproved land value, say, or curbs on multinational tax avoidance – to make its changes revenue-neutral.

Of course, the tax increases might then seem to be mounting – especially if one includes social insurance. So Labour might have to park any further tax proposals and accept some revenue loss overall, or rely on the tax take outpacing expectations (as it has done recently).

There are no easy options. Still, Labour has ways to protect much of the $3b in new spending set aside for future years, while outflanking Luxon by offering most Kiwis a much larger tax cut than he ever could.

This would be a long way from the ideal world in which all forms of income, including capital gains and inheritances, are taxed fairly. But it might at least prove Burke wrong.

National’s plans to axe the top tax rate and reinstate interest deductions for landlords are not, I suspect, especially popular; they look too much like a handout to Christopher Luxon’s rich cohort.