While National tries to cut taxes, Labour needs to repair them
In a rented Ford Ranger (diesel) I chaired a spontaneous car-karaoke for economists, on EV subsidies to fiscal holes. My passengers were two of New Zealand's most challenging economists, New Zealand Initiative’s Eric Crampton from the right and CTU's Craig Renney from the left.
They found some agreement. That New Zealand's biggest problem is low productivity. Without it wages do not increase, we build less stuff and fund fewer health treatments.
During last year’s election, Craig Renney warned of a fiscal hole in National’s plans. We’re now seeing he was right, at least in general: National’s tax cuts are unfunded.
Instead of a feisty debate in a Ford Ranger, the Government has responded with ugly personal attacks, noting that Renney is a member of the Labour Party’s policy council. Being an opponent of the Government does not make him wrong. When ministers attack the man, rather than adequately refuting his argument, they reveal the weakness of their own position.
This is Muldoonism: irresponsible economic management, culture war and bullying individuals.
National is pushing ahead with unfunded tax cuts because finance minister Nicola Willis said she would resign if she couldn’t deliver. She need not hold so literally to her promise. She is in a coalition with partners who will not allow her to raise the revenue she expected from smokers and from taxing overseas purchases of homes. The economy is in recession. The commentariat’s use of the term “technical” to minimise the recession needs to be retired. If it smells like a fart it’s a fart, and anyway, per head the recession is deep.
Willis is justified in calling force majeur, and delaying tax cuts. They are part of her strategy for growing the economy by getting us to spend more. Deficit spending is a legitimate way to stimulate the economy but her goal is being achieved through the many large infrastructure projects which are keeping unemployment low.
The Government says some of the cost of tax cuts are funded by cuts to public sector staffing. But it also says those cuts in Wellington are designed to move more services from head office to the “front line”. We will be borrowing for tax cuts.
I expect Renney is now applying his considerable forensic skills to the design of Labour’s tax plans. Chris Hipkins has said Labour will take a new tax plan to the next election, hinting that capital gains taxes, maybe some form of a wealth tax, will be considered.
He can make a strong case for a tax switch, moving some of the tax take from personal incomes – your wages – to capital wealth. About 76% of our total tax revenue is from tax on our wages and GST on our spending. The OECD average is about 50%.
One reason the cost of living feels so high is that we take far too much tax from families on the way up the hill instead of applying the tax when you make it to the top. We treat the bulk of taxpayers as consumers rather than producers of wealth. Imagine how many more people would be at the top, if we gave a tax break to the wealth-makers of tomorrow still struggling up the slope?
Labour has previously found it enormously difficult to sell a new tax. If it wants to do a tax switch and introduce, say a capital gains tax, it will not be able to get away with also promising spending increases.
This will be a painful choice. Police salaries, dental care, mental health, defence force readiness are examples where costs are huge while the need is urgent. Besides, while a capital gains tax has an immediate effect on investment, it takes a decade before the revenue begins to show up.
Hipkins is probably right that a capital gains tax would not have won Labour the election. Its chance of a tax switch died in the service of its spending follies like light rail and EV subsidies. Voters stopped trusting it to spend their money wisely.
If Labour wants a fairer tax system, then it has to put all its chips on a tax switch – swapping a new tax for really big cuts in personal income tax. Former revenue minister David Parker apparently had an oven-ready plan set to go last year, which would have made a bottom rung of income tax free. Labour will have to make its offer fiscally neutral. It will not be able to carry on, as it has since the election, as the political wing of the public service, arguing every programme is equally a priority and precious.
Instead it should focus on reform of the public sector. Until Labour can explain why the billion dollars it promised for mental health disappeared without trace, and without any difference to mental health, it should not be promising spending increases anyway.
Great parties need Great Causes. Fixing our broken tax system could be the cause that Labour needs.
This is Muldoonism: irresponsible economic management, culture war and bullying individuals.