Politics - Creating a Wealth Revolution (18 May 2009)

In his acceptance speech at the Republican convention in August 1988, President Bush announced: “And the Congress will push me to raise taxes, and I’ll say no, and they’ll push and I’ll say no again, and they’ll push again. And I’ll say to them “Read my lips: No new taxes”.  In June 1990 he found himself agreeing to a rise in taxes after all in order to keep the deficit from getting out of hand. One day reporters pursued the President as he jogged laps in St Petersburg, Florida, pressing him to clarify his stand. “Read my hips!” he smirked, and jogged on. Bush’s acceptance of tax hikes in violation of his pledge hurt him badly when he ran for re-election in 1992. He was defeated at the polls that year.
- P. F Boller, Presidential Anecdotes[1]

John Key and his National-led government would do well to reflect on the fate of President George Bush senior after he broke his election tax pledge. After all, tax was a main election pledge of the National Party at the 2008 election. In their case it was a three-year programme of tax cuts that attracted the support of many New Zealanders who were disgruntled with Labour’s broken tax cut promise in 2005.

John Key said, “I make no apologies for sending a clear message that National values enterprise, hard work, and people getting ahead under their own steam. We think personal tax reductions are the priority in the current environment. The surest way out of the red ink is for the New Zealand economy to grow faster than is currently projected. One of our first priorities is reductions in personal tax. In the short term, personal tax reductions will provide much-needed flexibility to taxpayers confronted with difficult economic conditions. In the medium term, our tax package will help make New Zealanders' after-tax wages more competitive. It will improve incentives in our economy and it will drive growth.”[2]

While the 2009 tax cuts have now been delivered, National promised tax cuts in 2010 and 2011, “On 1 April 2010 we will shift the threshold at which the 33 percent rate applies out to $50,000 and lower the top rate to 37 per cent. On 1 April 2011 we will lower the 21 per cent rate to 20 percent. The top tax rate applies to many of the skilled workers our communities rely on - including school principals, GPs, police officers, and many teachers. By reducing the top rate we will show these people that they have a real future in New Zealand where their effort and aspiration will be rewarded.”

John Key explained, “This programme of tax reduction will provide welcome relief for households who are feeling the pressure of a down-turning economy. That means that under National's tax plans around 80 percent of taxpayers will be paying no more than 20c in tax for every additional dollar that they earn. As a result of our changes to the tax structure, most workers with second jobs will pay a secondary tax rate of no more than 20 percent. Our longer-term plan for the income tax system is a simple three-tier structure with the highest rate at no more than 33 percent for income above $50,000.”

National was very clear that there would be no borrowing to fund tax cuts: “Taken together, the removal of the R&D tax credits and the changes to KiwiSaver mean National will not have to borrow or cut public services to fund our personal tax cuts. We will, in fact, be booking a small saving from the changes we are proposing - $283 million over three years. So, no matter what smears my opponents may try to spread, you can be confident. This is a prudent and responsible tax package. National will not undertake additional borrowing for tax cuts.”[3]

With National’s tax cut pledge being fiscally positive, there is no sound reason for them to break their tax cut promise.

Indeed, with the government’s accounts looking increasingly bleak, the prudent course of action is to do what households have had to do and tighten their belt. After all, the current administration has become bloated by nine years of Labour’s regulations, laws and special interest spending promises. Considering that National opposed much of Labour’s agenda they should have no hesitation in eliminating non-essential expenditure.  

In their briefing to the incoming government, Treasury advised National that the rate of growth of government spending over the last nine years is unsustainable. They recommended bold action to reduce spending to affordable levels.[4] This message has just been reinforced by the Secretary of the Treasury, John Whitehead, who in a speech on Friday, stressed how imperative it is that National gets public sector spending under control. He explained that more needs to be done to eliminate wasteful spending including cutting existing programmes that do not fit the Government’s objectives, and he identified $38.5 billion of public money “that could be better used”.[5]

The Secretary warned, “The state sector is a very large part of the economy - central and local government combined represent about 40 percent of GDP - so it is hugely important that it works as efficiently as possible to support the private sector. We cannot afford to crowd out private enterprise or impose unnecessary costs on people and businesses.”

And that’s the point. It is the private sector - the wealth makers - that will lift New Zealand out of the recession not the government, who are wealth consumers. That’s why lower taxes, less regulation, and a smaller government must be the priority. Empirical evidence shows the optimal size of government to be about 25 percent of gross domestic product. Switching the dead-weight loss of wealth being consumed by government to the private sector would provide the jobs the job summit merely talked about, creating a wealth revolution this country has not seen for a very long time.[6]

Treasury is of the view that National should prioritise tax reductions in order to improve New Zealand’s economic performance. In particular they have recommended that the top personal rates of tax be brought down to 30 percent or lower. They have also noted that company tax is now far too high and should be reduced: “Average corporate tax rates in the OECD continue to trend down, and New Zealand’s 30 percent rate is now relatively high, with small OECD countries having an average company tax rate of 26 percent in 2008”. If National is to succeed in their goal of lifting living standards so that New Zealand can catch up with Australia by 2025, an on-going programme of tax cuts is vital.

In his article “Judging National’s First Budget“, this week’s NZCPR Guest Commentator Sir Roger Douglas MP explains that there are ten fundamental economic truths that should be kept in mind when assessing a government’s budget - one is tax cuts:

“Tax cuts incentivise work and saving.  Ensuring all income is treated the same will remove costly distortions in our economy – like those occurring when people set up businesses in different ways to avoid tax.  The only way to reduce tax is to reduce Government spending. If Government spending is controlled, taxes can be low.  Mr English calls tax cuts unaffordable.  He’s wrong.  High levels of Government spending are unaffordable.  If we indulge the whim of every special interest group with tax money, taxes will be high.

“New Zealand’s current account deficit has ballooned.  If Government continues to spend at current levels, the deficit will increase.  This will see our credit rating downgraded, and our currency drop even further. But if the Government reduces spending – freeing up resources for tax cuts – it will help New Zealanders get through the recession and make the adjustment more manageable. In a recession we must tighten our belts and Government must realise this applies to it as much as to us”. 

At a time when wealth creators need greater certainty and less government interference, we are unfortunately being subjected to a number of initiatives that will deliver the exact opposite.

The first is in the vital Auckland region where the plan is to restructure seven cities into one super city. This is bound to create widespread uncertainty for an extended period while new consenting authorities are established and new regional plans put in place. This, of course, comes on top of the major uncertainty associated with the reform of the Resource Management Act itself. It is highly likely that many development projects will be put on hold while investors await the outcomes of these changes – at the very time when the country is in desperate need of the economic activity created by Auckland’s “power house”.

The second is National’s proposed new tax increase – in the form of an emissions trading scheme. It is, of course, the worst possible time to impose a new tax on a country as it will significantly hold back our economic recovery. The proposed Emissions Trading Scheme has already had a devastating effect on investment in New Zealand as the submissions to the ETS Review Select Committee from the country’s major industries reveal. Billions of dollars of future investment has been put on hold, and tens of thousands of jobs are in jeopardy as firms consider downsizing or relocating if the scheme is imposed. The proposed Emissions Trading Scheme presently hangs like a pall over New Zealand’s vital industrial sector.[7]

As National faces its first budget - in the wake of the Australian budget which last week delivered on the government’s tax cut promise – our Prime Minister and Finance Minister must not lose sight of the fact that families and small businesses are hurting badly. Many will have voted for National’s tax relief, since the tax cut promise, to drive economic growth and lift living standards, was central to their election campaign. The last thing National should be contemplating is breaking that promise because “postponing” the tax cuts is an easier option than cutting government spending. Voters have long memories.

Earlier this year an opinion poll on tax cuts was published by a left-wing organization which asked whether tax cuts should go ahead “if the government had to borrow to fund them”. Unsurprisingly, a majority of respondents said no and this was used to suggest that New Zealanders did not want future tax cuts.

This week the NZCPR would like to ask for your help in getting as many people as possible to answer this week’s poll question on tax cuts, which we will send to the Prime Minister and Finance Minister. The question asks whether the tax cuts should go ahead “if the government had to cut wasteful public spending to fund them”.

I have posted a short paragraph explaining the poll question at the end of this column and would ask for your help in copying it into an email and sending it on to those people in your address book who you think would like to have a say.

Further, if you would like to join the NZCPR’s Research Panel so that you can take part in a regular series of on-line surveys on attitudes to tax, climate change and so on, please click here.

Read more from New Zealand Centre of Political Research.

FOOTNOTES:
All articles can be found on the NZCPR RESEARCH PAGE
1. P. F Boller, Presidential Anecdotes
2. John Key on Tax Cuts: The National leader's speech
3. National's Election Tax Policy
4. John Whitehead, Looking to and through budget 2009
5. Treasury, Briefing to the Incoming Minister
6. Richard Rahn, The Optimum Government
7. Parliament, Emissions Trading Scheme Review Submissions

print