Page 9 of The Press today is an advertisement for Colin Craig’s Conservative Party and their policy of having two rates of income tax: 0% up to $20,000 and a flat rate thereafter. But the ad does not specify the flat rate. Will it be 20%, 30% or 40%?
How can anyone evaluate the policy without knowing what the flat rate will be?
As I have previously explained, if no reduction in income tax revenues is planned, the flat rate above $20,000 would need to be 34%. This would entail a tax increase for everyone earning over $36,000, with those earning between $40,000 and $70,000 hit hardest.
It is amazing that Craig thinks he can proceed in this way. Imagine a bank approached you and said they had a great deal for you on your $200,000 mortgage on which you are now paying 6%. Transfer it to them and you will pay two rates: 0% on the first $100,000 and some other unspecified rate on next $100,000.
Without being told what the rate charged on that second $100,000 is, only an idiot would even consider taking the offer. And only a company banking on the stupidity of its customers would make such an offer.
On TV3’s The Nation on Saturday morning, Colin Craig said that ACT and the Conservatives were not chasing the same voters. He is right. Whereas he seeks votes from the terminally gullible, we seek votes from the economically literate.
Speech to the Scenic South Conference
Dr Jamie Whyte
20 July 2014
Click here for a downloadable version of this policy.
ACT has a new proposal to make our democracy more accountable. The proposal may seem small but it could be the most significant idea in this election.
Policies such as the one I am announcing today, which change the behaviour of politicians, have greater long term effects than any particular proposals for this or that government activity, such as giving school children laptops, subsidising solar panels and the rest of the little tax-funded bribes the other parties trade in.
A proposal to reform New Zealand’s government accounts was hardly noticed in the 1993 election campaign. Yet the Fiscal Responsibility Act of 1994 has had a profound effect on how New Zealand is governed. Government accounts are now transparent and neither Labour nor National wants to be responsible for a deficit. The Fiscal Responsibility Act is probably the real reason why the government books will be back in the black by next year.
ACT’s fresh idea could be as influential as the Fiscal Responsibility Act.
* * * * *
Sir Geoffrey Palmer famously opined that the New Zealand parliament is the fastest lawmaker in the West. He was referring to the absence of checks and balances: the lack of a written constitution or second chamber of review. Laws can be introduced and passed in minutes. And they have been. An unsurprising example was a 1987 law to increase MPs’ superannuation. It passed through all stages of the legislative process, from introduction to becoming law, in seven minutes flat.
Had Sir Geoffrey not been of a socialist bent he might have pointed out that this legislative ease also made New Zealand lawmakers the fastest spenders in the West. In no other Western democracy is it so easy to spend taxpayers’ money. New spending proposals go through with minimal scrutiny or public debate.
Helen Clark’s Labour government increased government spending by 35%. In 1999 government spending was $15,500 per person. By 2008 Clark’s labour government had increased this to $21,000. (Both figures expressed in 2014 dollars.)
Do you remember any great obstacles being put in their way? Did Clark and her cabinet struggle to get their spending proposals past constitutional barriers or a sceptical parliament, media and public?
When government spending is being increased by 35% over a 9 year period, you might hope that political alarm bells would be ringing, lights flashing and barriers coming down. But nothing of the sort happened.
Increasing government spending by 35% was politically easy.
It shouldn’t be. Because, beyond a certain low level, government spending is a bad thing.
The most obvious reason is that government spending must be funded from taxation. Taxation transfers money from private individuals to the government. That transfer in itself costs society nothing. The taxpayer loses a dollar; the government gains a dollar. Nevertheless, taxation imposes a massive costs on society because it makes many productive activities unprofitable (by adding costs to them) and makes many unproductive activities profitable, such as employing a tax lawyer to rearrange you company’s affairs to reduce your tax bill.
This deadweight cost of tax is difficult to estimate but, for a country with a tax code like New Zealand’s, it is probably in the range of 25% to 50%. For every dollar transferred from taxpayers to the government, economic output is reduced by 25 to 50 cents. A less taxed population would be a richer population, before tax as well as after tax.
The second problem with government spending is that it usually replaces private spending. When you spend your own money on yourself you are likely to buy only what you value and only when you think it worth the price. When a government buys goods and services for you, these outcomes are unlikely.
Indeed, taken to extremes, profligate government spending can wreck an economy. Greece is the most obvious recent example. But several other European countries are struggling to get out of the holes dug for them by over-spending governments. After decades of governmental largesse, the French and Italian economies have near-zero growth and high unemployment rates, especially among the young. Youth unemployment in France is 24%. In Italy it is 35%. In their low-tax, low-spending, light-regulation neighbour, Switzerland, youth unemployment is 3%.
Nor is the problem restricted to national governments. After decades of over-spending administrations, California is almost bust. The excessive taxes it must now charge are driving businesses to other states – often to low-spending, low-taxing Texas. Here in New Zealand, Len Brown is spending Auckland City into a fiscal crisis.
* * * * *
Why then is there so little public resistance to increased government spending?
One reason is misrepresentation of the costs.
Whether from duplicity or economic ignorance, politicians never discuss the deadweight cost of the taxes entailed by government spending. They never make the point I have just made – that, beyond a very low level, taxes do not merely shift money around but reduce total output.
Nor are the costs of government spending described in a way that most people can understand. The policy of not charging interest on student loans costs about $670 million a year.
In the grand scheme of things, is that a lot? Most people wouldn’t have a clue, even if they knew the $670 million figure.
The problem with such numbers is not only that they are incomprehensibly large but they seem distant, almost unreal. They are merely book-keeping entries in the accounts of the government.
But they are not really distant issues. Such spending is the cause of our taxes, which is real money that we no longer have to spend as we choose. For example, if not for interest-free student loans, the top rate of income tax could be reduced from 33% to 30%. Or the 17.5% rate could be 16%. Or the corporate tax rate could be reduced from 28% to 25%. That is a remarkably big difference made by just one apparently trivial spending policy.
Such revelations will mean something to people. If you know that interest-free student loans are adding 3 percentage points to the tax rate you pay, you get a sense of what it costs – a much better sense than telling you that it costs $670 million, if you ever get told even this.
ACT believes that taxpayers should know the price of any spending policy of the national government or a local council in a metric that is relevant to them.
* * * * *
To this end, ACT proposes an Honesty for Taxpayers policy.
On this policy, regulatory impact statements, cabinet submissions and ministers’ introductory speeches for Bills in parliament will need to state clearly that “but for this proposal, your income tax rate would be X percentage points lower”.
When taxpayers visit the website of any government agency or local council and any programme of that agency, they should have a clear idea of the price of that agency in their taxes or rates.
Government departments and agencies should be required to declare on their home webpage “but for this agency, your income tax rate would be X% lower”.
Similar rules should apply to local governments. They should be required to reveal how much lower rates would be if not for a particular new policy proposal or existing service of the Council.
If a minister, department, agency or local council believes that the programmes it administers do indeed offer value for money to taxpayers, they should be proud to say how they are putting taxes to work in the clearest way taxpayers can understand.
For example, the government should be keen to alert taxpayers that, without Working for Families:
· the 17.5% income tax rate would be 12.5% OR
· the 10.5% income tax rate would be 3.5%.
The Minister for Tertiary Education should be keen to remind everyone that, if not for interest-free student loans
· the 17.5% income tax rate be would 16% OR
· the 28% company tax would be 25% OR
· the 33% top income tax rate would be 30%.
The Minister for Business, Innovation and Employment (MBIE) should be keen to announce that, if not for its policy of dispensing corporate welfare
· the 28% company tax rate would be 21% OR
· the 33% top income tax rate would be 27% OR
· the 17.5% tax rate would be 14.5%.
If you do not know what something costs, you cannot know if it is worth the price. Good decision-making depends on good information. In a democracy, this means that voters must be reminded of how much they are paying for government activities.
Politicians from the big spending parties will oppose this policy. That shows what a good idea it is. The bureaucracy will also resist it, because voters will be surprised to realise that much new spending is generated by bureaucrats. MPs and councillors will be more reluctant to just wave through spending when the information is publicly available.
By using the tools of the information age ACT seeks to make our elected representatives more accountable and allow citizens to participate in a more meaningful way.
I am pleased to lead a party with fresh ideas and practical solutions to the real issues.
On TV1’s Q&A programme, David Cunliffe boasted that his proposed new capital gains tax would collect an extra $5 billion a year. That is the biggest tax hike in the history of New Zealand. Which is saying something.
It is a dreadful boast. Taxes are always paid by people, whatever the taxes are levied on. Income taxes, corporate taxes, property taxes, GST: they are all the same in this respect. They are all paid by people.
Nor are the people who bear the cost necessarily the people who write the cheques to the government. For example, if a capital gains tax means that landlords get a lower return on the capital appreciation of their properties, it will increase the rents they charge their tenants. Or landlords may sell their properties to owner-occupants. The supply of rental properties will then fall and, again, tenants will end up paying more.
Where the cost of a capital gains tax will fall is a complex matter and extraordinarily difficult to predict. All Cunliffe knows is that the $5 billion will somehow be extracted from the people of New Zealand so that it can be spent in ways that he figures will buy him the most votes.
At least, that is what Cunliffe thinks he knows. In fact, he has almost certainly over-estimated the amount he will be able to squeeze out of tenants, consumers and entrepreneurs because taxes can be avoided.
When it comes to income tax, people can divert their activities from highly taxed activities, such as working in productive jobs, to low taxed activities, such as playing golf. When it comes to a capital gains tax, they can divert their investments from rental properties to bigger homes for themselves (which will not incur capital gains tax at sale). They can invest overseas rather than in New Zealand. They can delay selling assets to avoid realising a gain and paying the tax. And they can spend money on accountants and tax lawyers to devise all sorts of other ingenious schemes
Such avoidance activities will reduce the loot Cunliffe can get his hands on. That’s good. But they will also reduce the growth of the New Zealand economy. Resources will not flow to their most valuable uses. They will instead flow to the uses that are farthest from Cunliffe’s grasp.
A capital gains tax is a very bad idea.
Party vote ACT.
#TeamKey Wrong On Tax
Blog: Jamie Whyte, ACT Leader
The Prime Minister is being coy about the possibility of tax cuts. If there are to be any, he says, they will be for low and middle income earners.
That would be a mistake. We already have relatively low income taxes for low and middle earners: 10.5% for income up to $14,000 and 17.5% from then to $48,000. The problem kicks in at that point, when the tax rate jumps to 30% and then 33% from $70,000. Add in the effects of Working for Families abatements, and many people face marginal tax rates as high as 42.5% and some as high as 58%. That is, the rate of tax they will pay on the next dollar they earn is 42.5% or 58%.
Marginal tax rates are what really matter economically. They are what affect people’s incentives to work more, invest more, risk more.
Reducing the bottom rate of tax will appeal to more voters than cutting the top rate, since only 17% of the population earns over $70,000. But cutting the top rate will do more to promote economic activity, create jobs and lift wages.
That’s why ACT’s alternative Budget used the $4 billion of savings we found in cuts to middle-class welfare and corporate welfare to reduce the 30% and 33% rates to 24%. And we cut the company tax rate from 28% to 20%.
National has moved so far to the left that it now accepts the idea that income tax rates should be very progressive, with high earners paying the vast majority of total income tax. Bill English has actually boasted about increasing the share of total taxes extracted from high earners.
ACT continues to reject progressive income tax, because it is both unfair and economically harmful. ACT favours low, flat taxes. Voters who want an economically rational government should make sure that ACT is a big part of it.
Tax Cuts Are Not Gifts
Blog: Jamie Whyte
In May, ACT published its alternative budget. We showed how we could get the top rate of personal income tax down to 24% and the corporate rate down to 20% by cutting middle-class welfare and corporate welfare.
I was interviewed on Radio NZ’s Morning Report by Guyon Espiner. He asked why ACT wanted to give money to well off New Zealanders. I replied that we were giving them nothing. On the contrary, we were planning to take 24% of their incomes from them.
Espiner apparently believes that all income really belongs to the state, and that any it allows you to keep is its gift to you. When you are taxed at 33%, you should not see this as having something taken from you; you should see the 67% that you keep as a gift from the government. How else could Espiner think that a government that reduces tax rates has thereby given people money?
It is fortunate that a man with such ideas is only a journalist, you may think. Alas, some of our most important politicians agree with Espiner. David Cunliffe yesterday announced Labour’s plan to increase the top rate of income tax. According to the Herald, Cunliffe said the tax hikes would mean wealthier New Zealanders being asked to “return a small part of the very large tax cuts they received from the current Government”.
According to Cunliffe, when you pay more tax under a Labour government, you will merely be returning what was theirs in the first place.
Policies matter. But the ideas they flow from are more important. When you elect someone to parliament, or a party into government, you need to understand how they see the world. That will determine the kinds of laws they pass and the policies they pursue. The particular policies discussed during election campaigns are only a small part of what will happen after a government is formed. Indeed, given the coalition-forming process and the vagaries of parliamentary law making, they may be no part of it at all.
ACT believes that taxation involves the forcible confiscation of people’s private property. Taxes are a necessary evil. But necessary evils are still evil and they should be kept to a minimum.
By contrast, Cunliffe believes that apparently private incomes really belong to the state. He believes that your net income is effectively pocket money given to you by a benign government.
A man who believes this should not be the Prime Minister of New Zealand.
Craig Can't Count
Blog: Dr Jamie Whyte
The tax policy Colin Craig announced yesterday will increase income tax for everyone who earns more than $36,000. That is almost everyone in full time employment.
Craig’s policy is to make the first $20,000 of income tax free and then impose a flat rate after that. But, astonishingly, he doesn’t say what that flat rate would be. Perhaps he hasn’t worked it out.
Well, we have. The flat rate applied above Craig’s $20,000 tax-free threshold would have to be 33.6%. That’s higher than the current top rate of income tax which kicks in at $70,000.
The fact that ACT has had to calculate what Craig’s own flat rate would be reveals the frivolity with which Craig and his Conservatives approach public policy. They want you to vote for them on the basis of their tax policy. But they do not bother to tell you what rate of tax you would end up paying.
For those who are interested in the real implications of Craig’s tax policy – which apparently does not include Craig or his colleagues – here is how it would work out.
Income tax now contributes $29.8 billion to government revenues. Since Craig proposes no changes to other taxes nor any specific changes to government spending, we must proceed on the assumption that income tax will still raise $29.8 billion. All the income above $20,000 earned in New Zealand totals $88.7 billion. $29.8 billion is 33.6% of $88.7 billion.
As mentioned above, with a $20,000 tax-free threshold and a flat rate of 33.6% thereafter, everyone earning over $36,000 will pay more tax than they do now.
Nor will this policy do any good for marginal tax rates: that is, the rate of tax people pay on their next dollar of income, which is what affects economic incentives. The marginal tax rate will increase for anyone earning over $20,000. For those earning between $20,000 and $48,000, it will increase dramatically: from 17.5% to 33.6%.
Contrast the Conservative’s efforts on tax with ACT’s. In our Alternative Budget, published in May, we showed how the company tax rate could be cut from 28% to 24% and the top rates of income tax from 30% and 33% to 24% by eliminating $4 billion of government spending on corporate welfare and middle-class welfare. Our tax proposal reduces marginal tax rates for anyone earning over $48,000 and increases them for no one.
Our alternative Budget also treats our audience with more respect than the Conservatives do. It provides the rationale, details and calculations that anyone would need to understand and evaluate our tax policy. The Conservatives’ policy is so half-baked that we have had to work out their flat rate for them.
Craig should be embarrassed. And voters should steer clear of this man and his party. Politics shouldn’t be a game for wealthy buffoons.
As good as it gets?
Finance Minister Bill English released the Budget Policy Statement and the Half Year Economic and Fiscal Update this week confirming we are through the worst of the GFC. Treasury forecast an average growth rate of 2.6% over the next five years. They characterise this as relatively strong. However, it is significantly lower than forecast growth in a protein hungry Asia which accounts for about 44% of our trade and slightly less than Australia whose growth may, or may not, stay on forecast. Of course some of New Zealand’s growth results from the re-build in Canterbury.
Interestingly, Treasury note the strong increase in net permanent migration to New Zealand (17,500 in the year to October), half of which is from Australia and two-thirds of that, returning New Zealanders. This may be a good reason to stop advocating for an extension of Australian welfare entitlements to New Zealanders as all our Prime Ministers ritually do.
The size of government is set to grow
Mr English confirmed that Budget 2014 will achieve a forecast surplus $86million which is paper thin compared to a NZ$72 billion spend, but it’s a surplus nonetheless. Revenue is rolling in while expenditure is constrained. Net core Crown debt peaks at 26.6% of GDP and drops to a 22.3% by 2017/18 largely due to the improvements in the cash position. Revenue in 2013 was NZ$61.1 billion and is set to hit NZ$84.9 billion in 2017/18. Core Crown expenses in the same period start at NZ$70.3 billion and hits NZ$79billion in 2017/18. Treasury say we can expect a surplus of NZ$5.6 billion at the end of the forecast period assuming ongoing spending restraint.
Houston we have a revenue problem
Treasury say that tax revenue is due to grow by about 5.8% p.a. over the forecast period. They correctly identify the risk of a change in emphasis away from expenditure restraint. Nominal increases in core Crown expenses are driven by social programmes: social welfare benefits (the biggest of which is super and it accounts for most of the increased spend), health and education. From an ACT perspective an expansion of poor quality social spending could start under either a National led government in its last term or an incoming Labour-led government in 2017.
Election 2014 – giving some back or more tax and spend
With more than a third more revenue forecast in 2017/18 than in 2012 the big question for election year is whose narrative wins. The conventional wisdom is that an improving economy helps the incumbent Government. This is likely true, however improving finances will also lead to political demands for more spending.
Already the child poverty ‘industry’ is in high gear essentially advocating more welfare and trying to make their issue and election issue. Labour will probably run on the gap between rich and poor, (inequality) and echo their UK counterparts. This they will do, all the while ignoring the drivers of upward social mobility, which are not about more welfare programmes, but about better educational achievement.
National’s narrative is steady-as-she-goes and is about good economic stewardship. Will National make even the gentlest philosophical argument about taking less in revenue from taxpayers when it conflicts with the repayment of debt line? We know they will not undertake to address the future cost of superannuation. They have done some reform in welfare and education and nothing particularly substantial in health, although Tony Ryall will almost singlehandedly ensure that health is not an election issue.
Making the case for slimming the State in 2014
The best way to keep on pressure to restrain spending is to focus on public debt repayment and limiting new spending which makes politicians and bureaucrats consider value for money and the quality existing programmes. But spending self-control won’t be enough. History is against a record of on-going restraint, politicians and bureaucrats are simply not incentivised for it. Touchingly, Treasury have confidence that today’s politicians are keen to prepare the books for the GFC#2 sometime in the future. Returning some revenue to the New Zealanders who generate that wealth in the first place is the only sure-fire way to slim government over the longer run and generate a higher rate of economic growth.
Traditionally, making the early case for tax cuts falls to ACT. In 2002 we campaigned on tax cuts. By 2005 both Dr Brash and Dr Cullen were too. In 2008 National campaigned on tax cuts, implemented the first tranche and ditched the rest of the programme because of the GFC.
As New Zealand moves into the post GFC economy, the real world arguments about whether the New Zealand State should aspire to do so much for so many citizens, who could probably make better arrangements for themselves with more of their own money, will and should return.
RT will return on 10 January 2014. We wish everyone a Happy and Safe Christmas and a prosperous New Year.
ACT New Zealand Party President Chris Simmons and ACT MP Hon John Banks today announced the details of ACT’s Confidence and Supply Agreement, highlighting a number of very significant policy ‘wins’ for ACT.
Mr Simmons said the new agreement builds on the two parties’ strong, constructive partnership of the past three years and advances ACT’s core economic and social policy goals.
“In particular ACT wanted to see controls put in place to prevent excessive Government spending and poor quality regulation, improved choice in education, especially in disadvantaged communities, and reform of other key policy areas that are currently holding New Zealand’s economy back,” Mr Simmons said.
Hon John Banks said that the policy programme outlined in the agreement was an excellent platform for ACT in Parliament and a strong base from which to continue building the relationship between the two parties.
“It shows that National is willing to make changes in these key economic and social policy areas to ensure our joint aspirations for a more prosperous New Zealand are met,” Mr Banks said.
Key features of the agreement are:
• Continuation of ACT’s focus during the last term on publicly monitoring progress on improving the country’s economy wide performance using international benchmarks, and building on the work of the 2025 Taskforce, with a requirement for Treasury to report annually on the progress being made to improve the quality of institutions and policies, raise productivity, and reduce the income gap with Australia.
• Continuation of ACT’s work during the last term to reduce the regulatory burden on businesses and individuals through taking the Regulatory Standards Bill through to the new Parliament, with an agreement to pass a mutually agreed Bill based on Treasury’s preferred option (option 5) within 12 months.
• Continuation of ACT’s work during the last term on the Spending Cap (People’s Veto) Bill with an agreement to incorporate a legislated spending cap through a mutually agreed amendment to the Public Finance Act.
• Reform of the Resource Management Act, including simplifying legislation to ensure there is only one plan (a “unitary” plan) for each district.
• The provision to set up a trial charter school system - under sections 155 (Kura Kaupapa Maori) and 156 (designated character schools) of the Education Act – for disadvantaged communities, specifically in areas such as South Auckland and parts of Christchurch where educational underachievement is most entrenched. A private sector-chaired implementation group will be established to develop the proposal for implementation in this parliamentary term.
• The establishment of a taskforce to produce a comprehensive report on governance issues relating to state policy towards state, integrated and independent schools.
• The implementation in this parliamentary term of the Welfare Working Group recommendations 27: Parenting obligations, 28: Support for at-risk families, 30: Income management and budgeting support, and 34: Employment services.
• To introduce competition to ACC’s Work Account.
• To support National’s Post-Election Action Plan.
• The appointment of Hon John Banks to the positions of Minister for Small Business, Minister for Regulatory Reform, Associate Minister of Education and Associate Minister of Commerce.
Mr Banks said New Zealand is facing very challenging times.
“This agreement is a significant achievement for ACT, addressing not just economic issues but key social issues as well, in particular those that are currently contributing to our very high rates of unemployed, undereducated and socially marginalised young people.
“I intend over the next three years to advocate for further advances in these areas as well as in the areas of government spending and regulation, labour market reform, and other policies to reduce the burden on businesses and boost productivity and economic growth.
“I would like to thank former ACT MP and Parliamentary Leader John Boscawen for the lead work he has done over the past week to finalise the terms of the agreement. His advice and ACT Party experience has been invaluable and stands us in good stead to reinvigorate and strengthen the Party over the next three years.
“ACT looks forward to working with National, and Prime Minister John Key, to put in place policies to strengthen our country and put us on a path to prosperity,” Mr Banks concludes.