THE HAPS

The trend is your friend, and the latest Newshub Poll shows the change to an ACT-National Government solidifying. It has ACT up three seats to 13, even as National recovers from its midterm slump. Together the parties would have 65 seats, the same as Labour has now. Free Press readers know we need to make the change real, not just Labour policy with blue paint, but signs are good so far.

LOW, FLAT, TAXES

Free Press gets a lot of reader feedback. We’re grateful for the connection, and sometimes our topics are a response to things people ask us.

One of the most common questions we get is this: “Cutting tax is good, but cutting tax for the ‘rich’ is politically unpopular, so why not take a win win and make, say, the first $20,000 tax free?

That way, the story goes, you’d be cutting tax with a Robin Hood vibe. Australia does it, and they’re rich, so what’s not to like?”

It’s a seductive policy, but even Labour has rejects it. There are good reasons why. No tax on the first x dollars means every single taxpayer gets the reduction.

If the goal is to help only those who need it, then any policy giving every single person the same tax cut is going to be a really poor way of achieving it. The tax on the first $20,000 of personal income is $1,575.

If there’s a group of hard up people who can use $1,575, the simple solution is to make a rule (maybe, everyone who works at least 20 hours a week but earns less than $30,000 gets a $1,575 tax credit, for example).

Someone has to pay for that benefit, and it’s gonna be higher income earners. The low income earners can’t pay it, because the whole point was to help them in the first place.

What about high income earners? Well, they have to pay for the low income earners not paying tax on the first $20,000. If they were just paying for the needy to have an extra $1,575, that would be one thing.

But a tax free threshold is much worse. They don’t just have to pay for the transfer to the needy. They also have to make up for the $1,575 they aren’t paying on their own first $20,000. Welcome to very high tax rates on the rest of your income.

Australia is a good example. They may have $18,200 tax free, but they also have a top tax rate of 45 cents in the dollar.

The great economist Thomas Sowell once said that good economics is just asking ‘what happens next?’

The next step is that people don’t much like paying 45 cents in the dollar. So any method that avoids paying it is worth trying. Maybe move it into another tax year when you don’t have much other income. That way you can claim it tax free.

Maybe ‘employ’ your kids through your company so they pay no tax on their low income and tell them to buy their own clothes. Much better than the Government taking 45 per cent. The list of possible tax avoidance strategies is endless, and the higher the tax rate the more sense it makes to try them.

If you’ve ever tried paying tax in Australia, it’s much more complicated than here.

That takes us to the moral problem with a tax free threshold. We tell kids to listen to their teacher, study hard, get good grades, get a career, save their money, invest carefully, and so on. If they do it all right things should end up well for them.

Then the tax collector comes along and says, ‘if you do all that, I’ll take more of your money.’ If you become a doctor, if you start a successful business, if you invest well. Guess what? We’re coming for you. Somehow we have tax policy that sends the complete opposite message that we’re busy sending kids.

You end up with a large group of people who pay little to no tax, who are quite happy to vote for more spending knowing it’s a minority who carry the can. It’s tall poppy syndrome in the tax code.

High taxes gradually change the culture. They lead to less investment. Not just less financial investment, less investment in people through training and upskilling, less overtime, less side hustles, the country gets poorer as the incentives for people change. Why risk failure when much of your success will be confiscated anyway?

Higher rates on higher incomes don’t just lead to more complicated paperwork, they are morally wrong as well. This tall poppy syndrome in the tax code is the opposite of the values we tell kids are important. In the long term, it’s a policy that would make us poorer than we need to be.

Some parties exist to get votes even if they preside over the decline of a great nation in the process. ACT exists to resist bad policy and promote better ones, even if it means swimming against the tide sometimes. We hope this week’s edition of Free Press has been convincing, if you agree please spread the word.

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