Finance Minister English has confirmed the worst kept secret of the 2010 budget – GST is going to increase to 15%. Now I accept the Tax Working Group’s argument that the tax base needs to be broadened, but what I find so offensive about this particular tax increase, is that the money gathered from every single New Zealander is going to be used to pay for the tax cuts given to the 8% of kiwis who are fortunate to earn enough to pay the top marginal tax rate.
We have been here before - I know – but let me illustrate an example of why this isn’t going to be as simple as the government has outlined:
Businesses price items strategically. For example, an item is priced at $49.95 to psychologically convince the buyer that it costs less than $50. Add 2.5% onto this and you get $51.20c. No retailer is going to sell an item at this price point – the next psychological point is $54.95, which is around 10% higher – not 2.5% – or they will leave the price the same. Either way there is a loser – the purchaser, who has had to pay 10% more for an item, or the retailer who has had to forgo margin. If, however, the retailer leaves the item at $49.95, then, as sure as eggs, they will double the increase in price on other items to make up for this margin erosion.
My point is that the government is kidding itself if it thinks that the increase in GST is going to be smooth, seamless and painless. Those who will really feel the pinch are the 75% of people earning under the average wage, as costs increase above any level of compensation that the government may provide.
It would have been harder to argue against a GST increase in order to broaden the tax base IF AND ONLY IF the resulting personal tax cuts had been equitable to all in our society. Why is someone earning the median wage of around $33k/ann worth less than someone on $100k/ann.? Why shouldn’t everyone who works hard and pays tax be compensated equally? Of course the answer is they should.
The message this government is sending, however, is that not all New Zealand workers are equal. I wonder how Mr Key and Mr English will be able to look the guys in the eye who come in to clean their offices at midnight or who make sure they are kept safe during the day, when all parties know that Messers Key and English will be now be getting around $300/wk in the hand extra, when the cleaners and security personal will have got next-to-nothing. Is that fair? Not in my book.!
This whole discourse about tax is twisted and nasty. The public debate on tax is overwhelmed by sloganeering and one-dimensional analyses.
Our media has bought the neo-liberal nonsense and doesn’t engage in the debate about fairness, equity and egalitarianism. Instead it focuses how much money people can expect back without the fuller analysis about equity issues or funding essential services.
Let’s be clear here: The wealth of this nation – of all nations – is built on the labour of people it’s not derived from these much lauded “risk takers” or “wealth accumulators”. These spongers simply use the construct of the market to siphon off the wealth of the community. Our tax system should really be designed to reappropriate and redistribute the wealth of the community.
The problem is, the market kind of works. It IS an efficient means of allocating scarce resources – more so than a command economy.
So, we need to support the market’s continuation by enabling people to invest and get rich but we also need to recognise that it’s an inherently unfair system.
That’s where tax plays a role in ameliorating the market’s worst excesses through redistribution of wealth, providing government services and ensuring the gap between workers and the parasites who prey off their labour is not unreasonably excessive.
In my view the discussion about ensuring incentives for rich people to get richer is repellent. The discussion should be how much wealth can we equitably redistribute out of this inherently unfair system before it makes the market unsustainable.
UO – Great comment – Stuart
What would be useful is an analysis of what percentage of income gets spent on goods and services at various income levels. Clearly someone on $30k is unlikely to be able to save anything much, so will be spending close to 100% of their income on goods & services.
Someone on $200k is probably going to be spending more than someone on $30k in total, but as a proportion of their income I imagine it would be lower. Therefore, proportionally they end up paying less tax while the person on $30k ends up paying more tax if you raise GST.
What that means is that for income tax cuts to truly compensate those on lower incomes, they should match the increase in proportion that person spends on GST if we’re going to be fair. If someone getting income at a level which on average spends 100% of their income, then they should get a 2.5% income tax cut to off-set the rise. If someone in an income level that only spends on average 70% of their income, then the tax cut should be 1.75% of their income.
Surely someone with a better calculator than me could do the sums and work out what the decrease in tax rates should be to make this match up as best possible. I would guess that top tax rates might drop by 1%, with the bottom rate of 12.5% dropping perhaps to 10%, and some sort of gradation in the middle.
The key point is that unless National follow this process (which of course they won’t), the result will be a more regressive tax system with the poor subsidising the rich’s tax cuts.
Jarbury – you are dead right. This analysis was done by the tax working group and shows what you have predicted: GST is a regressive tax that hits those on the lowest incomes the hardest. Rubbing salt into the wound is that the money raised from the GST increase will be used to give tax cuts to the 8% who are fortunate enough to earn the most.
@ jarbury – sounds like a rational process. But we are still working out how to divvy up the same small pie into different sized pices between us.
This country’s main problem is that our economy is not powered by enough advanced industry and advanced services capable of selling successfully to the world. By not generating enough hard currency internationally and then not being able to keep enough of that capital onshore we end up with a much smaller, poorer economy. A small tax base means that all National can think of doing is shuffling the tax burden around. (In rather predictable directions, I might add).
Loota – spot on.! Stuart
Oh, and that other lame neocon idea, that the economy will somehow become wealthier and create advanced, high, high value added industries and services by cutting tax rates for the rich. Sheer economic mythology. The only sure result of a tax cut for the wealthy is…ummm…that they retain more of their annual earnings.
I agree Loota, which is why I am not opposed to the idea of raising GST and lowering income tax, as long is it is done in an equitable way. Taxing consumption rather than income has a number of advantages, in that it does provide an incentive for people to save money and it also puts a little bit more of a disincentive onto consuming – which is essential from a sustainability perspective.
If I were Labour I would not necessarily promise to lower GST and raise income tax at the next election, but rather promise to mess with the income tax system to ensure that it equitably balances out the GST increase – rather than National’s proposal which is shifting money from the poor to the rich. Most people would be winners out of such a change, so I don’t think there’s too much to be scared about in proposing to raise top tax rates (although I would do that through a 40-45% rate on really high incomes rather than stuffing up those in the $60-80k area).
@UO – your analysis omits any mention of property rights. For “egalitarianism”, that favourite word of redistributionists, read tall-poppy chopping.
The wealth of nations is derived from productivity under conditions of relative freedom. The “risk-takers” and “wealth accumulators” you seem to abhor – people like Bill Gates, Warren Buffet, Sam Morgan – raise living standards for everyone. Without them there would be far fewer jobs. Their so-called “siphoning off of community wealth” (which is really the sum of individual wealth) is done as traders, by voluntary consent – unlike the activities of tax collectors who use coercion, harrassment, threats, guns and prisons to get their way.
You got one bit right – markets are far preferable to a command economy.
Richard – Keynesian economic theory (that of us social democrats) understands the need for markets, and is hardly a ‘command economy’ philosophy, but does understand the need for govt intervention as and when necessary. I think that the economic crises of the past 30 years (Sth American, Asian, Japanese and global) has shown that if one lets the market lose without any form of regulation and oversight it ends up imploding to the detriment of everyone near and far.
By the way, the impression a lot of NZers now have from reading the news is that Phil Goff would not necessarily bring GST back to 12.5% if the National Socialists raise it to 15%.
Can anyone give us a catgorical assurance that Labour will reduce GST if they are ever re-elected?
Richard – all Labour has said about its tax policy is that it would be equitable and fair for ALL kiwis. The govt’s policy of increasing GST to apy for tax cuts for the top 8% whilst shunning the other 92% is simply not fair or equitable. Stuart
Dave: “Is a Telecom manager worth more than someone who scrubs the toilets?
Probably.”
Let me rephrase that…
Is a Telecom manager walking away with a golden parachute after running the company into the ground worth more than someone who scrubs the toilets?
DeepRed – that’s the point. Just because someone earns $30k, it doesn’t mean that they don’t work hard, have pride in their job and add value. The vast majority do.! And as you imply – who has created the most harm to the NZ economy over the past two or so years.? Not those on $30k, but the guys from Hanover, Blue Chip, etc etc, who were earning substantial amounts of money whilst destroying the wealth of thousands of kiwis.!!!
A Mother @ 24/4/2010 14:56:
Sorry to hear of that. Also see my cross-post on the “guard economy”.
@ Jarbury – and a capital gains tax please. Someone who buys a $1.2M holiday home and sells it two years later for $1.8M should probably pay some degree of tax on that $600K advantage.
stephensmikm
Thanks for your reply.
Until the Whanau Ora is rolled out we can only rely on what details are released. National’s agenda is plainly cuts to any state provided service. naivety in ranks of the Maori party is apparent and National have played this game before. It is often the finer detail that allows appraisal of a system working.
Compartmentalising services is adopted as a way of controlling various aspects of what is provided. There are downsides in doing this such as increased bureaucracy gobbling up the budget. DHB model has such features.
It will be a learning experience to see just what does happen with Whanau Ora implementation and where the cuts will lie. No increase in funding is effectively a cut as costs rise.
It appears to have made the Maori Party happy as they say they are doing something. Meanwhile the next election draws closer and Whanau Ora will be all too new to evaluate thoroughly with teething problems.
The essential element of insufficient money being allocated to health is not changed.
Tax cuts for the upper bracket has higher importance. The increasing wealth at the top end and diminishing share at the bottom is intensifying. The growth of a group with negative wealth is alarming.
All important matters that are not addressed.
Yes that is a loaded gun I agree.
Increasing disparities between rich and poor and consequent exclusion from full participation in society are a rich medium for adverse social and health consequences.
Richard McG – you’re asserting property rights like they’re some inalienable right that trump other claims/rights. I don’t see that way.
I take a Rawlsian perspective on this type of stuff: If you were to construct a society from the ground up and were behind a “veil of ignorance” about your eventual place in that society, would you create a society which is geared to preserve the interests of a few over the interests of the many? I doubt many would.
Yes it’s utopian. And, yes, I acknowledge the market as an efficient means of allocating scarce resources. But surely one of the essential considerations when thinking about tax is to acknowledge and address, as far as we can, the inherent flaws and unfairness of the system – and not to perpetuate and exacerbate this unfairness.
Making workers pay more for basic goods and services in order to help fund tax reductions for people who have already parasitically sucked wealth from others just doesn’t seem right to me.
And even more than making the system “fair” the system must promote a society that we enjoy living in, working in and can take pride in.
We’ve got to be able to afford the things that we want all of our citizens and communities to have, not just the top earning or most advantaged quartile of them.
Now here is the rub that the NACTs don’t get. You cannot make the economy work the way it needs to, to generate this level of societal wealth unless every single person, young and old, is given every single opportunity to participate and contribute fully to it.
Stuart: if Labour can not say unequivocally that they will reduce any GST increase back to 12.5% if re-elected in 2011 means that they by default, agree with the increase.
With regards to whether the increase will be seamless, well let me ask this: will it be any less seamless than when it was raised from 10% to 12.5Z%, when no one battered an eyelid?
For the record, I personally can’t see how a GST increase will be worth the cost (in terms of trying to make it a net neutral impact on the lower incomes).
As I have stated before, I personally would prefer more emphasis to be placed on the anomalies such as lowering the top rate & closing tax, WFF & property loopholes.
As for the rest of the debate Stuart you were spot on when you said “we have been here before”.
GST is a poor tax, and makes the quality of life between rich and poor larger.
When I go on holiday overseas I don’t pay GST in NZ. And if I go to Australia I can even get a refund on their version of GST at the airport when I leave. So I pay less GST on what I consume than someone staying in New Zealand all year.
Which leads me to something I think many people have missed. Thanks to the Global Financial Crisis, people in other countries are spending much less on their overseas holidays, so increasing GST could have a significant impact on tourism numbers in New Zealand. Increasing a tax on one of our biggest export earners can’t be a good thing.
Stuart: if Labour can not say unequivocally that they will reduce any GST increase back to 12.5% if re-elected in 2011 means that they by default, agree with the increase.
Actually, argumentatively, there are many other options for Labour to undo the effects of increased GST on the lower socioecnomic demographic.
Reducing it back to 12.5% is only one of them.
No need for Labour to limit options of undoing the damage today.
Concluding that not having a Labour statement committing to a reversal of the GST increase “means that they by default, agree with the increase” is therefore faulty.
A more progressive income tax system, plus higher GST might actually be a good thing.
Stuart, Loota is correct there is no reason for Labour to say they will definitely role back GST. They should keep their options open.
Just know that with GST at 15% and the top tax rate at 33% someone earning $100,000 pays 28% tax while someone earning $14,000 pays 29% tax.
http://politicalaccountant.blogtown.co.nz/2010/04/24/new-tax-proposals-take-from-the-poor-to-give-to-the-rich/
Loota: the other thing Labour could do is make sure they all raw/staple foods GST exempt.
But they appear to be against this also. This along with refusing to say they will reduce GST back to 12.5% does put a question mark over their credibility….especially considering Phil Goff is prepared to say he will definitely reverse any cut to the top rate of personal tax and make sure that any tax cuts (if there are any as let’s face it, it took them 9 years to do finally concede and make a token gesture of sorts in 2008) go to the “many not the few”!
The fact that Labour will not promise to reverse GSt and also refuses to recognise that the top rate cuts in far too low will be their downfall in 2011.
@ Rebecca, certainly Labour has to work on its formula. 33% in the polls isn’t a disaster, but neither is it very reassuring for Labour supporters. John Key still has a lot of political capital to spend.
Yes I agree. I want Labour to come through but I just don’t like what they have to say! Like I’ve said on other posts: fairness is synonymous with validation in my view! Oh well, time will tell. Great that Phil Goff is coming across as a bit more fiesty though.
@Rebecca – All Phil said was he can’t say for sure what Labour would do, fair enough.
Can some one point me to the theory or justification for not lowering everyone’s take through the lowest thresholds?
I understand the top thresholds raise issues vis a vis company tax etc, and agree that needs to be addressed, although Australia’s top income tax bracket is MUCH higher than ours, and we hear about the need to emulate them?
If no one pays any tax on their first 12,000 earned then everyone, as stated earlier, has more money in their pockets?
Tracey, you are right that there’s a good argument for not taxing the first $10,000 of incomes. That would be the fairest way to compensate for increasing GST.
I also don’t see what the need is to align the top tax rate with other rates. Most overseas countries don’t do that, it just seems like they have better rules and more effective monitoring to help ensure that people are paying the tax they should.
Stuart Nash’s post about aliging tax rates is worth a read:
http://blog.labour.org.nz/index.php/2010/02/18/exploding-tax-myths-part-5/
@ Tracey, jarbury – re not taxing the first $10k… You may say that but I couldn’t possibly comment
Ah hello, elephant in the room?
You guys don’t read or comment on compelling evidence of where the big sum games are really at? you are not instilling me with great hope if you guys/gals are representative of Labour supporters fairest and brightest?
http://blog.labour.org.nz/index.php/2010/04/23/gst-increase-not-good-for-vast-majority-of-kiwis/comment-page-1/#comment-48695
I AAAM ABSOLUTELY PROUD OD THIS GUY THAT HAS STOOD UP FOR NOT JUST LABOUR AND HIMSELF, BUT ALSO FOR THE POOR ! you people need to stop and think for once. you guys might not be thoe ones affected by this. but who really will be? iKNOW .. THE POOR people! so i suggest you guys stop being selfish and thinking about yourselves and start thinking about OTHERS who are trying to get their point accross! especially to John Key who is careless about NZ .. but only cares about himself !
I AAAM ABSOLUTELY PROUD Of THIS GUY THAT HAS STOOD UP FOR NOT JUST LABOUR AND HIMSELF, BUT ALSO FOR THE POOR !( speaking about the person whos written this) you people need to stop and think for once. you guys might not be thoe ones affected by this. but who really will be? iKNOW .. THE POOR people! so i suggest you guys stop being selfish and thinking about yourselves and start thinking about OTHERS who are trying to get their point accross! especially to John Key who is careless about NZ .. but only cares about himself ! and at least weve got someone writting about their rights on the net unlike key . something he wouldnt DARE have the guts to do! so stop being judgmental and leave the judgment to God, but for now, look .. theres always two sides of a coin! (just like how john keys got 2 sides of his face! ) hahahaha JOAK
peace out `x