I’ve been thinking about the hype the government has created about their ‘tax switch’. True, by increased borrowing, they have shuffled a slightly larger amount than was expected, but it is still mainly a shuffle between taxing income and consumption which will have a limited effect on the shape of our economy.
National has done what they always do – increased the proportion of tax paid by low and middle income groups and disproportionately decreased the tax paid by the wealthy. They have left capital untaxed. The switch to GST from income tax for low and middle income groups is largely illusory. GST is effectively a tax on labour for these groups, given that they have to spend all or virtually all of their wages/salaries on GST’d goods and services.
For those with higher disposable incomes, the tax package make a significant change. They pay less. Their capital and intergenerational wealth transfers remain untaxed. Inflated asset values – now beyond the means of younger New Zealanders who have not inherited – will remain inflated. The intergenerational inequities on the economic as well as environmental front remain. Social mobility will continue to decline. Bernard Hickey’s analysis of this in recent months about this is spot on, and this budget does not do much to change it.
The tax bias driving excessive investment in property relative to the productive/ tradeable export sector remains. The constraint on claiming depreciation on buildings is a very timid step given the seriousness of the imbalance we now have. It hits commercial property as much as residential, and does not remove the more significant anomoly that allows a property investor to deduct from their other income losses from borrowing costs on their rental invesments, yet leaves them free to pocket capital gains (as an aside gains on property are seen as capital for tax purposes because the statutory definition of income assumes that income has a short-term temporal frequency, when in reality those who rent-out or farm property for a long term gain have a longer-term view of what amounts to their income).
Our lack of savings is only indirectly touched, and really only for those already better off.
As I said in my post earlier today (its worth reading the BERL budget analysis linked to that post), the current account deficit projected by this budget sees it climbing ever higher - up to 7%. So plainly the budget does not forsee a substantial increase in exports or savings.
So where is the roughly 3% pa growth going to come from? Well, as the BERL budget analysis shows, the assertion about a substantial increase in non-residential investment seems optimistic. If that growth does not come to pass at all, or comes from a return to current account deficit funded consumption and property investment, then we will be even more in the cart.
The ‘switch’ is not turning the tradeable sector on and the speculative sector off.
The ‘switch’ happening here is more akin to its other definition – a whip – being used to protect capital and the capital class by decreasing their share of tax paid and increasing the proportion paid by the less wealthy.
If this was going to fundamentally rebalance the economy, I might be able to see at least some justification. But the sad reality is this budget does little to rebalance the economy. Rather it does just what National always does. It ‘rebalances’ taxes, not the economy.