Red Alert

Deck chairs

Posted by on March 19th, 2012

The Inland Revenue Department’s tax policy work programme was released by Hon Peter Dunne on the weekend. 

Reading through the Minister’s related speech, I couldn’t help wondering about the symbolism of its delivery just one month short of the Titanic’s 100th anniversary.

According to its own publicity, the IRD tax policy work programme places emphasis on achieving efficiency and fairness in the system.  Worthy objectives indeed.  And much of the work in the programme is worthy – plugging holes, and trimming sails to align with competitors - where it is to our advantage so to do. 

But significant change appears to have been ruled out once more. A Capital Gains Tax that would push investment towards the productive sector, for example, will not be considered.  The current tax system watches on as the Government shuffles deck chairs and sails towards a $12 Billion deficit.  This is crazy.  If you don’t change anything, nothing will change.

Our current tax system is in need of a serious overhaul.  The tax policy work programme looks a bit like an exercise regime for a thoroughbred nearing a big race – light and steady.  This would be fine if we owned a thoroughbred.  We don’t.  The Minister is refusing to admit his existentially-challenged Clydesdale needs anything more than a good make-over and a stiff crack of his whip.

The fiscal hole is getting bigger and the Government has no credible plan to address it. In my earlier post, I asked how the Minister of Finance could continue to credibly claim tax changes implemented under his watch were ‘broadly revenue neutral’ – when the Government’s own officials say otherwise.  IRD officials have said that 2.5 percentage points of a 4% drop in revenue were due to Government policy changes. 

We need jobs and a plan to address the structural issues that underlie our current account deficit. Tinkering with finer points in the tax system and changing who owns what through asset sales doesn’t begin to address the serious issues facing our economy.  New Zealand debt is set to continue climbing under National.

On the matter of economic policy and tax settings: no amount of deck-chair shuffling will change things - if the ship remains set on the same course.


12 Responses to “Deck chairs”

  1. Eye Patch says:

    Hi David, nice to see you blogging.

    If you are so worried about deficits, then why did you stand for a party that went into the election last year advocating higher deficits, saying only private debt was a problem, and not coming up with numbers that people could understand?

  2. Pete George says:

    Isn’t proposing a CGT just rearranging the deck chairs, shifting the tax burden, incentives and disincentives around a bit? I thought it was generally accepted CGT wouldn’t raise much if any extra revenue, especially in the next decade.

    In a recent speech David Shearer said: “Labour will spend the next two years listening, drawing up our plans. We will accept the best ideas wherever they come from.”

    What if that listening tells you that the downsides of CGT make it too risky a change to our tax system? What if that listening tells you that the current regime that taxes capital gains on profits on property and share sales is sufficient?

    Or is Labour open to consultation on some policies but not on others?

  3. David Clark says:

    @Pete George, the point of a CGT is that it addresses structural problems we have in our economy, pushing investment away from speculation and towards productive enterprise.

    Listening to the upsides and downsides of the CGT debate is exactly what I’m keen on. As I said above: this debate has been shelved by the Government. It is something that will not be considered in the work programme. Effectively, the Government is saying significant change will not be considered. Meanwhile the structural problems in our economy remain and we continue to rack up debt.

  4. David Clark says:

    @eye patch.

    Thank you.

    Private debt and the structural problems in our economy are the big issue. As a country, we cannot go on forever spending more than we earn.

    Government debt does become the issue if we continue to borrow apace and have no credible plan to address structural imbalances. (Muldoon illustrated this point).

    The Government doesn’t seem to have any credible plan to turn the economy around and to address the balance of trade problem. Selling off your best revenue generating assets, and tinkering with the public sector does not constitute a plan for prosperity.

  5. Eye Patch says:

    David, that’s just rhetoric and cant, saying the government doesn’t have a credible plan. What credible plan did your party have in office? Seeing the productive sector flatline and watching government spending balloon and fuelling an illusory property bubble? Dr Cullen presided over the worst structural imbalancing act in NZs economic history, when it was the best time to change things!

    A CGT’s not a plan, especially the one you’ve come up with that is so full of holes and inconsistencies. And if you’re worried about diluting the tax base, you don’t change the best GST system in the world by opening doors for tax accountants to drive trucks through for the sake of cheap populism.

    I hope you’re serious about coming up with a plan, David, it’s a long time coming.

  6. bbfloyd says:

    i despair sometimes of ever hearing, or reading, any kind of relevant, constructive, and balanced criticism coming from those who would regard themselves as the intellectual, and moral superiors on any given issue….

    a point is being made…. if those goldfish impersonators wish to display a gaping ignorance of the complete statements made regarding the reasons for running deficits during recessionary times……then good luck finding a good seat to watch the final descent beneath the waves….

    the idea behind the responsible use of deficits during recession is to use the money to invest in new infrastructure that positions us to be able to utilise resources efficiently once the new growth phase gets underway, to invest in comprehensive education upgrades, which, if done in a realistic manner, will provide skills and knowledge necessary to the above….to invest in research and development in a meaningful way, also to dovetail in with the two examples above….

    new zealand has a proven history of wealth creation based on innovation, the resilience,ingenuity, and resourcefulness of it’s people….

    before allowing self interest, and greed to cloud our faculties, we need to read our own history…. our “golden” periods have coincided with, and followed from periods of large scale public investment….

    hard times in new zealand have coincided with a return to the “old” ways of scapegoating the “lower classes” and simply clawing back the nations real wealth into the coffers of the “elite”, who already have most of the wealth and power, but simply can’t, or won’t shed their hereditary bigotries and rapaciousness.

  7. Eye Patch says:

    tl;dr bbf. Plus you didn’t read David’s post.

    David was pointing to structural deficits, not deficits in lean times. What David is saying is Labour deficits good, National deficits bad.

  8. Pete George says:

    David, I’d support a decent debate about the pros and cons of CGT, rather than continuing an election debate.

  9. Tim G. says:

    Pete George said:

    David, I’d support a decent debate about the pros and cons of CGT, rather than continuing an election debate.

    David has opened that door for a decent debate. Why don’t you make a point in that debate instead of naysaying and complaining that he’s electioneering?

    Vacuous.

  10. tracey says:

    Interestingly today the PM says Auckland’s about to property boom again while the Minister of Finance said on Q & A yesterday it isn’t.

  11. Simon says says:

    David is right to raise the CGT issue at a time when revenue is falling and the debt is ballooning: and the govt seems unprepared to make the tough calls. If i remember rightly, Labour’s rationale behind a CGT was threefold:
    1. Fairness. A CGT taxes income that under the current regime isn’t taxed. So, in essence, a CGT is another form of income tax. Why should those who make money thru capital gains not pay tax when everyone who earns wages and salaries does? The opponents will come out and say ‘there is a CGT of sorts in NZ’, and, yes, this is true, but it’s also true that it is VERY easy to avoid – to the tune of well over a billion a year. The answer is all income should be taxed; not just some.
    2. Equity. When one form of investment is taxed and the other not, this will encourage certain types of investment behaviour. This is what has happened in NZ. Any honest accountant who deals in this area will tell you that many people invest in, for example, property for the tax benefit, rather than for the sound financial arguments like a balanced portfolio, risk, yield etc.
    3. Debt reduction. The Government’s answer to debt management is to sell state assets. Labour planned to realign the tax system. If i remember rightly, both plans ended up with the Government’s books back in surplus at the same time. Let me think about this one: one-off sale of state assets or bring the tax system into line with nearly every other developed (and many developing) countries. Hmmm no brainer.

    Go hard David, as there is no sound argument against a CGT that can’t be rebutted in 2 sentences. It’s also bold, visionary and it’s the right thing to do.

  12. Spud says:

    “existentially-challenged Clydesdale needs anything more than a good make-over and a stiff crack of his whip.” 8O

    Man, I feel sorry for the tax horse :-( :-( :-( !