As we know, today Phil Goff announced a tax free threshold policy. Trevor outlined the bones of this revenue policy in a previous post. Phil also announced other measures to improve the fairness of the tax system. These mainly centred on closing down tax loopholes that are currently used by some to avoid paying their fair share and that inhibit investment in the productive economy. I would like to briefly explain the philosophy and three guiding principles behind today’s announcement.
Philosophy: Labour is a social democratic party that (by and large) adheres to the principles of Keynesian economic theory (as do most Western democracies). Keynes believed that in times of recession the government should provide tax relief to the lower and middle socio-economic classes, as this group will spend any increase in disposable income, thereby stimulating demand in the economy. He stated that giving tax relief to the wealthy is counterproductive, as they either save or retire debt; which is exactly what has happened in NZ. Alan Bollard, Bill English and the Treasury have admitted that the latest tax cuts have had no stimulatory effect on the economy at all. So in a time of the greatest recession since the 1930s depression, why spend $14billion on tax cuts that aren’t going to help economic recovery? You don’t – or shouldn’t. National’s tax switch was fiscally irresponsible, based on out-dated economic theory and poorly targeted.
Integrity: for any tax system to work efficiently it must have integrity; i.e. minimise the ability of taxpayers to engage in avoidance. When the government-instigated Tax Working Group discovered that half of New Zealand’s wealthiest 100 citizens don’t pay the top tax rate, there were gasps of disbelief. How could this be? It could be because there are too many loopholes that allow a high level of legal tax avoidance. The Tax Working Group noted that the $200billion invested in rental properties brings in no tax revenue; in fact it generates tax losses. Hardly the type of investment that will drive sustainable economic growth or create export-driven industry, and yet the law currently allows it. Labour will change this. It is important for the integrity of the tax system that these loopholes are closed down and people pay their fair share.
Equity: basically this deals with tax equity across investment classes. Phil talked about using the tax system to drive investment towards the productive economy by closing down the tax advantages afforded to those who invest in property. Under current law, investors have the ability to write off tax losses associated with investment property against personal income. Often people negatively gear investment properties simply to maximise tax losses, and therefore avoid paying their fair share of income tax. Labour will change the law around this and ensure that losses associated with investment properties are ring-fenced (as currently happens under company law).
Equality: is it really fair that in last year’s October tax cuts, someone earning $1,000,000 pa received an extra $1,000 per week, whereas someone on the median income received pretty much nothing? No it’s not. I totally agree with rewarding those who do well, who are successful, take on responsibility and who put in the hours, the study and the time – but not at the expense of the great many. The level of inequality in NZ is alarming and it needs to be addressed. We pride ourselves on living in a country where all have the opportunity to achieve to our potential. However, this ideal is sadly no longer reality. The tax system is but one tool we can use to create a fairer, more equitable society.