Budget for top 5%

Any rational discussion of the budget we might have hoped for was drowned out in a self-congratulatory chorus of government ministers and business leaders supported by largely uncritical media commentary.

Ex-National Party candidate and Breakfast Television host Paul Henry made no pretence at journalism when he gushed his congratulations to the Prime Minister for his “inspiring” budget.  Person to person one could almost calculate the size of their personal tax cut by the exuberance of individual reactions to the budget.

Then within 24 hours the government moved from confident to smug with Finance Minister Bill English telling a business lunch the government sees its next big economic policy movement as privatisation of state assets such as Kiwibank following next year’s election. It’s become an Act/National government rather than the other way round.

The consensus among the business, political and media elites is that the budget was a bold move in the right direction for New Zealand. They have bought the line that shifting taxation from incomes to spending will encourage saving and investment rather than consumption and that tightening up property tax somewhat will push this investment to the productive sector rather than fuelling another housing bubble. Finally we are told the cutting of the top tax rate will stop tax avoidance, stimulate economic growth and encourage young New Zealanders to stay here.

A cautionary note should sound to anyone who looks across the Tasman at the robust Australian economy with pay rates at least 30% higher than New Zealand. Like New Zealand they have just completed a major tax review but are doing the opposite to us. They are leaving GST at 10%, keeping the first $16,000 of earnings tax free (we’ve never had this), retaining a top tax rate at 45c in the dollar, significantly increasing tax on mining companies while increasing employer contributions to worker superannuation by 30%.

But none of this seems to bother those who stand to get personal windfalls from the policy. Prime Minister John Key can expect an extra $272 per week and Telecom CEO Paul Reynolds will get an extra $6,640 a week while the vast majority of workers will be lucky to get some loose change after the GST rise and ACC increases announced earlier this year.

The iniquity is obvious. The top 5% of income earners will receive a third of the total value of the cuts. Are the rich overtaxed such that they deserve such a windfall? John Key thinks so. He says the top 10% of income earners pay 44% of income tax. That’s true but only because they get the lion’s share (34% in fact) of the national income. The lower-paid half of wage and salary earners receive just 16% of the country’s income and pay 11% of the tax.

New Zealand is now so unequal that if our top 150 income earners gave up just the increase in their wealth each year we could eliminate child poverty and almost double the incomes of the half a million New Zealanders earning less than $15 an hour.

Despite the overwhelming evidence to the contrary Finance Minister Bill English says the budget will leave the gap between rich and poor “about the same”. Pure delusion. This is a budget of the wealthy, by the wealthy and for the wealthy.

None of the other reasons given for the tax changes in the budget stand scrutiny either.

Dropping the top tax rate will not lead to economic growth if past experience is anything to go by. A US study found that between 1950 and 2002 the periods of strongest growth occurred when the top tax rates were the highest. In 1993 for example the US increased its top tax rate from 31% to 39.9% which preceded a period of rapid growth. The same effects have been experienced here in New Zealand. After Labour reduced both the top tax rates (48c and 66c) to 33c in 1986 we were told to expect economic growth and improved living standards across the board. Instead our economy stagnated while Australia with its progressive taxation forged ahead.

A similar thing happened here in 2000 when the Labour/Alliance government increased the top tax rate to 38c. Economic growth increased despite National claiming it would be a brake on the economy.

The most interesting theory I’ve seen to explain this is that many of the rich are inherently lazy and they work hard only when their share of national income is reduced by taxation. If they have it too easy they spend even more time over long liquid lunches and the like and because they control most of the capital for investment, the economy falters. Remember the awful behaviour and conspicuous consumption which marked the tax cuts of the late 1980s? Expect to see another round after 1 October.