Labour tax policy panned

As people wake up to the deliberate absence of critical details from Labour’s economic policies, John Shewan tears apart the income tax component of Labour’s borrow and hope strategy.

PwC Chairman and Tax Working Group member John Shewan is critical of the income tax aspects of Labour’s tax package. Leaving CGT aside, which Shewan says is clearly an issue where there are pros and cons, and the pivotal question is whether an overall net benefit will result, he described the balance of the package as being directly contrary to several of the foundation principles set down by the TWG.

In particular, the TWG’s strong recommendations around lowering and aligning tax rates, maintaining a comprehensive GST base (no member of the TWG supported GST coming off fruit and veges), and reintroducing incentives falls well short of the principles laid out in the TWG Report. Shewan points to the significant distortions caused by the up-ending of the tax system last time the tax rate was increased at 39%, and questions why NZ would want to go through the same pain again.

He also laments the fact the Govt declined to accept the recommendation institutional arrangements be introduced to ensure there is a strong focus on achieving and sustaining efficiency, fairness, coherence and integrity of the tax system when changes are introduced. He argues on this score the non CGT aspects of the package announced last week fall well short of the TWG framework, which is based on accepted orthodoxy from the OECD and similar organisations.

As we know Labour doesn’t want to tell us the details, they think the public aren’t interested and they will be found to be boring. ACtually Trevor was wrong about that, it isn’t that we will find them boring, it is that we find them dishonest.

 


THANK YOU for being a subscriber. Because of you Whaleoil is going from strength to strength. It is a little known fact that Whaleoil subscribers are better in bed, good looking and highly intelligent. Sometimes all at once! Please Click Here Now to subscribe to an ad-free Whaleoil.

  • gazzaw

    It will be interesting to see how much coverage John Shewan’s comments get in the NZ HErald and on TV1 and National Radio. Sweet fuck all, particularly while they are concentrating on hunting down Israeli spies.

  • rouppe

    As does Tony Alexander’s weekly overview:

    With our culture needing to be turned around toward more focus on profiting from our inventiveness, and with productivity enhancing investment weak, will some of the policy proposals appearing now make our economic and income growth prospects better or worse?

    Raising the top personal tax rate to 39% does what? It discourages people from making extra income therefore this will tend to reinforce our culture of income distribution, cutting tall poppies, and disrespect for wealth and those who achieve. At the margin the policy change will reduce the incentive for high income earners to come here and encourage more get up and go people to leave. Additionally the difference with the company tax rate of 28% will lead to a hefty investment of people’s time into restructuring their affairs to avoid the tax. The policy will worsen our long term growth prospects.

    Introducing a capital gains tax on investment property does what? Over the long term reduced relative returns to property investment will divert some investment funds toward other assets – though keep in mind most housing investments are financed by debt so the amount available to be redirected toward more productive assets will be a lot less than people may be thinking. The move however will be positive for economic growth long term. However, by reducing the incentive for investors to build houses the current shortage of property will deepen and there will be extra upward pressure on rents. This will place extra pressure on governments to subsidise rents for low income earners and this will produce extra upward pressure for higher taxes on middle to upper income earners. The country’s redistributive and tall poppy cultures will tend to be reinforced though with an offset from more efficient resource allocation over the long term.

    Introducing a 0% income tax rate for the first few thousands of dollars of income does what? This will tend to encourage more people to get off welfare and into the workforce and increase incentives to get basic training. The effects will be positive for growth but must be offset against the negative effects of higher taxes elsewhere discouraging work effort which takes one into a higher tax bracket. The change in fact strongly reinforces our culture of not earning money vastly superior to those around us, not sticking out, not risking being scythed down, not risking looking superior. Basically the increased progressiveness of the tax system will retard long
    term economic growth by reinforcing our current culture.

    Removing GST on fresh fruit and vegetables does what? We all benefit from that, those on lower incomes more so. But the door will be opened to other GST exemptions, it will be an administrative nightmare, and there will be a need for other taxes to compensate and if they are levied on those with upper incomes the tall poppy syndrome will again be reinforced and the country’s long term growth prospects again retarded.

    Though to be fair:

    Selling stakes in electricity companies and Air New Zealand does what? No evidence is in hand to suggest these companies are poorly run currently or that partly selling them off would boost their efficiency. They return more to the government than would be saved by reduced bond issuance therefore the government deficit will be higher and the scope to alter our anti-work culture through reducing progressiveness in the tax system will be less. The sales do not seem likely to improve New Zealand’s long term growth prospects.

    The policies so far offered up by the two main political parties in New Zealand reflect their respective ideologies and if enacted would tend to retard our long term growth prospects rather than enhance them.

40%