ACT Offers To Support Labour

ACT Leader Richard Prebble today offered ACT's vote in Parliament to Labour to pass a prosperity-promoting tax cut. "Labour does not have to rely on either the Greens or United," Mr Prebble said.

"ACT MPs are the balance of power. Labour campaigned at the last election for the centre right's support, `to be free of the far-left Greens'. Implict in Helen Clark's appeal was Labour's willingness to look at more centrist policies.

"New Zealand needs a tax cut in this year's Budget. First: to keep the economy growing, for jobs and prosperity. Second: for fairness. Now eighteen percent of all fulltime taxpayers are in the 39 cent tax bracket. After-tax incomes have fallen. Working families need a tax break.

"ACT has made two proposals. Either an across-the-board $50 a week tax cut equal to the projected $4 billion surplus, or a McLeod-style tax cut - for $4 billion, company and personal taxes could be lowered to 25c and the bottom rate to 18c, giving every worker a tax cut.

"I wrote to Dr Cullen over ten days ago. I believe the lack of a reply means that Labour is at least considering the ACT option," Mr Prebble said.

Richard Prebble's letter to Dr Cullen is attached below:

Dr Michael Cullen
Minister of Finance
Parliamentary Buildings
Wellington

Dear Dr Cullen

The 2003 Budget

A middle class tax cut now

Lower company tax than Australia now

A tax cut for every worker now

I am writing on behalf of every taxpayer - worker and company - to put the case for a middle class tax cut in this year's budget.

The projected surplus is around $4 billion, that is 3.0% of GDP. There is room for real tax relief. $4 billion is enough money for a tax cut of $50 a week or $2,600 a year! Put another way, the Labour government is over taxing New Zealanders by more than $2,000 a household.

Under Labour governments, tax revenues have risen a massive $9 billion in just three years.

Labour's manifesto was to only increase tax on the top 5% of earners. In fact all working people are paying extra tax. Inflation has pushed middle-income earners into the 39-cent tax bracket.

Stealth taxes - there are over nine major stealth taxes such as petrol, excise duties, tobacco - have brought in billions of extra revenue. Then user chargers - from the cost of going to court to school exams - have risen. Government now uses instant fines - from speeding to the proposed fines for smokers - to raise revenue.

These taxes fall almost entirely on the middle class - the working families where both partners have to work.

Parliamentary Library Economists confirm that since Labour came to office in November 1999, on average a working family (with both partners in fulltime work) is $28 a week worse off, that is $1,456 a year (or 2.4% worse off).

If government were to return the over-taxation, then the average working family would be 3.1% better off.

I strongly recommend that the revenue collected by over-taxation be returned - first as an issue of fairness.

There have been statements by you of the government transferring this money to low-income earners. Low-income earners are mainly social welfare beneficiaries. Other low-income earners are part-timers (who often belong to high earning households) or students who are just temporarily earning low incomes.

Social welfare beneficiaries have done well. Their income is completely protected by inflation adjustments. The community card means health costs are low, something that middle class families have not shared. In addition, the government has introduced "closing the gaps" programmes.

In contrast, middle class families not only face a 2.4% drop in income but also a decline in government services. Choice of schooling has been denied. Hospital waiting lists are longer. Roads are more congested.

It is time that hard working New Zealanders who earn this country's wealth got some tax relief. It is middle New Zealand who pays the tax. (The income tax paid by beneficiaries is nominal, and company tax is in this country a withholding tax.) ACT proposes that the whole projected surplus be returned now.

From media comments, I note you are concerned that the surplus may be the result of the economic cycle and you say you wish to wait and see if the surplus is continuing.

While you are right to be cautious about the reasons for the surplus, you are wrong to wait. If the surplus is structural then the extra revenue ought to be returned at once. If the surplus is the result of a very favourable set of factors - good terms of trade, good weather, low dollar, America's Cup, etc - you should also cut taxes now.

It is clear that the economy has turned. The Fonterra payment is down, the higher dollar has hit exports, we have lost the America's Cup (estimated cost $1 billion), the Iraq war is affecting tourism and economic sentiment.

The economic data that confirms a slow down will only be available in six months' time. Tax revenues are always a year behind. If the economy is slowing, tax revenues will fall in a year's time.

Following your reasoning, you would then say you couldn't afford a tax cut. If you do cut taxes in a year's time, it will be to restimulate an economy. This is difficult to do and a tax cut is generally reckoned to take up to 12 months to kick in. So waiting before cutting taxes is not a good option.

There is almost zero risk of a tax cut now over-stimulating the economy. Every forecast, including Treasury's, is for the growth of the economy to slow this year.

Now is the right time for a tax cut. A tax cut now will be a prosperity creating measure to counter the effect of recent adverse economic events.

You have three choices: * $50 a week tax cut for every worker (cost $3.8 billion) * The principles of the McLeod Tax Report (a tax cut for every worker) - 25 cents company tax rate (lower than Australia), 25 cents top and medium tax rate, 18 cents bottom tax rate * Labour's budget - putting $2 billion a year in the Cullen Super Scheme that invests mostly overseas, and using taxpayers' money for "closing the gaps", America's Cup challenges, Maori TV, etc.

ACT is putting this choice to New Zealanders in surveys. So far, overwhelmingly, those surveyed favour tax cuts along the line of the McLeod recommendations - which is ACT's preference.

The greatest benefit would come from a tax cut that encourages investment.

The McLeod Tax Report recommended that the tax system be flatter and pointed out that low-income families receive far more in government benefits than they pay in taxes.

For $2 billion the top rate of tax could be lowered to 28 cents, the company rate to 28 cents and the bottom rate dropped to 18 cents, so giving every working person a tax cut. With a surplus of $4 billion the rate could be reduced to 23 cents!

ACT recommends the top company and personal rates be reduced in the budget to 25 cents and the bottom rate to 18 cents. It takes three months to implement a tax change so government will still earn a surplus using Treasury projections.

Such a tax cut will: * Lower New Zealand's top personal rate below Australia's, so helping reverse the brain drain. * Lower the company rate below Australia's (currently New Zealand's is higher than Australia's.) * Boost average incomes. * Reward hard work and enterprise. * Improve the return from investing in New Zealand.

Such a tax cut will boost investment, growth and employment.

You will notice that I am including in my recommendation cancelling the "Cullen Superannuation Scheme". The massive losses in the Government Superannuation Fund show what a gamble the Cullen Super Scheme is.

The Treasury has pointed out that the Cullen Super Scheme does not make superannuation any more affordable - it is a smoothing scheme not a savings scheme. As most of the money is invested overseas, the scheme does not boost the New Zealand economy. A tax cut of $50 a week, if invested by a 30 year old, would by age 65, produce a fund of $240, 000 (in today's dollars using an annual average rate of return of 5%).

The insurance industry has worried the Cullen Super Scheme has made the future crisis in retirement worse as it has sent a false message to New Zealanders that they no longer need to save for the future. Answer: Scrap the scheme and make it easier for average New Zealanders to save for retirement through a middle class tax cut.

The ACT Party would be prepared to offer parliamentary support for a well-designed middle class tax cut. Labour campaigned last election to be given a mandate to be free from having to rely on the Greens for support. ACT will support tax relief for the average New Zealand family.

Yours sincerely

Hon Richard Prebble CBE

Leader, ACT New Zealand

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