Don Brash MP National Party Leader

10 December 2004

Getting Ahead With Lower Taxes

Earlier this year, I indicated that an incoming National Government would give priority to tax relief for low and middle income working families, with gradual tax reductions for those earning higher incomes as fiscal circumstances permit.

I also said the next National Government intended to reduce the tax rate on businesses to at least match the Australian rate of 30%.

Over recent days, I have been signalling my intention to draw clear battle-lines between the two major parties on taxation as we move closer to the next general election.

The Minister of Finance has responded with increasingly strident assertions that there is no room for reductions in taxation. You may note that he stops short of absolutely ruling out tax cuts. And Helen Clark has nothing to say on all this.

As Labour has demonstrated on numerous occasions this year, if threatened politically, there is no part of the National Party's programme that it will not steal.

But by now I think most New Zealanders understand that Helen Clark and her Government are philosophically opposed to lower taxes.

I hope that I have no need to reassure you that I am very much in favour of lower taxes.

And today I want to remind you why.

Many of you will have heard me lament the growing gap in average incomes between New Zealand and Australian workers. Many of you will have heard me assert the need for a long-term plan to lift New Zealand incomes back into the top half of industrialised nations - an objective which was shared by the current Government until it was placed in the too-hard basket about two years ago.

If we are to do better as a nation, if we are to improve our performance, we will need a change in culture.

A big change in culture.

If we are to improve our performance, we will need to create a culture of enterprise, of skill, and of hard work.

And to achieve that, we must get the incentives right.

We must have a tax system which rewards enterprise, rewards skill and rewards hard work.

Yet today we have a tax system that punishes all these things.

I am utterly opposed to the direction that Labour is taking us. Through the combined effect of the tax and benefit systems, most working families will receive much the same net income, regardless of how hard they work, regardless of what responsibilities and promotion they accept, regardless of their own efforts to better themselves.

That is a charter for the idle, and a recipe for a low productivity, low income, society.

The tax system punishes positive attitudes, while the welfare system encourages a set of attitudes which are utterly destructive of self-reliance and self confidence.

These are terrible signals to send to the next generation of New Zealanders.

And it need not be like this.

If we slowly but consistently work to reduce taxes over time, large benefits will emerge for all of us.

And so I am putting taxation policy firmly on the agenda for next year's election campaign. I am not, today, going to release the details of the tax policy we will take into the next election.

But I can tell you about the general shape of the concerns that we will seek, over time, to address. And I can give you a sense of what will be at stake in the next election.

The updated government accounts make it clear that there is room for the government which is elected next year to deliver a tax cut for every working New Zealander in its first Budget.

Overtaxation

No thanks to the present Government, the economy has remained very buoyant over the past few years: international commodity prices have been firm, there has been a strong inflow of people seeking to get as far away from international tensions as possible, and international interest rates have been at a level which has produced a strong rise in property prices.

As a consequence of that buoyancy, and of the increased taxes imposed by the current Government, the surplus in the government accounts was $6.6 billion last year, and is headed for close to $6 billion next year - and that despite huge increases in government spending in recent years.

The very comfortable fiscal circumstances which we enjoy provide a backdrop for an important election-year debate about the incentives New Zealanders face, and give the prospect of real choices as we elect a government for the next three years.

I want to stress that National's decision to retain the New Zealand Superannuation Fund, announced last week, has no effect on what we will do. We never had any intention of trading off contributions to the Fund against tax cuts. The issue was always whether to pay off government debt or build a Fund. Both required us to run a fiscal surplus.

But the current fiscal position provides the capacity to deliver tax relief and much improved incentives for every family, and every working New Zealander, while continuing to contribute to the Super Fund.

It is easy to get too close to these issues: too bound up in the details of the size of the fiscal surplus, too wedded to particular habits of political rhetoric about spending priorities versus tax relief.

So let's just step back a moment and try to register the enormity of what is happening to the earnings of working New Zealanders.

In the year ending June 1999, tax revenues were $30 billion.

Last year, tax revenues spiralled out to $42 billion.

Since 1999, the government has taken in an additional $34 billion in revenue above what it would have received had revenue stayed at the 1999 level. $34 billion.

This Government has had 5 years and a $34 billion increase in revenues. Those revenues are still growing fast.

And yet none of that massive flood of revenue has been returned to the very people who go out to work each day and earn that money.

Not one bit.

The Finance Minister was asked in Parliament recently to list the taxes he has increased. He said there were six significant increases. In total, in fact, there have been 30 increases, although some were quite minor. He's certainly increased income tax rates, petrol tax, and taxes on cigarettes and alcohol.

But asked to list the ones he has reduced, he was stumped. He couldn't think of any. My Finance spokesman, John Key, helped him out by reminding him that he had introduced a preferential tax rate on Maori authorities, reducing the rate from 33% to 19.5%.

None of these tax increases had anything to do with a need for more revenue.

For this Government, it seems those revenues have developed a glittering attraction.

The reality now is this: you earn it; we will spend it for you.

So there we have it: massive revenues, a huge surplus - and not a thought of easing the enormous pressure on many of those who actually earn the money.

What this means for working New Zealanders

I want to focus now on some of the personal situations we are talking about, because they reveal the damage our tax system inflicts on the incentives people face, and the opportunities they have to get ahead in life.

Think about the person who works for years to build up a business, takes many risks, puts their own savings on the line, and endures very low incomes in the hope that the business will come right - and there are nearly 250,000 small businesses in New Zealand.

And if that business does come right, and all those years of effort and risk finally pay off?

Well, this Labour Government will be there to relieve you of the burden of your success. They may have some more hip-hop tours to fund.

Or think about those people with volatile incomes - which is pretty much every small business. Or every tradesperson. Or every professional rugby player. Whenever these people get a good year, Helen Clark and Michael Cullen will be at the door to take their cut.

But they don't turn up with a refund when the bad year comes; they are not around when an all-too-brief professional sporting career is over.

Or think about another aspect of a typical life cycle. Think of a couple bringing up a family, paying off the mortgage, and then perhaps in their fifties finally being able to save for retirement. They will probably still be providing support to children in some form of tertiary education. After a lifetime of work, this couple will probably be near the peak of their earning power; but after all those years of doing it right, bringing up a family, paying off the mortgage, and saving for their retirement, their reward is that in all likelihood they will be hit by a punitive tax rate. And to compound the pain, the return on their savings, which is so crucial as a supplement to their New Zealand Super, will be taxed at the top rate as well.

There is something deeply wrong here.

There is a very direct link between undisciplined government spending and the financial pressure on households.

The reality is that our tax system is stopping people getting ahead, stopping them paying off their debts, stopping them building an ownership stake in society, stopping them building adequate savings for retirement.

Incentives

There is a broader set of issues behind all this.

We are moving further and further away from a New Zealand that rewards initiative, that celebrates hard work and achievement, and that applauds success.

It is all about incentives.

The Labour Party is schizophrenic about incentives.

They eased access to sickness and invalid benefits, and were surprised when numbers increased sharply. Since 1999, the population has increased by just 6%. But the number of those on the sickness benefit has increased by an enormous 33%, and those on the invalids' benefit by over 40%.

And yet they don't think incentives matter.

Except when it suits them.

Because Helen Clark has decided that incentives are important in other areas: subsidies get handed out to carefully selected businesses, especially when they provide photo opportunities for Cabinet ministers, and to big-budget movies.

The same schizophrenia applies to the tax system: incentives seem to matter when it comes to taxing cigarettes and alcohol, or fatty foods, or fossil fuels.

But when it comes to work, to saving, to investment and to risk-taking - in other words to all the things that are crucial for economic growth and rising personal incomes - the Government is in denial about the incentive effects of taxation.

They talk about the ownership society, but Labour policies cut deeply into the very things that give people the chance to build their own ownership stake.

Our tax system deflects people from the habits and attitudes that encourage self-reliance.

Even more damaging, we are sending a terrible signal to the next generation about what to do to get ahead in life.

And this is not just a matter of the tax system. It is reflected in our welfare policies, and in our education system.

What is the message from an education system determined to make sure everybody passes, in some degraded form?

What message are we sending our children if the option of a period, or even an entire life, on welfare is so easy to adopt?

These issues point to the challenges facing the next National Government.

Working for Families: the 2004 Budget

Let me turn to the latest Budget. The message to working New Zealanders from that Budget was that there would be no tax relief.

In my view, political pressures will in fact lead to some gesture of tax reductions or bracket adjustments next year, but unless the National Party is breathing down Labour's neck they will be small and begrudging - and, in any case, far too late.

What the 2004 Budget envisaged was a reverse flow of benefit payments to somewhat offset the punitive over-taxation of families. As a consequence, middle-income families will gradually be shifted into beneficiary status.

This is the new world that Michael Cullen unveiled in the Budget this year, with the 'Working for Families' package.

Under this greatly expanded welfare programme, your income, after taxes and benefits, will increasingly be unrelated to what you earn. It will be related instead to how many children you have, whether you are on one of the various forms of benefit, and whether you are a target political constituency.

And in this world, what is the advantage to the person who puts in the extra hours in overtime, who studies to get new skills and a higher earning potential, who takes on extra responsibility?

The answer is that, after all this work, these people will see precious little difference between their after-tax-and-benefit income and the income of those who do not put the extra hours in, who do not invest in developing skills, who do not take extra responsibility.

The last Budget amounted to a Labour Party lifestyle guide - take life easy, don't work too hard, don't take any personal responsibility for yourself, and there will be minimal sacrifice of income.

It is a set of policies that is taking New Zealand into a world riddled with perverse incentives. It amounts to a declaration to nurses, junior doctors, teachers, builders, plumbers, engineers, the skilled and the energetic, that you will not get ahead in this country no matter how hard you work.

You doubt that? Let me give a simple example.

Suppose you are a principal income earner on $38,000 with a partner and three young children, living in a central Auckland suburb, and eligible for the accommodation supplement. You decide you want to get ahead faster and get better clothes for the kids. You get a new qualification, work longer hours, and take on more responsibility. Your salary eventually rises to $70,000 a year, $32,000 more than before. But your after-tax-and-benefit income rises not by $32,000 but by just $2,856, with the other $29,144 going to the government. Your effective marginal tax rate is 91%. The abatement of the accommodation supplement contributes significantly to this, but even without that the government takes 66% of the increased earnings.

So why would anybody go to all the effort?

The same sort of situation affects those on benefits looking to get into work, where many people will lose in excess of 80% of their extra earnings.

I am deeply opposed to policies which stifle the incentives that drive personal responsibility and self-reliance.

Problems with our tax system

Let me summarise what is wrong with our tax system.

Simply, our tax rates are too high at all levels.

And the higher tax rates cut in at incomes that are far too low. In the United States, the top tax rate cuts in at the equivalent of NZ$450,000, not the $60,000 in New Zealand.

Our taxation of families is punitive, and the benefit system that tries to offset that is making most middle-income earners dependent on the State, when they should not have been taxed so heavily in the first place.

Our tax and benefit system destroys incentives to work; it penalises those who work hard and try to get ahead.

Our tax system punishes success, while our welfare system rewards lack of effort.

Our tax system punishes those who save, who try to build an ownership stake in society.

Because of this our tax system is fundamentally unfair.

Instead of re-confirming shared kiwi values of self-reliance and enterprise, we are building a culture of self esteem without achievement, of financial rewards without hard work, of dependence on others instead of fostering a confident independence.

At the next election New Zealand voters face a momentous decision.

We are reaching a fork in the road, and the decision will substantially determine the sort of country we become, the sort of attitudes and aspirations the next generation will adopt.

National's approach to tax policy

National's tax policy will ensure that the core kiwi values of independence and self-reliance are encouraged.

That will be one of the key choices that voters will make at the next election: a choice between a massive extension of welfare into middle-income New Zealand, or a future that encourages and rewards enterprise and self-reliance.

With the biggest budget surplus in our history, there is scope for a tax cut for all working New Zealanders.

Clearly, the scale and initial focus of such cuts will depend on the state of the economy at the time. We have no intention of triggering a lift in interest rates with too rapid a cut in taxes. I, more than most people, understand the connection between tax policy and interest rates!

But I part ways with the Finance Minister, who seems to have the strange notion that if he spends your money it is not inflationary, but if you do it is.

A significant reduction in the tax burden will take many years and more than one term of government. But if we slowly but consistently work to reduce taxes over time, large benefits will emerge for all New Zealanders.

Reducing the tax burden is about improving the opportunities that this country offers those with initiative, energy, ideas, and drive.

A National Government will ensure that the benefits of hard work and investment are largely retained by those who do the work and take the risks.

I don't believe in a culture of envy; I believe in a culture of aspiration and achievement.

And a culture like that, when harnessed to shared values of compassion for those in need, and a determination to take care of the weak, the ill, and those who have simply stumbled upon bad luck, produces a society that we can all be proud of.

It will be a society that generates the incomes needed to keep our citizens in this country, and which has the wealth to support those in need, to help them back on their feet, and to care for the elderly.

That is demonstrably not the society we have at present.

But it is one we could have.

Conclusion

I want to conclude by saying something about the choices we have, and the differing goals they would serve.

As I have said on many previous occasions, I place the highest priority on reversing the hugely dangerous and growing gap in average incomes between this country and Australia.

Nothing threatens the prospect of this country offering a future to our children and our grandchildren more than a growing gulf in the standard of living between New Zealand and Australia.

That set of numbers, which measures the still growing income gap, represents a growing disparity in our ability to resource medical care, educational opportunities, and most of the benefits of a civilised society.

We can close that gap.

To do so, we require taxation changes that provide greater incentives for investment, enterprise, entrepreneurship and hard work. And those changes will involve both personal tax and company tax.

Also needed are changes to our welfare system and improvements in the quality of the education we provide.

Another important goal of our tax reforms will be to reinforce social stability by lessening the burden on the hundreds of thousands of middle-income families who, under the policies of the current Government, are taxed as if they were the new rich.

That could mean targeted reductions in tax on families, leaving significantly more of their own cash in their pockets - as distinct from the middle-income welfare policies announced by Michael Cullen in this year's Budget, which will churn tax from one pocket to the other, minus a bit to pay for the bureaucracy.

It could also mean tax relief for those who reduce the burden on the state by meeting the costs of their own medical care, or the costs of their children's education. That could be achieved through either tax deductions or rebates on such expenses.

It is not at all clear to me why some New Zealanders should be expected to pay twice for their healthcare and for the education of their children - once through their tax and once through health insurance premiums and school fees.

That being said, National is committed to a broad-based, but lower-rate tax structure - that is the structure most consistent with achieving a high income and high-growth society. The more exemptions and deductions there are, the less likely it is that we can move to a lower rate structure.

Clearly, we cannot immediately make huge steps in all of the directions I have alluded to.

Equally clearly, there is plenty of room to take meaningful steps towards a number of them - unless, of course, the Labour Government opts to bribe voters with a vast splurge of additional government spending in next year's Budget.

Before the next election, I will outline in detail our plan to ease the tax burden, to improve work incentives and enable people to get ahead in this country. Our focus will be on what can be achieved over a number of years, not just in year one.

We will not be sacrificing valuable public services in that goal, but we will be holding the bureaucracy accountable for every dollar spent. We believe in a strong and efficient public sector, and we will fund it accordingly.

I believe governments should budget and spend taxpayers' money as carefully as hardworking families have to do every week. That will be our benchmark for reviewing spending programmes.

This Labour Government has had more than five years to provide some tax relief but has done nothing.

Over a similar period, a National Government could radically transform the incentives New Zealanders face, and the opportunities they have to get ahead in life.

And we intend to do just that.

ENDS

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