Tax changes - not fair, won't help the economy

Not only are the tax changes that take effect on 1 October unfair and will hit low income people hard, but they will be ineffective in dragging New Zealand out of recession and into long run improvements in the economy, says CTU Economist and Policy Director Bill Rosenberg.

“They are unfair. They worsen New Zealand's already damaging income inequalities. The gap in take-home pay between someone on $30,000 a year and someone on $150,000 a year will grow by $102 a week as a result of the income tax cuts - a tax cut of $16.15 per week compared to one of $117.88.”

“Income disparity has widened over the last 25 years and tax cuts like these only widen the gap further. It is all very well to say that the top 50 percent of income earners pay 89 percent of the income tax take, but they get 84 percent of taxable income.”

“Tax Working Group research showed that the lower a household's income, the harder GST hits it. After GST we estimate that someone on $30,000 a year will have only $4 a week more spending money after the tax cuts. Even someone near the average wage on $50,000 a year will be getting only about $14 more a week after GST. Three quarters of taxpayers get less than that income. Someone on $150,000 will be $90 a week better off.”

“On top of that, people need to meet other higher costs such as for energy, early childhood education, and ACC levies as a result of government actions.”

“The changes to property taxes are welcome, but far from enough to bring about real changes in investment behaviour. Property investors may pay some more tax, but not all high income people are property investors, and property investors can avoid the higher taxes. Overseas investors will benefit from unnecessary cuts to company taxes.”

“The tax changes will not make a noticeable difference to savings and growth. Treasury's recent working paper on savings (Saving in New Zealand - Issues and Options) showed private savings fell during the 1990s despite rounds of income tax cuts and GST increases, and concludes ‘tax changes are unlikely to on their own deliver a significant increase in the level of national saving’. Even the Government’s own Budget estimate was that the tax package would increase GDP by only 0.4 percent in four years and 0.9 percent in six years (by June 2017) - an increase in annual growth of about 0.1 percentage points – a number that will get lost in the margins of error. And GDP growth flat-lined after the massive tax cuts in 1986.”

“The tax cuts will make it harder to pay off government debt. Rather than a temporary, targeted stimulus to help New Zealand out of the recession, they put money in the hands of people less likely to spend it in New Zealand and the cuts become part of the Government's structural deficit. They will mean there will be harsh cuts in government spending that would otherwise not be needed.”

“The stimulus could have been targeted at low income people, and broader spending programmes could have helped build educational and health facilities.”

“The Government could have raised revenue through a capital gains tax exempting the primary home - which most other developed countries have had for years - or an international financial transaction tax which would reduce the New Zealand dollar's vulnerability to speculative attacks. Both would have been fairer to low and middle income earners and would have helped the economy change to a more sustainable path.”

ENDS

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