Thursday, August 25, 2005

NZ Tax Cuts - an expert appraisal...

Gareth Morgan is an economist. That means that he must be a dry-as-dust-ivory-tower-boring kind of a guy, right?

Well, let me put it this way. I don’t always agree with him on matters politic or economic, but then that isn’t hard either. He might have an edge on the former, he is country miles ahead on the latter.

It has taken a while, but I have finally tracked him down on the net. I have wanted to do this simply because his columns (he writes on matters social, politic and economic) are generally interesting, to the point, and well spiced with ginger.

The desire to dig him out in quotable form came again on Monday night when he appeared as one of a panel of “experts”, in this case to support the “right” side of the topic of the tax cuts proposed by the various (well two leading) parties as “vote-for-me” bribes. In his usual forthright fashion, Gareth gave his honest appraisal… including an objective if quiet “yeah, right” to the right tax cut.

So this is where you will find the full text of his latest column

Example –

To assess the merits of each, rational voters I presume will compare the offerings from two perspectives. Firstly the personal hip-pocket impact – how much do I get? Secondly which package best promotes the well-being of New Zealanders overall.

On the first count voters need to look beyond the direct impact on their wallets and take account of second round effects from tax cut packages of the magnitude of those offered. These effects include what the package might do to the economy as a whole and them personally as a consequence.

On this score both offerings are expansionary – we’re looking at the budget surplus being reduced over the next 3 years from 7% of GDP to around 2.5% of GDP. Such a reduction is a significant reduction of government savings, in an economy already at the top of the borrowing league of the OECD club. Remember our economy is already at full capacity, we are out of labour and we have inflation at the top of the permitted range. Now if the private sector is set to undergo a significant slowdown or even contraction, then an expansion of government won’t impose a strain on those macroeconomic indicators of health. But if the private sector doesn’t acquiesce then adding government spending fuel to the fire of an economy already running hot, will have exciting results.

His conclusions?

So against this benchmark how do the tax offerings compare? Neither look great but National wins – its personal income tax regime isn’t as progressive as Labour’s although it does still impose very steep marginal tax rates (poverty traps) on middle income families exposed to abatement of their benefits. Labour unfortunately has some middle income families losing 60 cents in every additional dollar they earn, to tax. This "tax rate of 60 cents" is calculated by adding together the actual tax paid and the value of state benefits lost. Is that fair? In principle I would say yes. Is it right? No, but the error is in the level and rate of state assistance rather than the rate of abatement.

For the voter seriously considering then the efficacy of the tax packages for New Zealand overall, the question they have to decide on is actually quite simple. People who earn more than you pay more tax. But do you think that they should pay proportionally more tax and if so why? If the answer is simply because you’re jealous and feel they should be punished, vote Labour. Don’t however delude yourself that we need a progressive income tax schedule to finance the welfare of those who earn less than you and qualify for income supplements or benefits. We don’t. National’s package is closer to one which retains progressivity only to the extent it’s needed to fund minimum family incomes.

So, that should make Robert feel a lot happier...

Good luck.

A sentiment, Gareth, that I heartily endorse.

Oh, yes. A bike riding economist who has been arrested in Iran can’t be all bad…


Robert said...

So, that should make Robert feel a lot happier...

I feel fine, thanks…and you?

National’s package is closer to one which retains progressivity only to the extent it’s needed to fund minimum family incomes.

I suppose ‘baby steps’ away from Marx are better than nothing.

The probligo said...

Heh, Robert, I am trying to track an op-ed from the weekend, written by one of NZ's industrial icons of the 1980's.

His name is Robert Jones (Bob to most) and he was a very successful man. "Was" because he is now enjoying the fruits of his labours.

What he said about libertarians is quite "interesting".

Oh, and calling him "left wing" would probably earn a rapid summons for libel.