Joining the Taxpayers' Union costs only $25 and entitles you to attend our annual conference, AGM and other events.
A new report by Taxpayers’ Union Research Fellow, Jim Rose,analysing the impacts of implementing a tax-free threshold concludes that the policy would be an expensive and poorly targeted way of reducing the tax burden and increasing after-tax incomes of New Zealand families.
> The introduction of a tax-free threshold is poorly targeted with many of the intended beneficiaries of the policy already receiving other Government support such as benefits, superannuation and tax credits, which could be increased without spillovers to other higher income groups.
> The more important tax threshold that needs to be adjusted is the $48,000 income tax threshold that when crossed sees individuals paying a 30% marginal tax rate. Given that a full-time minimum wage worker earns $47,216 annually, they only need to work one additional hour a week or get a 40 cent per hour pay rise in order to be pushed into the higher tax rate. This, combined with the 27% abatement of Working for Families tax credits, can create punishing effective tax rates well above 50%, which has significant impacts on incentives to work.
> Most of those in incomes low enough to substantially benefit from a tax-free threshold are either in groups where more targeted support can be provided (such as those listed above), are students working part time, or are second earners, again working part-time.
> The tax-free thresholds proposed by the Greens and Te Pāti Māori, along with the one considered earlier in the year by Labour, would cost more than what is currently spent on Working for Families but spills over to many taxpayers who do not need it, rather than just those the policy intends to help.
Commenting on the report, Taxpayers’ Union Head of Campaigns, Callum Purves, said:
“While it might be seen as appealing at first, the introduction of a tax-free threshold is arguably one of the least effective tax cuts. It is poorly targeted and doesn’t address the real issue, which is high marginal tax rates for primary earners in a household. Marginal tax rates matter because the impact on incentives to work, invest and up-skill along with being key determinants for whether people come to New Zealand or if our best and brightest decide to head overseas for a better return for hard work.
“The Taxpayers’ Union would of course prefer a tax-free threshold be introduced to the current high-tax status quo if it was funded by reductions in wasteful spending. However, there are far more effective options which should be explored instead, such as reducing the tax burden at the point where it hits the hardest by increasing the income threshold at which the 30% tax bracket kicks in.
“Hiking taxes even further to fund a tax-free threshold is simply untenable. The taxes proposed by the Greens and Te Pāti Māori (and previously by Labour) would economically ruin New Zealand by punishing innovation, investment, and success, draining New Zealand of the income needed to sustainably fund such a threshold.”
A new report published by the New Zealand Taxpayers’ Union analysing the impacts of taking GST off fresh fruit and vegetables concludes that the policy would be expensive, complicated, poorly targeted and would see most of the benefits going to supermarkets rather than consumers.
Using a collection of the leading research on GST and VAT systems from around the world, the report concludes:
> Evidence of significant litigation internationally over the categorisation of certain food products demonstrates the significant cost and bureaucratic complexity of determining whether different items should be zero-rated or not.
> The inherent complexity of a GST system with a zero-rating regime adds significant compliance costs to small and medium sized businesses who currently enjoy the benefits of a system that is simple to calculate and administer.
> Taking GST off fresh and frozen fruit and vegetables will not see a 100% pass through to consumers and is likely to be substantially less than this. Any pass-through of less than 100% therefore leads to wasted money which would be more effectively spent on other social policy tools such as an increase in Working for Families payments.
> The lack of competition in the New Zealand grocery sector means that consumers are even less likely than their international counterparts to see the GST reduction result in lower prices at the checkout.
> Removing GST off food items is a poorly targeted way of reducing the cost of living for those most in need with most of the benefit going to those on higher incomes.
> Undermining the GST system for fresh and frozen fruit and vegetables is likely to lead to a slippery slope where lobbyists push for more exemptions to be made to other products such as other basic foods, sanitary products and children’s nappies which would further erode the efficiency and simplicity of the current system.
In response to the report, Taxpayers’ Union Campaigns Manager, Callum Purves, said:
“A flat-rate GST system with few exemptions is one of the few things economists have been able to almost universally agree on as being good policy. It is a shame that certain politicians and political parties are willing to go against the overwhelming consensus for a policy that supposedly focus groups well.
“The Finance Minister’s own comments in relation to GST before the policy was announced shows that he knows creating GST exemptions is a bad idea, a sentiment which was also shared in earlier comments from former Revenue Minister David Parker and former Prime Minister Jacinda Ardern. The Labour Party strategy seems to be one of simply hoping that New Zealanders are too silly to see this policy for what it is.
“If the Government wants to bring down grocery prices for struggling New Zealanders, they should focus on removing overseas investment barriers for supermarkets, particularly those relating to the purchase of land, and also cutting the red tape in our resource management system that make it so costly and complex for any major developments to occur.”
Today we have released our latest report, ‘Socialism for the Rich’, by Jim Rose. The report shows that the annual cost of corporate welfare is now $1.6 billion - or $931 per New Zealand household.
‘Socialism for the Rich’ collates the costs of all the corporate welfare expenditure in Budget 2017. It shows that the company tax rate could be six percentage points lower if these favoured handouts were abolished and spread fairly across all New Zealand businesses.
Instead of rewarding profitable businesses with an across the board tax cut, these subsidies pick winners by directing subsidies to businesses that cannot keep afloat on their own.
Budget 2017 has allocated $294 million to commercialising science and innovation. In the past, the Government has directed investment at ‘public good’ science - research and development that has low commercial viability. Now, funding is going towards trying to commercialise technologies in the private sector. It’s socialised costs for privatised profits.
A further $148 million is going towards subsidising the film industry, $12 million less than the last budget. Since 2008, $997 million of taxpayer funds have been spent trying to attract the glitz and glamour of Hollywood.
The largest recipient of taxpayer funded corporate welfare is KiwiRail. The latest budget has allocated $396 million to KiwiRail, a 50% increase on the previous year. KiwiRail has now received more than $4 billion in taxpayer handouts since 2008 despite being valued as a $1.5 billion liability.
Corporate welfare is not only a waste of taxpayer money but also counterproductive. Look at Emirates Team New Zealand. Removing the direct corporate welfare saw Team New Zealand bring home the Auld Mug. Forcing private businesses to compete on their own footing, rather than rely on government handouts, will inspire competition and innovation. On the other hand, corporate welfare slows down the boat.
The report's author, Jim Rose, says, “The role of government is to provide essential public goods and social welfare that the market cannot. This Government has significantly overreached this role and actively engaged in picking winners and propping up failing businesses.
Originally published by the National Business Review on Friday, 10 June 2016
Too much of tax policy is debated with pistols drawn at 10 paces. Each side accuses the other of ignorance or being steeped in moral turpitude, and preferably often both.
Far too much time is spent feuding over the incentive effects of taxes.
If you inspect closely the history of the warring sides, they all agree that incentives matter.
If you tax something, you see less of it; if you cut taxes, you will see more of it.
The difficulty is the advocates for various causes are disappointingly selective about when they admit this is so.
Incentives do matter
French economist Thomas Piketty could not be more honest about the impact of a higher top tax rate. He welcomes the strong incentive effects of high marginal tax rates.
Why? Piketty wants to use high taxes to put an end to top incomes. He wants few to earn a large income and if they do, they should face ruinously high 70-80% marginal tax rates.
This honesty of Piketty is the basis of a ceasefire. Let us all admit that taxes have incentive effects and argue whether that is good or bad or that other considerations are more important than efficiency.
Too often in debates over income tax cuts, the opponents will not give an inch on the labour supply and investment effects of lower taxes.
Incentives count, especially when they bolster your case
But when the same groups argue about poverty traps when welfare benefits are wound back or when tax rates and Working for Families abatement rates interact, they admit that work must pay. Ordinary families will work less and second earners may stop working.
Those deeply troubled about poverty traps from high effective marginal tax rates deny point blank that putting the top tax rate back up to 39% or more will harm labour supply, investment, entrepreneurship and the incentive to go on to higher education.
On taxes on sugar and tobacco, consumers are said to be fairly responsive to higher taxes. Unkind words are said about the motives of those that disagree with these taxes.
The opposition is about how taxes on sugary drinks is a waste of time unless they are prohibitively high because there is plenty of substitute sources of sugar and fattening foods.
A higher tobacco tax is much more likely to cut smoking because there is no reasonable substitute. If the government really wanted people to quit smoking, rather than raise more revenue, they would legalise the sale of the safer alternative – e-cigarettes containing nicotine.
Opponents of company tax cuts are unwilling to admit that in highly integrated global capital markets a lower company tax wins more investment. They say that more tax is paid in the home country of the foreign investor if we cut our company tax.
In the next breath, they will rage against Facebook and Google for avoiding New Zealand company taxes. This is despite their previous argument implying this tax avoidance must be futile because Facebook and Google will pay more taxes offshore if they pay less company tax in New Zealand.
European Union politicians will say in domestic elections that company taxes do not deter investment but still relentlessly bully the Irish for its 12.5% company tax rate because it was winning more investment at their expense.
What is the point of the EU and G20 push for tax harmonisation unless it is to stop competition for investment through lower company taxes?
Clashing value judgments
It is perfectly reasonable to agree on the effect of a particular tax policy but have an honest disagreement about its desirability. A higher top tax rate will not raise as much revenue as some hope but that may not matter if you want less income inequality.
Sugar taxes may not reduce obesity by much but it could be a useful first signal about healthy eating.
Others disagree because sugar taxes are ineffective and because people should be able to live their lives for better or for worse by their own lights as long as they do not harm others. People meddling in the lives of others because they know better has always ended in tears.
At least we should keep the conversation civil. Incentives matter. Taxes bite. The disagreement is over who you want the taxes to bite. By how much usually depends on how you value the competing goals of efficiency, equality and liberty.
Jim Rose is a research fellow at the Taxpayers’ Union
Any new kids at the trough? a report by Jim Rose launched today, collates all of the corporate welfare in Budget 2015. The report updates our previous report, Monopoly Money: the cost of corporate welfare since 2008.
The new report shows:
Corporate welfare will cost taxpayers $1.344 billion this year, up from $1.178 billion in Budget 2014
The amounts are the equivalent to $752 (Budget 2015) and $663 (Budget 2014) per household
The largest item of corporate welfare is still KiwiRail which has cost taxpayers $13.2 billion (including write downs) since 2008 with still no sign of the ‘turn around’ National promised soon after it was elected to office.
‘Economic development’ is the second largest category of corporate welfare, including a $115 million appropriation for NZTE 'international business growth services’ which saw the controversial ‘Agri-hub’ given to a Saudi farmer.
The fastest growing area of corporate welfare is the ramping up of taxpayer funded grants to agriculture businesses wanting to install irrigation.
Corporate welfare is where politicians try to pick winners and the taxpayers lose. It robs middle class taxpayers to reward the well off and politically connected. For every dollar spent on corporate welfare, there is one less dollar for education, health, or investment by the taxpayer who earned it.
The report includes a forward by Matthew Elliott, Chief Executive of the London-based business group, Business for Britain. Mr Elliott has been in New Zealand as a guest of the Taxpayers’ Union and told media:
Many of the business subsidies and corporate handouts this report exposes are more suited to an EU-style picking business winners regime than a modern open economy. What these reports demonstrate is that lower taxes – not additional government spending – are the best driver of economic growth and prosperity.
Joining the Taxpayers' Union costs only $25 and entitles you to attend our annual conference, AGM and other events.
With your support we can make the Taxpayers' Union a strong voice exposing waste and standing up for Kiwi taxpayers.
Often the best information comes from those inside the public service or local government. We guarantee your anonymity and your privacy.