The New Zealand Taxpayers’ Union is calling Labour’s proposed capital gains tax (CGT) an unfair and poorly thought-out policy that punishes ordinary New Zealanders for inflation, not real gains.

Taxpayers’ Union spokesperson Tory Relf said:

“Labour’s capital gains tax is effectively a tax on inflation. Around 40 percent of house price growth over the past three decades has simply been inflation, not real profit, yet Labour wants to tax it anyway. That’s not fair or sensible economic policy.”

“By refusing to adjust for inflation, Labour is taxing people on phantom gains. It means someone could sell a property for the same - or lower - real value they bought it for but still get hit with a 28 percent tax bill.”

“If Labour genuinely wanted to broaden the tax base, it would have made the policy revenue neutral by lowering other taxes. Instead, it’s just another cash grab dressed up as reform.”

The Taxpayers’ Union is slamming Labour’s plan to expand taxpayer subsidies for the video-game industry, warning the current Game Development Sector Rebate is already unnecessary corporate welfare.

Taxpayers’ Union spokesman Rhys Hurley, said:

“This is déjà vu. We’ve already seen millions funnelled into the gaming sector through the Centre of Digital Excellence (CODE) and rebate scheme, with next to no public transparency and questionable results. Why double down on a failed policy?”

“If Labour are actually serious about jobs and growth, writing bigger and bigger cheques to high-performing overseas developers already turning over millions won’t cut it."

"New Zealand has some of the highest corporate tax rates in the world; that’s why firms can’t succeed here.”

“Labour want to keep taking money from small businesses who could stand on their own two feet and use it to prop up pet firms who can’t. This is corporate welfare in high-definition.”

This morning's Radio NZ's Morning Report interviewed Labour's Finance Spokesperson Grant Robertson on the OECD report on inequality released today. In the interview, Mr Roberson referred a number of times to 'trickle-down economics' and reiterated the point Green Party co-leader Russel Norman made in an earlier interview that the theory is invalid. But what does the term mean and have fiscally conservative groups (such as the Taxpayers' Union) or centre-right politicians ever argued for lower taxes on the basis a 'trickle-down' theory?

Audio on demand: Labour's take on inequality's effects

What is 'trickle-down economic' theory? Does it exist?

Back in February, Jenesa Jeram at the New Zealand Initiative, a Wellington based think-tank, considered the same question.

Defeating the trickle-down straw man

Jenesa Jeram | Research Assistant | New Zealand Initiative

In debating, speakers are not rewarded for having a superior argument per se. They are rewarded for convincing the audience that they do. The easiest – but ultimately dishonest – way to do this is to caricature the opponent, portraying their argument as ridiculous beyond belief.

Trickle-down economics is an example of a “ridiculous beyond belief” idea; that giving money to the rich will eventually trickle down to the rest of the economy to benefit all. Indeed, the refutation of this theory of trickle-down economics dominates the discourse.

Recently, opposition leader David Cunliffe cited the theory’s failure in his State of the Nation speech, arguing that “The rich are getting much richer, the middle is struggling and the poor are going backwards. It’s the human face of “trickle-down economics”, the idea that if we give more to those at the top, eventually things will get better for the rest of us.”

The problem is, there is no such thing as trickle-down economics. In fact, it is an oxymoron: it has no “economics” in it whatsoever. Thomas Sowell, senior fellow at the Hoover Institution argues convincingly that the theory is a straw man argument – a flimsy invention of those arguing against it so they can easily knock it down. Sowell writes that the idea cannot be found in “even the most voluminous scholarly studies of economic theories”.

Trickle-down economics is a complete caricature of the original arguments supporting economic growth. No economist has ever argued that in order to make a poor person richer you should make a rich person richer first. Economists have, however, argued that economic growth can make us all better off, whether we are rich or poor.

So why has this trickle-down nonsense persisted for so long? Perhaps because it sets the parameters of debate around redistribution, focussing solely on inequalities in wealth, rather than inequalities in capabilities. If wealth is not trickling down naturally through voluntary processes, then it is up to the government to intervene to ensure it does.

However, there is a much better way to deal with inequalities. Instead of trying to correct inequalities through redistribution, we should ensure that everybody has a chance to participate in our growing economy. First and foremost, this means making sure people acquire the right capabilities and education.

Rather than waiting for wealth to trickle-down from the top, the focus should be on ensuring everyone has the ability to swim with the economic tide.

Ms Jeram's final two paragraphs hit the nail on the head. In fact they are a better summary of the main message of the OECD report: the importance of investing in education and ensuing equality of opportunity.

Unfortunately Messrs Robertson and Norman couldn't help but take the opportunity to use the report to mischaracterise the economic arguments for a low tax economy. Our press release responding to the comments is over the flip.