Sunday, January 24, 2010

Taxing work

For the second time in as many months, hard-right economic conservatives proposed radical changes for New Zealand. For the second time, Finance Minister Bill English initially expressed a willingness to adopt at least part of a radical plan, only to turn around within a couple days and again say, in effect, that the radicals had gone too far.

The common element is Prime Minister John Key. Like his Labour Party predecessor, Helen Clark, Key is a pragmatic leader more than a partisan one and, in any case, his political leanings are centrist, not rightwing. The radicals’ proposals never had any chance of being adopted in their entirety.

That may have been the plan all along: The reports of the two “working groups” could’ve been trial balloons to see how far the New Zealand public was willing to go. A poll claimed Kiwis would accept raising GST from its current 12.5% to 15%, and that would seem to suggest that the first trial balloon worked to soften up the general public. I’m sceptical.

However, the New Zealand tax system absolutely needs reform: It rewards passive investment in residential rental property or empty land and discourages “active” investments (which includes shares and company bonds, among other things). With no capital gains tax, for example, an investor who sells an investment house at a huge profit pays no tax on the profit, but a businesses owner making a similar amount in profit will pay a third in tax. That makes no sense.

The conservatives generally tell us that raising GST is the best answer, but it’s a terrible idea. A flat tax, GST is regressive and hits poor and working people far harder. Better-off people can cut back on consumption to avoid paying more in GST tax, but there are currently virtually no exemptions from GST, so the prices of food, clothing, electricity, water—all the minimum, basic requirements for life—go up.

GST also places all the costs of collection onto businesses—large and small—rather than on government, as with normal taxes. This creates enormous burdens on businesses, especially small businesses—the engine of most Western economies.

Some have proposed financial transaction taxes as a better alternative to GST. Others have said a land tax would discourage people “land-banking” empty land, and a capital gains tax on investment property would encourage investors to put their money into more productive uses. There are, in other words, many alternative proposals that don’t require raising the taxes on the poor to give the better-off and rich tax cuts.

The rightwing claim that the only way to preserve our current services in health, education, etc., will be to increase GST and cut the taxes of the better-off. All New Zealanders deserve to be treated fairly by the tax system—including those at the bottom. The better-off and investors shouldn’t be able to take advantage of everyone else. Fairness is what New Zealand is all about—and ought to be.


d said...

I'm sure I've mentioned it before, but I went to a day-long workshop to hear the tax working group's ideas.

I completely agree that increasing the GST is the wrong way to go. While the tax group was made up of the 'best and brightest' minds in public accounting, there were definitely dissenting opinions about the GST (and the other ideas). We'll see where the government takes it from here...

Arthur Schenck said...

Now see, if you were blogging (ahem!), we coulda heard all about that!