The Minister of Finance has released his much-anticipated National Infrastructure Plan. Generally I’m averse to plans putting the decisions of consumers and businesses into straight-jackets on the whims of politicians, however, the plan itself appears sound: invest in key infrastructure areas such as fibre to the home, roads of “national significance”, schools, hospitals and prisons. These things that lead to long-term sustained economic growth, not random and hard to administer tax breaks and subsidies.

However, as is a usual theme for this government, it seems like one good idea – Public-Private Partnerships or PPPs, will not be utilised. As FCK has long stressed,  the government is spending beyond New Zealand’s means. This situation cannot last forever – either the economy has to grow much faster than government spending, or government spending has to be cut so economic growth can catch up. This means unless we slash welfare spending or strike oil, a big spend up on infrastructure isn’t feasible.

This is where PPPs come in. While lefties moan that PPPs represent “privatization by stealth” and ensure returns go to private investors, the reality is that they ensure infrastructure is built sooner (thus enabling economic activity to grow faster than before) and reduce the taxpayer’s exposure and expenditure. The government’s cautious approach to PPPs and its desire to spend up large on infrastructure make the task all the more harder, and expensive, for taxpayers.

Meanwhile, Tower Investments want PPPs to be made available to KiwiSaver investors. Now there’s an innovative idea – all the silly nonsense that infrastructure will end up in the hands of foreigners would be quickly forgotten, as only New Zealanders can invest in KiwiSaver. According to KiwiSaver’s own website, $930 million has been deposited in the scheme between 2009 – 2010.

…well, that used to be the Act Party’s slogan. Not anymore sadly.

After reading through the debate between The Standard, Idiot/Savant and DPF, it looks like the best possible retort – because both DPF and the lefties are arguing at cross-purposes. It doesn’t matter if you’re talking about households, families or individuals. The problem is that progressive tax systems inherently tax the wealthy more; so the wealthy always benefit the most from cuts to any of the rates of tax, whether they’re the lowest or highest rates. That’s the whole point of a progressive tax system.

So as soon as you talk about cutting income tax, those at the bottom always get the least, because they pay the least proportionally. Key’s problem – apart from breaking a promise on paying GST (sure, that’s a free hit for the left – and Key’s reaction should’ve been “yeah I broke a promise – but I’ve spent a lot of taxpayers money looking at fixing the tax system, so it was a promise I’m justified in breaking” not some dopey defence of being quoted out-of-context – but I digress) is that any attempts at reducing tax for the poor will trickle upwards. The only alternative is further tinkering with Welfare Working For Families, or some other kind of tax credit for poorer households.

It would be far smarter to simply scrap WFF and introduce a tax-free threshold for everyone who’s not actually a net contributor to the government’s revenue – in other words, a tax-cut for every worker. The top tax rate could then fall as all households benefited, albeit still with increases in GST. Of course, government spending in other areas would need to be cut (as it has to anyway).

The Prime Minister will make a big speech tomorrow at the opening of Parliament. Apparently it’s going to set out the government’s tax policies. Be prepared to be disappointed. That way if the package is good, you’ll be elated.But seriously, tomorrow’s speech needs to articulate a way forward – a wishy-washy yes maybe speech won’t cut it. Luckily, I suspect the way it’s been talked up in the media implies JK’s office knows it.

It won’t be Labour that ends John Key’s dream run. No, 2010 will be the year that makes or breaks John Key’s premiership. Showing some testicular fortitude now by moving the country towards significant changes in how much tax we pay, and what we pay it on, will significantly alter our future course as a country. Allan Bollard is right – we won’t catch Australia if we don’t make some bold changes.

Fixing the tax system is not a silver bullet though. The government must also address our long-term spending problem; the fact we are living beyond our means. Because today’s spending problem is tomorrow’s debt problem – and that debt will unnecessarily burden future generations. That’s why I care about these issues – because of our future generations. I don’t want them burdened by some previous government’s inability to control its own spending, as my generation was during the 90s thanks to Muldoon’s spending binge of the late 70s and early 80s. So come on John, show us you’ve got a pair and give us the step change we need.

Well, after my fuck up on minimum wages, I guess I’d better point to something that shocked me: a Labour MP talking sense. Mr Rick Barker on Red Alert takes aim at the pain capital gains tax could cause to mainstream, hardworking Kiwis. His anecdote (perhaps staged, but that’s not the point) looks at a typical scenario:

This man is no bludger, no rack rent landlord, he is not highly leveraged gambling on capital gain to off set other costs, he is a hard working Kiwi and a saver.  He has done what was asked of him and now he fears that he is to be punished some how for doing the right thing, saving prudently.  He saw a house as a good investment.  Property values might go down, but he would still have the house.

Great stuff – a capital gains tax will hurt hardworking Kiwis, which is why the Prime Minister has rightly ruled it out. The only problem Rick, is that your own leader wanted to do a deal on capital gains tax. You’re on the right track, but you really need to get rid of the phil-in in charge of Labour.

One thing you can be sure of when it comes to Grey Power is their insistence on re-litigating old arguments – talking about the Tax Working Group they say:

…reeks of shades of former Prime Minister, Jenny Shipley, when she set the amount of national superannuation back to 60% of the Net ordinary after tax weekly wage.

FFS, that was what, eleven years ago!

Grey Power feels that the recommendation is ridiculous that those earning $70,000 per annum receive tax cuts while those below that figure receive nothing.

Erm, no. The TWG recommends reducing both the top tax rate (38% on everything over $70,000) and the middle band 33% over $48,001 rate.

Perhaps the most frustrating aspect of the Tax Working Group report isn’t the report itself, but the course it sets our economic discussions on for the next three years. Our beloved Minister of Finance will make raising GST and reducing income and corporate tax rates as if it’s a ballsy change that will have a deep impact. Certainly, it will help move the burden of Government spending off the top 10% of taxpayers, who pay 76% of all tax, a situation that inherently discourages people to earn higher incomes and increase the nation’s wealth.

FCK takes the view that while raising GST to cut income and corporate tax rates is a good move that will increase the efficiency of our tax system, it’s only a half measure, and only part of the answer. To have any real impact, Mr English must cut wasteful spending and idiotic tax-churning policies, the worst of which is Welfare Working For Families. As Roger Kerr points out:

…taxes will have to rise to reduce prospective budget deficits and levels of public debt if spending is not cut.

All of this shifting the tax burden will be for naught if we don’t reduce our spending. Ironically, the previous Labour Government actually did a reasonable job at reducing the government’s share of spending as a part of GDP from 1999 – 2005. From 2005 – 2008 they greatly increased spending at unsustainable rates. For that I blame Winston Peters, students and WFF.

Over at New Zealand Conservative, ZenTiger takes aim at David “Pinko” Farrar, alleging that DPF is a wrong because he supports raising GST so that income and corporate tax rates can be lowered. Now, we may chide DPF for being a Pinko on a lot of issues, but tax is not one of them. Let’s look at Zen’s logic and see if it stacks up:

So if the new taxes are going to “balance out” as you imply, why change it?

Because GST, as a consumption tax, is more efficient. It is a “neutral” tax, in that since it applies equally to all transactions for goods and services, it does not change economic behavior. That is much unlike income or corporate tax rates, which both remove incentives for people to earn more (and thus grow the wealth of the country, increasing the wealth of everyone in the process) or the incentives for companies to invest in New Zealand for profitable growth, increasing our country’s wealth.

Unlike income tax, consumption taxes like GST are flat taxes (and hence regressive, which is why lefties don’t like them as much). That means that you don’t have the problems of fiscal drag, or the inherent dead weight losses that goes with progressive taxes. In other words, shifting more of the tax burden to GST makes our economy more efficient.

Socialists love redistributing tax. In this instance, National want to redistribute tax so overseas businesses can repatriate higher profits through smaller company taxes, and the lost revenue will be made up by people. The taxes therefore are going up for “people” as opposed to “businesses”. That’s just socialism for capitalists.

Oww, those naughty foreigners! This might’ve escaped Zen, but GST doesn’t simply apply to consumer products. Every time one of those foreign-owned businesses buy goods or services in New Zealand, they pay GST on the transaction. Sure, lower company taxes enable greater repatriation of profits overseas – but on the other hand, the also allow greater investment by businesses seeking growth.

*Yes this is a piss-take of a famous Hong Kong film – but which one? Answers below please…

The Mayor of Newmarket, Cameron Brewer, writes in The New Zealand Herald again today on GST. This time, Brewer takes aim at the Tax Working Group’s proposal to increase GST to 15%, arguing:

If an increase in GST is to lead to a fall in consumption, a tightening of business margins and a Government being hurt politically, it is hard to imagine the Finance Minister announcing it in his second Budget.

Cameron’s right that increasing GST on its own will lead to a fall in consumption -that is inevitable as prices rise. However, when combined with a cut to corporate and personal tax rates, it is likely consumption would remain unaffected. This is acknowledged, with an interesting rider:

An increase to GST could help to offset any cuts to the corporate and personal tax rates, but it would mean Kiwis’ pay-packets would shrink overnight.

Now this rider isn’t exactly correct. Increasing GST won’t hurt Kiwis’ pay packets, but it will mean we pay more on transactions. What would hurt pay packets would be not cutting income tax and corporate tax at the same time. That’s the real issue with raising GST – the only other valid issue is the potential to hurt inbound tourism, although I suspect a higher-valued Kiwi dollar versus the US dollar is hurting our tourist trade more, as it makes New Zealand less attractive (besides, a 15% sales tax is not that huge compared to other countries – I think the Japanese have a 25% sales tax from memory). That issue could also be easily remedied by allowing tourists to claim-back GST on their large purchases, as Cameron has previously proposed (and already occurs in Australia).

The real problem with raising GST is not cutting income and corporate tax rates at the same time. The Minister of Finance has ruled out cutting income tax, and may be forced to cut corporate tax because the Australians are going to in their next budget. The $2 billion raise from increasing GST could easily go towards cutting income tax towards 30% for top earners, and to get our corporate tax rate down. Since GST is a more efficient flat tax (and you can easily introduce measures to ensure the poorest members of society aren’t hurt too badly by an increase) increasing the amount of GST while cutting income and corporate tax increases the overall efficiency of our tax system. Sadly, it doesn’t look like the Minister of Finance will do that, so Cameron’s fears of a moribund retail sector may be well founded.

A while back I mentioned a report by Business NZ called “Setting New Zealand Apart” a blueprint for creating productivity growth and making the New Zealand economy more competitive internationally. Read alongside the “nuggets” of the 2025 Taskforce Report and Tax Working Group, the reports ought to provide a good basis for John Key’s Government over the next two years into the 2011 election. This is the first post in a five-part series on these “nuggets”.

We already know in the 70s this country fell behind Australia, and it was only in the 1990s and 2000s that we started to first tread water and then catch up, albeit slowly. Labour’s spending binge from early 2005 – 2008, relentless expansion of regulation and strangulation of business in general helped kill the growth off again. New Zealand’s productivity statistics 1978 – 2008 show some serious problems for our capital productivity, good growth for labour productivity (thanks to a lot of us working longer hours for less) and sluggish growth of ‘multi-factor’ productivity (that’s the two others – labour and capital – combined).

Productivity Growth

While productivity isn’t the silver bullet that will save our economy, it does matter a lot. Anyway, here’s the 50 recommendations Business NZ made, what the Government is doing to implement them, and what the 2025 Taskforce recommended:

1. Create a “New Zealand Productivity Commission” to keep on top of new regulation and review existing regulation.

While I’m generally opposed to new bureaucracies, the Productivity Commission (along the lines of the Australian Productivity Commission) would be a good thing. The 2025 Taskforce states such a body would have expertise in micro-economic policy.

2. Make regulatory bodies more accountable.

We should ensure that regulators get it right first time. An investigation into the possibility of a wider merits review process would provide a strong start. This could provide a framework to safeguard against inappropriate regulation and provide more accountability for decisions.

3. By mid 2010 deal to the top five areas of red tape for business.

The top five areas are:

1. Tax;
2. health and safety in the workplace;
3. Employment Relations Act;
4. ACC;
5. the Holidays Act.

The Government is set to introduce legislation on the Holidays Act and has already amended the Employment Relations Act for greater flexibility. The two sticking points seem to be ACC and Tax. Key won’t want to scare the horses with further ACC changes, and tax is a no-go area thanks to Mr English’s determination that there won’t be further tax cuts. I suspect the Government won’t move on tax until 2011, hoping a tax cut might bolster its support in an election year.

4. Develop a national Infrastructural Plan.

This is already underway, as a part of the Treasury, and should be out in the next couple of months.

5. Develop a national Transport Plan.

There doesn’t appear to have been anything done on this yet. C’mon Steven!

6. Electricity

Gerry’s made good progress at cutting red tape and axing the useless Electricity Commission. But more needs to be done to create a more competitive environment.

7. Telecommunications

Business NZ recommends going back to a “light-handed” regulatory environment.

8. Phase two of RMA

The report recommends creating a technical experts group to deal with water issues, something which matters greatly in rural areas. Good stuff. Meanwhile they also proposed codifying the right to compensation for the removal of property rights and / or restrictions on land use. Again, this is a good thing, and something that is missing from the Bill of Rights.

9. Include property rights in a Bill of Rights Act.

This is a fairly simple change in law – however, its implications for Government and New Zealand’s constitution generally are wide-ranging. That doesn’t mean it’s not worthwhile. Perhaps National can get a proposal for property rights in the Bill of Rights Act in its Constitutional Inquiry this year?

10. Ensure that decisions that may result in access to resources being closed off have the value of their future use explicitly recorded as part of
their cost-benefit analysis.

Seems practical. Perhaps some sort of legislative “ratchet clause” on the value of the land’s resources?

Part II coming soon…

Funnily enough, Marty at The Standard says that it’s “ironic” that I think he’s got it all wrong on GST tax-back for tourists. I didn’t actually say he was wrong, I said he was moaning – the difference between my position and Marty’s is ideological, and strictly speaking just saying Marty’s “wrong” goes without saying when it comes to ideology. Likewise, he’d say I’m always wrong because of his ideology.

Marty, and social democrats, are concerned with keeping the tax base as wide as possible, taking the largest possible slice of the economic pie. This is to ensure that the government can spend our money on a range of programs to create their version of “social justice”. That’s why one of Labour’s first actions in government in 1999 was to introduce a new higher tax rate. The idea of offering a tax-back to tourists is an anathema to Marty.

From my perspective, the purpose of the government is not to tax and spend or create social programs to spend; and it’s certainly not the purpose of government to try and borrow and spend our way out of recession. It’s to maintain law and order and do what it should to create conditions for a good standard of living. Taxation is a necessary evil to meet those ends (I don’t think taxes are necessarily theft as libertarians do, although the focus of tax on the wealthy is envy related), not a means to an end.

Anyway, back to GST off for tourists. The Aussies National Accounts do show a general upswing in tourist spending following the introduction of GST tax-back:

Aussie International Trade in Tourism

Tourism exports (that’s what people spend when they’re in Australia, and imports are Aussies spending money elsewhere) have generally been increasing. What’s missing is the data prior to 1999, when there was no GST. However, the general trend for tourism as part of Australia’s national accounts has been good. The only other reason I could think of that would account for a jump in 2000 was the Sydney Olympics, but the above graph tends to disprove that.