…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).

Unemployment is a complex problem. There are multiple factors for why at any one point in time a worker might become or find themselves unemployed. Hence a basic assertion like “higher minimum wages cause unemployment” isn’t necessarily true – and, of course, vice versa. Sadly the debate over whether increasing the minimum wage will or will not increase unemployment is framed in this simple rhetoric; that those of us on the right are just nasty poor-people-haters.

Take our friends at The Standard for example. Apparently surveys of economists showing increasing numbers do not beleive there is a correleation between unemployment and higher minimum wages is objective proof that their assertion is true. But if they were really going to put their money where their mouths are, why not propose a minimum wage of, say, $47,000 p.a.? That way we could catch up with Australia overnight! No-one would lose their jobs, and we’d all be magically better off. Never mind that the inflation created would erode the gains made (although Labour appears to have forgotten this with their new monetary policy – are they going to index the minimum wage at the higher rates of inflation they’ll create?).

Sarcasm aside, if we accept the Standard’s ridiculous argument then that is the logical conclusion. Never mind that factors like economic growth, labour demand and skills shortages can often soak up the additional costs of higher wages (as the Cato Institute points out, thanks to the handy link from the Standard) – their own graph on the issue appears some (note some, it’s not absolute nor do I claim it to be) correlation between higher minimum wages and unemployment. For example, the leap in unemployment during the early 90s appears to correlate with a jump in the minimum wage during the 80s; as does the recent strong rise in unemployment. Of course, both these peaks in unemployment occur at times when the economy was in the shit anyway – which reflects businesses’  firing the lowest skilled first.

Update: okay, so the correlation is only 0.05 (where 1 = perfect correlation). My bad.

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.

So, you’re in business. You have a choice between situating your company in a larger, more diverse market which may be more competitive, depending on your industry, and a 25c in the dollar tax on your profits, and a smaller market that may be less competitive but with fewer expansion opportunities, and a 30c in the dollar tax on your profits. Which market would you choose to locate your business in?

This may be the choice facing many New Zealand businesses if the Australian Federal government lowers company tax rates. While Australia and New Zealand currently have parity in rates of company tax at 30% each, the Australian market is still bigger with more opportunities and has been attracting a number of New Zealand businesses. Decrease the company tax rate and it becomes even more attractive for businesses to hop the ditch. If they don’t, they’re faced with competing with better-funded Aussie businesses, who already benefit from stronger capital markets and a more diverse consumer market.

This is what Marty at The Standard needs to understand. It’s about competitiveness.

John Key has predictably stated that the Government will “keep its promises”, and therefore won’t be implementing the report of the Taskforce 2025. The Standard gives the cookie-cutter response of the left – Dr Brash is evil, ridiculous and silly all at once. One quote really says it all for me:

The neoliberal agenda has never been about growing the pie. It’s about taking a larger slice for the rich; stealing from the poor. Look at the ‘nuggets’ and you see that’s exactly what they want do. It’s all about weakening workers’ rights, lowering their wages, and cutting the social wage to enable a transfer of wealth to the wealthy.

Herein lies what I think is the key contradiction of social democracy: if you want better wages, better conditions for workers and better social services, you need a wealth-generating economy to pay for it. While The Standard might whine that the “neoliberal agenda” is about taking a larger slice for “the rich”, the fact of the matter is that wealth disparity has been getting worse in New Zealand since our economy began to under perform – at least a decade before 1984 (albeit, things did get worse post 1984 – when we had to pay for the previous ten years’ pissing around). Labour might’ve talked about getting New Zealand into the top half of the OECD, an admirable goal, but they did precious little to go about reaching it. Their lack of fiscal restraint has pumped up inflationary pressures in the economy.

Anyway, here’s the reports recommendations, from the NBR:

• Replacing the top tax rate of 38 cents in the dollar and business rate of 30 cents in the dollar with a top tax rate of between 20 and 25 percent;
• Limitations on some universal benefits. Those included interest-free student loans and subsidies for early childhood care education;
• The Government to reduce operational spending to 29 percent of gross domestic product by 2012-13;
• Use the NZ Superannuation Fund to pay back borrowing and change the age of entitlement;
• Impose congestion charges in cities to pay for roads;
• No capital gains tax.

These recommendations are made on the report’s following principles:

• Sharpening private incentives to invest, to save, and to work;
• Minimising the regulatory obstacles the government puts in the way;
• Managing the public sector’s own huge assets much more effectively;

All good starting points. The report also recommends that some policies not be implemented:

• Greater research and development support (i.e. tax credits for R&D);
• A new government financial institution;
• “Sectoral-based” growth strategies (i.e. tax credits for certain sectors of the economy)
• Initiatives to lift workplace productivity;
• Compulsory private superannuation savings scheme;
• Exchange rate regime; (we’re looking at you Labour)

All interesting proposals. I’ll comment further once I’ve had a chance to read the report in full.

Marty G at The Standard complains that income tax cuts help the wealthy the most. There’s a simple explanation for that: in a progressive tax system, the wealthy pay proportionally more of the tax burden. That’s the whole point of progressive taxation.

So naturally it’s very difficult to cut income taxes so that cuts only benefit poorer New Zealanders.