The battle of tax policies

Positions are being laid out for tax policies for September’s election. Against a background of growing surpluses, Prime Minister Bill English has indicated tax cuts should be coming, and Labour leader Andrew Little has responded.  Each has difficulties with their positions.

Mr English has, as is to be expected, said any cuts would not apply this year but after the election.

That is a time-honoured tactic that allows extra spending in the election year budget to salve wounds and makes it more difficult for the Opposition to fund its promises.  All the while, tax cuts are dangled as a promise of things to come.

The tax take has been rising through growth and immigration and the long-awaited  surpluses are finally arriving. While an expanding population creates a justified demand for more spending,  taxes are inexorably, if slowly, rising through "bracket creep" ("fiscal drag").

As earnings increase, more of taxpayers’ income slides into higher tax ranges.

What would seem sensible and fair would be to adjust for wage inflation the thresholds put in place in 2012 (for up to $14,000 10.5%, to $48,000 17.5%, to $70,000 30% and greater than 70,000 33%). The CPI increase over that period is about 4.3%, and wage increases on average have been more. The  problem is in perception. In dollar terms, those on low incomes would receive only small benefits,  and increases compounding through the tax thresholds. 

That makes sense. Those who pay most tax would receive the biggest reduction.

It is  a poor look, however, when, inevitably, the tax reductions for the Prime Minister or company chief executives are compared to those on the minimum wage.

As well, when the increases are small they can be quickly labelled as "chewing gum" savings (as Winston Peters once did) and be seen as insignificant. 

Former prime minister John Key once said tax cuts needed to be at least $30 a week to have an impact on voter perceptions. 

Mr English, clearly, has challenges selling any tax cuts, which in part explains the noises about targeted help for lower and middle-income earners. Labour has been following part of the Key playbook.  No matter the principle, avoid unpalatable policies, like the previously backed capital gains tax,  and expound apparently simply assurances.

In Labour’s case, apart from extending the "bright-line" property sales test,  this is for no tax increases (which ignores bracket creep), although this commitment is qualified by what might be in National’s budget and the impact of costs from the Kaikoura earthquake or a fresh natural disaster.

When challenged about the expense of policies like building 50,000 new low-cost houses, paying for three years’ free tertiary education and increases in healthcare funding,  Labour has argued the surpluses ahead will be larger than Treasury forecasts,  that the housing plan will pay for itself and free tertiary education can be staged and brought in as money allows. Labour will also be pressured  by allies the Greens for spending commitments, and the support of likely king-maker Winston Peters will come with purse-strings attached. Labour politicians will be desperate to be seen by middle New Zealand as responsible economic managers who can lead this country with wisdom, prudence and caring. If Labour and the Greens form the government, however,  Mr Little would be ruling out, at least until after 2020,  significant tax reform, something finance spokesman Grant Robertson has worked on.

National will be endeavouring to build on Mr English’s supposed reputation of prudence and financial skill.

Once again, it will try to hitch together Labour and Green policies, while the Greens in recent years have moderated policies in order not to scare the horses. 

Much, as always, will come back to credibility.

Tax policy is important, for individual taxpayers and the wider economy.  It is good that it will be up for serious debate in this year’s election.

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