Sunday, October 21, 2007

In Praise Of Higher Taxes (or, to be more exact, a higher top tax rate)

Sigh...meanwhile over at Kiwiblog David Farrar is getting excited about tax cuts:

As I have said many times, most left wing parties do not share NZ Labour’s ideological hatred of reducing tax. I doubt one could find another party in the world that has had surpluses as high as NZ’s, and they’ve refused to lower personal tax rates.

Australian Labor leader Kevin Rudd has endorsed almost every element of Peter Costello’s massive tax cuts. The only difference is with the rate for those earning over $180,000.

All of which is painfully disingenuous. Rudd, in case anyone hasn't noticed, is in the middle of an election campaign. Who knows what his actual thoughts on tax cuts are but I rather suspect that right now he is concentrating on ducking his opponent's king strategic hit - as opposed to expressing an honest yearning for a low tax economy. Moreover, as the Standard points out Michael Cullen has entirely pragmatic reasons for for caution on tax cuts.

Prior to the last election, I wrote why I think tax cuts would be a very bad idea. I wasn't the only one making these points at the time, yet I have yet to hear anything resembling a persuasive counter argument from tax cut types. This, I think, is suggestive of the existence of blind ideology about tax cuts.

Anyhow, buried away in the Kiwiblog post is a fact that does point to a sensible critique of Labour's record on taxation (missed entirely by DPF, of course). This is the fact that Australia has an additional high-tax threshold which we don't have in New Zealand. People earing over AU$150,000 currently pay 45c on every additional dollar earned.

There are two simple reasons why this is a great idea and why it is to Labour's detriment that they never created an additional tax bracket similar to this:

Reason 1: It brings in more money. From people who can afford to pay it. People earning over NZ$150,000 currently contribute 16% of our total income-tax take; increasing the amount they pay, even assuming some increased avoidance behaviour, could contribute handily to the government's coffers. This, in turn, could either pay the way for increased future government spending (and, believe me, with an aging population there is no escaping this, unless you want to cut key services) or it could be used to fund something like the introduction of a tax free threshold so that those earning lower incomes had more money in their pockets after tax.

Reason 2: It would help, in some small way, in tacking inequality in New Zealand. I keep meaning to write explaining why inequality is not just a problem that concerns socialists; one day hopefully I'll get round to it. However, for now I'll just point you to this post from Chris Bertram which sums up most of the problems with high levels of inequality. And these are problems that should concern us here in New Zealand. New Zealand is a relatively unequal country by OECD standards. It is also a country that has experienced a significant rise in inequality since the 1980s.

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(If you're interested Robert Reich makes a similar argument in the US context here).

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