Tuesday, January 15, 2008

Flat Tax? Fat Chance

In a display of bipartisan contempt for bad methodology both NoRightTurn and David Farrar have criticised ShapeNZs poll, undertaken for the New Zealand Business Council for Sustainable Development, which Peter Neilson recently enthused about in the Herald on Sunday.

Neilson wrote, citing suvey data:

But a cut in personal and corporate taxes to a flat rate of 20c will draw more approval than disapproval among Green-Maori-New Zealand First-Act voters because major cuts like these would be paid for by new forms of revenue, such as increasing GST from 12.5 per cent to 20 per cent, while fully compensating people on benefits and lower incomes for the price rises and other day-one impacts.
As both NoRightTurn and DPF point out, the survey Neilson relies on is unreliable because of its self-selecting population sample. Also, if this press release is to be believed the survey itself smells rather fishy:
ShapeNZ asked people to chose between three tax reform options: cutting top personal income tax rates from 39c to 30c; cutting the top personal and corporate tax rates to 28 cents, or introducing a single rate of 20 cents, paid for by increasing GST from 12.5% to 20% (while fully compensating people of low incomes and benefits for price rises resulting from the GST increase).
So, when asked to choose between three tax cuts, people chose - wait for it - a tax cut! Well I never. It's hard to escape the feeling that one way or other the survey in question was going to lead to a column about tax cuts.

Survey aside, the economics behind the idea of a flat tax are poor too.

Despite what proponents claim, there is little evidence that flattened tax structures stimulate economic growth. What they will achieve though is rising inequality. Something that is harmful for a number of reasons.

Moreover, given the significant rise in GST, for most Kiwi's the 'tax cut' is not what it seems:
  • For the approximately 16% of New Zealanders who's top tax bracket is 33c/dollar there's no guarantee that they would end off much better off as the drop in income tax may well be offset, for the most part, by a rise in GST.
  • And for those New Zealanders who currently earn between $9,000 and $38,000 (nearly half our population) there'll be next to no improvement on the income tax side of things, while some/many/most/all of them will end up worse off thanks to the rise in GST*.
  • And for country's least wealthy: they may be compensated for higher prices caused by GST but that won't change the fact that the income tax they pay will increase. (Source for all statistics).
The tax cut would be a wonderful windfall for our most wealthy though.

I bet they didn't tell you that in the survey.

*Whether it is some, many, most or all will depend on where the low income threshold for GST rebates is set. If it's set low then it may be all of these tax-payers. If it's set high, fewer will be worse off but taxes themselves will also have to be raised to offset the fiscal loss.

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