Tuesday, October 13, 2009

ZenTiger Flat tax option blindingly obvious

Treasury was considering a flat tax rate to help close the income gap between New Zealand and Australia. Finance Minister Bill English had a unique opportunity to reform the tax system, Treasury said.

This opening section of the article has gained several favourable comments for the on-line NBR story.

Some think flat tax is a blindingly obvious move, and I can see the merits of this. However, blinding might be the key word. Here's the sting in the tail that need to be right at the top of the article:

GST, land tax and capital gains tax would be increased to fund the changes.

This isn't a reformation of the tax system, it's solely about broadening the tax base.

There's no serious look at the tax system, as I have seen very few ideas around the tax system I'd expect to see mentioned let alone discussed in depth.

There is no discussion on any restraints on government spending (living within a budget, rather than expanding it), nor mechanisms to prevent tax rates being increased again once the "new" taxes are established (some of us still take note of history).

The result will be that the government will simply continue to increase in size and scope year on year, and taxes will be applied across a broader set of targets, so that when one rate goes down, two others go up.

And guess what the net result will be?

7 comment(s):

Ruth said...

Exactly Zen. And Treasury are hated by almost all - including RBNZ.

Flat tax is no silver bullet. Just swings and roundabouts.

Psycho Milt said...

I heartily recommend Danyl's post on this. Even the comments are gold, including "closing the gap… closing the gap... I’ve heard that somewhere else" and "Bush’s tax cuts closed the US income gap with Australia"

ZenTiger said...

Gold? They seem to generally indicate an ignorance based on a default ideological perspective that doesn't allow for rational consideration.

There is, for example, a rising wages gap (a disparity) with Australia. There would be advantages to correcting this, and a flatter tax system would be one way of doing it (and there are other ways too - as Ruth said, flat tax is no magic bullet. It still would bring in a range of benefits around fairness, reduced administration and simplicity - all worthwhile.

I love the comment that Australia has a top tax rate of 45%. It does indeed. Guess when that tax rate actually kicks in. Clue: Try tripling the threshold level for our "top rate".

Psycho Milt said...

Doesn't allow for rational consideration? Aus has a more highly progressive tax system than us and a strongly unionised workforce - if there's some "rational" reason why we might assume flattening our own tax system would make our incomes more closely match theirs, it's not obvious. An ideological reason, sure - just not a rational one.

ZenTiger said...

It's obvious to me. and the issue isn't necessarily matching incomes, it's about matching employment opportunities, purchasing power, and retaining talent on this side of the Tasman. It does not follow that we need to mirror what Australia does to equalise our wealth.

And the desultory comments at DimPost were far more ideological than rational. I guess the post title gives that away though.

And speaking of why flat taxes can reduce administration, why don't we implement a GST based on incomes? Show your universal income card when you make a purchase. If you are a poor person, 1% GST. If you are a rich git, 30% GST. Or are you going to argue that GST flat tax is somehow easier and lower cost to implement and administer?

Psycho Milt said...

I don't see it. Look at what Treasury's saying: Aus has higher per capita income than us; that difference can be reduced by reform of the tax system.

There's a clear inference there that Aus' tax system is conferring an advantage relative to ours, and we can eradicate or at least reduce that advantage by altering our system. At which point, Treasury's prescription - that we can reduce that Aus advantage by making our tax system even less like theirs (and, er, most of the other countries that are better off than us) - simply defies the logic of their own argument.

If you believe there's some reason unrelated to relative taxation why a flat tax here would boost our economy relative to Australia's, fine. But that's not the case Treasury's making. Danyl's assessment of the case they're actually making is spot on.

ZenTiger said...

Not quite. Look at it another way. Australia has a higher per capita income than us, and we both use a graduated tax system. So following the Australian tax system in itself hasn't produced an equivalent per capita income.

There's a clear inference there that Aus' tax system is conferring an advantage relative to ours,

Well, yes and no. A tax free threshold, bigger and higher tax bands and the top rate kicking in at 180K, and lower company tax rates, is still different enough to take a look at how we can attract more capital and investment.

It therefore looks like there might be benefits to doing things differently, and one way is to review and reform the tax system.

One of the suggestions is a flatter tax system.

As a suggestion, it gets rejected out of hand by Danyl (and others). They must also be pleased that it got rejected out of hand by Key.

His assessment was nothing more than "it's what I expect Treasury to do, and by the way, let's nuke the treasury and kill everyone."

Anyway, the point of my post was different - we can expect more taxes from more sources, and no real discussion of options. The blinkers appear to be firmly on and middle New Zealand appear to be thrilled at the way things are heading. At this rate, National and Labour can form a Grand Coalition and rule forever, although I think Key rather likes saying yes to the Maori Party and the Greens.

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