National’s tax cuts: Prior to the release
Posted October 8, 2008on:
It now appears that National is going to scale back its tax cuts (ht Big News, Kiwiblog, The Standard) – stating that poor economic conditions have made larger cuts uneconomical. There are two ways I can read this:
- The economy is only temporarily weaker so we can cut taxes more later,
- The economy is structurally weaker than we expected but the level of spending we want to make is unchanged, therefore we cannot cut taxes as much,
The first way doesn’t make sense (as tax rates should be independent of the economic cycle, they are “structural”). We have discussed this before here.
The second reason is defensible, but if this is the case then the structure of their package seems a bit strange. They still want to give the $50 a week tax cut to an average person worker, so they are reducing the tax cut to high income earners. This will increase the progressiveness of the tax system further, which may increase equity but will definitely reduce economic efficiency (relative to a flat tax cut scheme – as it increases effective marginal tax rates).
Given that Labour states that focusing on equity is one of their primary goals, and National has been stating that it will improve economic efficiency, this sounds more like a Labour party policy than a National party policy. How can National say that it is going to “grow the economy” compared to Labour, when its tax policy does not add any growth impetus and its spending policy is pretty much the same?
If National is differentiating themselves from Labour, then I think they need to advertise it because I can’t see the difference. (Apart from the fact that National said they won’t mess with the Reserve Bank Act – for an economist that is a big issue where I think National wins, but I don’t imagine this will get non-economists particularly excited).
Of course, we will have more details about the potential for National’s tax policy to “grow growth” once it is release. Once the policy is out we will comment on whether National is threatening to be as fiscally irresponsible as Labour has been – by the sounds of things it appears that the demands of politics will lead them down that way.