The visible hand in economics

Opinion on National’s tax policy

Posted on: October 8, 2008

I’ll be honest, I don’t think too much of it. I view tax as a structural thing that just needs to be set. Both National and Labour have this “incrementalist” view of changes taxes, which gives the potential for shifts in policy and creates uncertainty in the economic environment.

I am also disappointed that they leave the tax bands fixed – when inflation adjustment of the tax thresholds is the only way to ensure that the real tax burden isn’t rising over time.

Finally the independent earner rebate seems like an ad hoc addition that they tacked on in order to provide “$47” relief to the “average worker”. This policy does nothing to increase efficiency in the economy – the very issue that National said it was trying to chase.

The reduction of the 39c tax band makes sense – as it is a dis-incentive to save and punishes people with highly variable annual income. But reducing it at 1c a year is just too slow for a structural issue like tax policy – if it is going to grow the economy so much, why not just cut the damned thing now.

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7 Responses to "Opinion on National’s tax policy"

Yeah it’s slightly disappointing, but still better than the alternative from Labour.

Of course, there is another party that offers a flatter, more efficient, tax system. 😉

“Of course, there is another party that offers a flatter, more efficient, tax system. 😉 ”

True – and they are saying that they will leave real spending unchanged, implying that they have some concept of balancing budgets.

[…] Visible Hand in Economics – Opinion on National’s Tax Policy […]

“I am also disappointed that they leave the tax bands fixed – when inflation adjustment of the tax thresholds is the only way to ensure that the real tax burden isn’t rising over time.”

Presumably this would involve IRD changing the tax rates periodically (quarterly or annually say ) to adjust for the effects of inflation. This is not a simple task and involves reprinting all the guidance documents, reprogramming tax algorithms, businesses changing their payroll tax rates etc. The job of getting this done at short notice for the latest Labour tax cuts was pretty substantial (and therefore costly to the taxpayer).

Maybe the promise of doing this every three years would add some certaintly, remove some potential cost and get the correct inflation adjusted rate…albeit every three years.

“Maybe the promise of doing this every three years would add some certaintly, remove some potential cost and get the correct inflation adjusted rate…albeit every three years.”

Indeed, the adjustment I was thinking was a little less frequent than every quarter 🙂

I was thinking every 1-3 years, depending on the compliance costs of adjustment.

The main fact is that, if it is legislated, then parties can’t pretend they are cutting taxes when they are actually leaving the tax burden unchanged. As a result, the debate would have to focus on the optimal structure of taxes to raise funds for a given level of government spending – which should be the primary issue when discussing tax policy methinks

Its not a matter of changing the rates, just the bands. If each of the bands changes with inflation, then the total tax take would also change with inflation.

The problem at the moment is inflation increases wages by 4%, and prices by 4% (so in theory no worse off) but tax increases by 9-10% because some people move into higher tax bands.

I’m not sure of the exact numbers. the example I have seen modelled previously was 3% inflation was increasing the tax take by 8% per year (ignoring any growth etc), without any increase in tax rate;

“Its not a matter of changing the rates, just the bands. If each of the bands changes with inflation, then the total tax take would also change with inflation.”

Yes

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