KEY POINTS:
Michael Cullen, who seems to regard tax cuts as religious heresy, has become well-practised at resisting transtasman comparisons. The latest, the Howard Government's desperate bid for re-election next month, causes our Finance Minister no qualms at all.
We cannot afford tax cuts on that scale, Dr Cullen says. The Australian Treasurer might be giving back $40 billion in lower personal tax rates over the next three years (provided the Liberals are returned) but it would mostly benefit the higher end. There would be no cut for the first $30,000 of annual income, just $20 a week for incomes up to $74,000 and $128 a week for those on $200,000.
"Not the kind of programme you would expect to see from a Labour-led Government," Dr Cullen sniffed.
Well, not from this one. Almost its first act was to raise the top rate of personal tax not because it needed the money - the Treasury was running Budget surpluses - but because Dr Cullen, Helen Clark and Jim Anderton had been backbenchers in a Labour Government that flattened the tax scale and they were determined to restore its former bite on higher earners.
The reason for flattening tax scales is to increase incentives to work. Steeply rising scales punish overtime and secondary employment. Over the past decade of good economic growth the economy has run up against capacity limits, particularly of available labour and skills in growth sectors, and when a growing economy hits those limits, inflation threatens. That is one reason the Reserve Bank has had to raise interest rates, driving the dollar high and hurting exporters.
Through all this time the Labour-led Government has retained its 39c top rate, and rising pay rates have put a high proportion of taxpayers into that bracket. It no longer hits "the rich", it is catching relatively modest incomes. Dr Cullen's one concession to the logic of tax cuts in recent years was to contemplate an increase in the income thresholds at which the rates apply. But not for long.
Now, having been presented last week with another Budget surplus higher than expected for the last fiscal year, he again faces the question of when he might give up some unnecessary taxation. He says he will consider it in next year's Budget. Next year being election year, he might announce a tax cut, probably timed to take effect the following year, if Labour wins a fourth term.
But since he probably could not bring himself to match the scale of cuts the National Party might offer, any concessions Dr Cullen makes are likely to be weighted to lower-income earners and will steepen rather than flatten the disincentive to increased output.
It will be interesting to see the Australian Labor Party's response to Mr Howard's tax cuts. The polls point to a Labor victory next month and leader Kevin Rudd has been matching most Liberal positions that seem popular. If he announces tax cuts across the board, Dr Cullen is going to need a different tune.
This Labour-led Government likes to give selective tax favours in the form of credits, not cuts. Tax credits mean the tax is collected, flows through the system and is returned as a payment such as "family support". Many wage earners get all their tax back in such payments. Why not leave it with them in the first place and save the cost of collecting it and processing their payments?
The reason Dr Cullen's brand of Labour Government does not take the cheaper option is social principle. They believe universal benefits create a shared stake in the state that is socially healthy, not to say politically valuable for Labour. That is the reason tax cuts are anathema to them. We are paying a high price for their principle.
