Westpac weighs in on tax debate

Westpac Bank's chief economist has weighed into the election year tax debate, saying there is plenty of scope for cuts, especially as New Zealanders have arguably overpaid $8.7 billion in the last five years.

Brendan O'Donovan said in a statement that while the Government had consistently said there was no leeway for reducing tax rates, "we would argue that there has been, and still is room for tax cuts on a number of counts."

The government had chosen to increase spending and pay down debt rather than cutting income tax or even allowing tax brackets to track inflation, Mr O'Donovan said in a paper on taxation issued by Westpac.

Crown spending was set to increase from 29.6 per cent of GDP in 2004 to 32.3 per cent in 2009, meanwhile the Government was pointing to its dwindling cash balance -- expected to go into deficit next year -- to illustrate that it could not afford tax cuts.

Mr O'Donovan said the Government's use of the cash balance -- which includes student loans earning considerable interest and capital investment -- was "misleading".

By contrast, the operating balance was a truer measure of crown finances, and that was expected to remain in surplus for the next four year

Furthermore, Mr O'Donovan said the Government had set itself against tax cuts on the grounds they would be inflationary. "However, we would argue that $1 of tax cuts would be far less inflationary than $1 of increased (government) spending."

"Tax cuts allow the expansion of the economy's productive capacity by leaving more for private investment, stimulating employment, influencing the incentive to work, and attracting people to work and stay in New Zealand. Over time this all boosts economic growth, and hence the overall tax take. In contrast, higher government spending sometimes does little more than redistribute wealth from higher to lower income groups -- the latter of which have a greater propensity to spend and hence create inflationary pressures."

Meanwhile, Mr O'Donovan said the changes to personal income tax brackets announced in last month's budget were "disappointing", not changing for another three years, "and even then by a paltry amount".

The move was in response to "bracket creep" rises in wages, largely due to inflation, which pushed workers into higher tax brackets despite them not being any better off.

"On our estimates, if the tax-to-income ratio had been held constant at its 2000 value then the household sector would have paid almost $8.7 billion less in income tax over the eight years to 2008.

"Thus it seems that there is a considerable element of tax relief to be had before anyone even starts talking about tax cuts!"

- NZPA