David Farrar: tax package great PR, bad numbers

Labour are trying to push their 'Own our Future' campaign. Photo / Mark Mitchell

Labour's political management has improved a lot.

They managed to get two weeks' worth of publicity for their tax package, and had a website ready to launch, with masses of detail on it.

They also have online advertisements appearing the day after their announcement trying to drive people to their Own Our Future website. In fact they have redirected their own Labour site to this campaign site, so keen are they for people to visit it.

Quite cunningly, they are also trying to position their Capital Tax proposal as an alternative to National's plans to allow minority private investment into SOEs. Of course the two policies have nothing to do with each other. One could support asset sales and having a capital gains tax (as I do). It's a false comparison, but politically a smart tactic.

Amongst the masses of information Labour did make available on their website, there was one document they did not put up. It was in the media pack, but not on their website. It was the table showing what impact on the deficit (and hence debt) Labour's tax package would have each year. According to their own numbers (which are debatable), the impact on Government finances in their first term of office would be:

* 2012/13 - $122m extra revenue

* 2013/14 - $384m less revenue

* 2014/15 - $648m less revenue

* 1st term - $910 less revenue

Now does it get better if Labour won a second term?

* 2015/16 - $466m less revenue

* 2016/17 - $283m less revenue

* 2017/18 - $127m less revenue

* 2nd term - $876 less revenue

So even under Labour's forecasting, Labour would run bigger deficits and debts for their first two terms of office (if elected).

The numbers are even worse than that though. Labour have just invented numbers for how much extra tax they will get with anti-avoidance measures. This is not based on any actual policy or costing. Considering Labour is proposing to have a massive 11 cent difference between the top personal tax rate and the company tax rate, I believe the far more likely scenario is greater tax avoidance, not less.

If you remove the made up number for reducing tax avoidance, then that adds an $1.22 billion to the deficit over the first two terms. So the total revenue difference could be as much as $3 billion.

So at a time when New Zealand has the highest deficit in its history, and Governments overseas are defaulting on their debt, it is a strange time to announce a policy of borrowing for tax cuts.

Labour also announced a new top tax rate of 39%, for those earning $150,000 or more a year. They obviously feel those people are not paying enough tax through 33% income tax, 15% GST and now also a 15% CGT.

What I find interesting is the data on who is a net tax payer in terms of income tax and welfare payments such as Working for Families. As those benefits are calculated on the basis of household income, the data is for households, not individuals. But it is still fascinating.

Households who earn $150,000 or more currently contribute 71% of the net income tax (tax less transfers) of all households. So 10% of the households pay 71% of the next tax. If you take households over $120,000 then you have 17% of the households pay 97% of net income tax.

At the other end of the tax scale, you have 44% of households with income under $50,000. Those 44% of households play $1.7 billion in income tax and receive $7.7 billion in welfare transfers such as Working for Families, Accommodation Supplements etc.

I can't see a rational argument that higher earning households are not paying their fair share.

In the 1980s a Government which included Phil Goff and Annette King in it introduced GST, and in exchange for that they cut the top tax rate from 66% to 33%. That was a great tax package.

Almost 30 years later Goff and King are proposing once again to bring in a new tax - Capital Gains Tax. But instead of using it to lower tax rates across the board, they are saying we'll bring in a new tax and we'll also increase the top tax rate, rather than cut it.

I do like their policy of having the first $5,000 of income tax free, but their own numbers show it is unaffordable for at least the next six years.

* David Farrar is a centre-right blogger and affiliated with the National Party. A disclosure statement on his political views can be found here.