Editorial: Act needs to come up with fresher ideas than flat tax

Dr Whyte says Act also has strong policies on social welfare reform, and savings and superannuation. Photo / Natalie Slade

At the very least, Richard Prebble will bring a high rate of activity and profile to his role as Act's campaign manager. He should also deliver the sort of political nous that was demonstrated when he led the party to nine seats in Parliament at its high-water mark in 2002. Mr Prebble, however, is also associated with the old Act, an entity that became so dysfunctional and discredited that its new leader, Jamie Whyte, symbolises the need for a fresh start.

For the party to make a success of that, it must come up with new and innovative policies. In that context, Mr Prebble's announcement that Act would likely revive its flat-tax policy does not bode well.

In his defence, the policy does hark to the principles espoused at the founding of the Association of Consumers and Taxpayers in 1993. Broadly, these embrace individual freedom, personal responsibility, small government and lower taxes. During Act's decline, these faded from view as the party became more associated with perk-busting and the like. Dr Whyte says that he wants to take the party back to those principles.

"The best known of those policies is Act's belief that the fairest sort of tax system is a flat tax where everyone pays the same rate," he says.

That might make sense in terms of party principle. But it hardly offers anything new or innovative. Nor is it likely to gain any traction. Act may have been encouraged to return to the policy by the apparent success of flat taxes in some of the former states of the Soviet Union, and references to the merit of the policy by the Australian Prime Minister, Tony Abbott. But if New Zealand voters failed to share that view in the 1990s, there is even more reason to think they will reject it now.

The flat tax idea involves the applying of one tax rate to everyone regardless of income. It is advocated on the grounds of simplicity, fairness, transparency and economic growth. Gone would be deductions, loopholes and tax shelters. There are several thorns in that rosy picture, however. In practice, a flat tax has a greater impact on low and middle-income earners because they pay much more tax proportionate to their income. This has led to the concept being condemned as a ploy to make the rich richer and the poor poorer.

Advocating the policy here will open Act to the same criticism, the more so given increasing concerns about the cost of social inequality. Already, New Zealand's tax system is more lenient than most on those who make money, a consequence of the opening of its economy to the world. A top tax rate of 33 per cent is lower than all other nations in the OECD when other income taxes are taken into account. There is no effective tax on capital gains and few exemptions to GST.

That framework works well in terms of international competitiveness, but it seems the lowering of tax rates has been a factor in the gap between the rich and poor widening over the past quarter-century.

Critics of a flat tax would point to the potential for even greater inequality. They could also note that there would no longer be scope to make adjustments to taxable income, such as deductions, exemptions and tax credits for desirable activities.

Dr Whyte says Act also has strong policies on social welfare reform, and savings and superannuation. Commendably, he has spoken out against National's failure to address the age of retirement.

Hopefully, his party's other policies will be more innovative and more attuned to this country's need to improve opportunities for wealth creation for all New Zealanders. If not, Act will be whistling in the wind.

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