Editorial: Cunliffe right to ditch dud tax policies

David Cunliffe. Photo / APN

Political parties should be in the practice of jettisoning policies that serve only to hamper their electoral prospects. It is up to any new leader to recognise these and act. On that basis, the Labour Party's David Cunliffe has done well to dump two tax policies of one of his predecessors, Phil Goff - the removal of GST from fresh fruit and vegetables and the setting of a tax-free band on income below $5000. Both were poorly directed, and the fruit and vegetable initiative, in particular, could have had an array of unhelpful consequences.

This was recognised by Mr Cunliffe's immediate predecessor, David Shearer. In his first major speech as leader almost two years ago, he indicated the policies would be dropped. In making that dumping formal, Mr Cunliffe suggested that new evidence showed fresh fruit and vegetables were eaten mainly by those who could afford more, and said the party must seek a more targeted way of providing relief for the poor.

Yet sufficient evidence to rule out the policy was available even as Mr Goff was establishing it. As much as it might be assumed that a price reduction would trigger a change in consumer buying, researchers at Auckland and Otago universities found that discounting GST prompted only a "modest" improvement in healthier purchases. The impact on overall diet was, therefore, very limited. It was certainly not sufficient to warrant tampering with an important aspect of this country's goods and services tax.

This was recognised by Helen Clark during the final period of her prime ministership. When pressed to drop the GST on food, she pointed to the advantages of a system that applied across the board and was, therefore, generally regarded as simple to administer. "That means it is very low on complexity, which means it is low on compliance costs, so, therefore, there would be considerable reservation about changing it," she said.

Britain's experience has confirmed the perils of creating exemptions. There, most food does not attract value-added tax through a complex schedule that aims to separate essentials from luxury items. The outcome has been confusion, and a situation that benefits lawyers more than anyone else.

Mr Cunliffe said dropping the two policies would recoup about $1.5 billion a year in lost revenue. Labour would look to reinvest the money in ways more directly focused on helping struggling families. But two other of Labour's flagship policies - a capital gains tax and raising the superannuation age of eligibility from 65 to 67 would remain, albeit tweaked, the latter to address issues of social and gender equality. Alterations to its capital gains policy are also warranted given that an excessive number of exemptions risks rendering it ineffectual.

Other major tax decisions await Mr Cunliffe. One is whether the party continues with a policy of reinstituting a top 39c income tax rate on incomes above $150,000. That would make little sense on several grounds, not least because it was maintained for too long by the previous Labour government, albeit at an much lower income level, and even the Clark-Cullen administration began reducing it. A higher tax rate would merely encourage tax avoidance, a field that is already worthy of much greater attention. Equally, it makes no sense that families in higher earnings brackets continue to benefit from Working for Families tax credits.

Mr Cunliffe has correctly identified two tax policies that offered neither effectiveness nor electoral advantage. He should not stop there. But he must also do more than ditch policies. A new initiative said to create opportunities for families is to be released in a keynote address today. If Labour is to strike a chord, this must be the first of a string of announcements that are both positive and attention-grabbing.