Tapu Misa: Taxing question of high unemployment

We cannot blame the Government for the record 7.3 per cent rate of unemployment. It's not its fault.

Blame, instead, circumstances beyond its control, the worst financial crisis the world has seen since the Great Depression, globalisation and population growth.

We shouldn't make any unfair comparisons with Australia, either, just because its unemployment rate is 5.6 per cent and dropping.

Anyone can see the Lucky Country's circumstances are different - except, of course, when we're talking about productivity and GDP, in which case, as Reserve Bank governor Alan Bollard found last week, there can be no excuses for a transtasman gap in performance.

We can, however, blame the unemployed for not having enough get-up-and-go to find work even if more than 2000 people line up for hours to apply for minimum wage jobs at a South Auckland supermarket.

And we can definitely imply that many of them are slackers "who lack the will or desire to work as hard for their living as their fellow New Zealanders", as John Key did last week when he presaged tougher benefit rules and welfare reform.

Unlike the Government, these people aren't victims of circumstances beyond their control, the worst financial crisis the world has seen since the Depression, globalisation and all that other nonsense. They simply lack will and desire.

When he talked about welfare reform last week, Key pointed out that if we moved just 100 DPB recipients off their benefits and into work, the welfare system would save close to $10 million over their lifetime.

And if we were to "assist" 5 per cent of single parents whose child is aged over 6 years into work (however non-existent), we would save almost $200 million over the next 10 years.

It was an appeal to the kind of politics of resentment that galvanised the conservative Tea Party movement in the US, where working-class wrath is just as misdirected.

And it was exactly the kind of helpful distraction you'd want low- and middle-income earners to be focused on when you propose a Clayton's tax reform package that isn't so much a step-change as a giant sidestep from real reform.

Who will benefit from these reforms? According to economist Keith Rankin, the very New Zealanders who the Tax Working Group found were exploiting loopholes that not only saved them the trouble of paying their fair share of taxes but also allowed them to earn hundreds of thousands, even millions of untaxed income.

Unlike feckless beneficiaries, they couldn't be blamed for hiding their real income in trusts, or writing off non-existent losses on their investment properties. If they were avoiding paying tax, it was the tax system's fault, not theirs.

Therefore the proper response was not to strengthen tax enforcement or tighten trust rules or introduce a capital gains tax which would earn $4.5 billion for the country.

As Key indicated last week, the proper response is to reward high-income earners by cutting the top tax rate while still doing as little as possible to stop them earning more untaxed income through property.

In effect, as Rankin pointed out in Scoop last week, the Government is saying that "top-income recipients find ways to avoid meeting their responsibilities so we should therefore not even bother to ask them to pay an appropriate share".

This is familiar territory for British writers Polly Toynbee and David Walker, who observe in Unjust Rewards (2008), that "inequality in wealth is mirrored by inequality in the way fraud and evasion are handled".

"The Department of Work and Pensions puts out a self-congratulatory press release when it employs extra staff to inspect benefit claims; but [the UK Customs and Tax Department] treads on eggshells in matters of staff numbers ... Consider the shock and awe directed at the criminal poor and the political silence about tax fraud."

They argue the British experience has given the lie to the conventional wisdom that tax cuts remove the incentive to cheat. In 1986, after Tory Chancellor Nigel Lawson announced the top rate would be slashed to 40 per cent, "to the Inland Revenue's surprise, tax avoidance blossomed along with evasion and other frauds".

According to a tax inspector: "When people had more, they seemed to want to keep even more of it. It changed the atmosphere in some important way. It tipped a balance."

Keith Rankin calls the Government's proposals particularly clumsy.

"Only those on the top are intended to become better off, and the whole exercise of change is being undertaken solely as a means of achieving gains for those few.

"There is no coherent evidence that a cut in the top rate of tax from 38 per cent to 33 per cent will have any wider benefits for economic growth, productivity, efficiency, sustainability or anything else that might raise living standards."

He argues that one of the major problems with our current rates is that, compared with other countries, we have higher than average tax rates for those on lower incomes.

"The reality is that marginal tax rates are already low in New Zealand, and company tax rates are comparatively lower than they may seem because of our imputation system that prevents double taxation of profits."

He points out that the average tax rates for people earning around $100,000 may be higher than in some other countries, but that's only because of the comparatively high tax rates paid on the first $40,000 of their earnings.