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Home / New Zealand

Labour takes heat from tax debate

By Paula Oliver
NZ Herald·
12 Oct, 2008 03:00 PM6 mins to read

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KEY POINTS:

It nearly cost Labour the election in 2005, but tax policy in this year's campaign is not the force that it was because Labour has taken the heat out of it.

Finance Minister Michael Cullen's $10.6 billion personal tax cut package began to take effect just two weeks
ago and has effectively neutralised the political advantage National enjoyed in the area of tax policy.

That was clear for all to see when National leader John Key last week launched a bigger, $16 billion, tax-cut programme that failed to inspire voters.

National's tax cuts are aimed at middle and higher income earners more so than Labour's, which are skewed toward lower incomes. But while that point of tension remains between the two big parties during the campaign, the sting has been taken out of National's tax cuts because they are being evaluated in terms of how much more a week they are worth to workers than Labour's - and the difference is not large.

This is a far cry from the stark contrast seen in the 2005 election campaign when National offered big tax cuts and Labour none at all.

And clouding the issue this time is the global financial crisis, which is threatening to plunge the world into recession and placing a handbrake on big election promises.

So it has fallen to the smaller political parties to argue for something different in this year's campaign, and they are - from eco-taxes to tax-free thresholds to income splitting to removing GST from food.

How many will ever be implemented is up for question, but the smaller parties are certainly not bereft of ideas.

United Future leader Peter Dunne, who as Revenue Minister has had a hand in designing business and personal tax cuts over the past three years, criticised both Labour and National's programmes as too complicated.

Mr Dunne is advocating a three-tier personal tax system with rates of 10 per cent, 20 per cent, and 30 per cent.

"Ours is very simple, much easier to understand and it delivers more if you include income splitting," Mr Dunne said.

Income splitting is not a policy of either Labour or National but Mr Dunne has long been an advocate and got the issue as far as discussion document stage during the parliamentary term.

Income splitting allows parents raising dependent children up to the age of 18 to split their incomes for tax purposes, meaning a high income earning parent would not necessarily have to pay the top tax rate.

The Maori Party is advocating a range of changes which together are very expensive, including the removal of GST from food and a tax-free threshold of $25,000.

Opponents of tinkering with GST argue the system is simple now and would become difficult to administer if some items were excluded, but there has been widespread public support for change in a petition.

Several parties, including the Maori Party, New Zealand First and Act, favour the introduction of a tax-free threshold in the personal tax scale which would give an equal tax cut to everybody.

However, such a change is also expensive and neither Labour nor National has been moved to implement or advocate a tax-free threshold.

Act leader Rodney Hide is not outlining preferred tax rates, instead opting to focus on getting Government expenditure under control. "The way to do that is to cap the growth of government expenditure to the rate of inflation," Mr Hide said. "If we do that, we can have immediate and ongoing tax cuts - indeed, we could immediately abolish Cullen's 39 cent rate which is what Act will do."

Known as a bold advocate of lower, flatter tax, Act in this election appears keen to sound more realistic than slash and burn.

"It's an MMP thing, we're not going to be running the entire shop," Mr Hide said.

Perhaps the boldest policy of the campaign is yet to be fully announced - that of the Greens. Co-leader Russel Norman said the party planned a major shift toward eco-taxes, which would see the tax burden taken off workers and put squarely on polluters and the users of scarce resources.

"We will cut income taxes at the bottom of the scale so that everyone benefits equally, rather than giving greater tax cuts to higher income earners as Labour and National propose," Dr Norman said. "We will replace that income tax with a range of eco-taxes such as on commercial use of water, unearned income from speculation, and royalties on minerals like gold and silver."

Act's Mr Hide doubts eco-taxes work and the idea is not being discussed by Labour or National in the campaign.

Research and development tax credits are another battleground, with National intending to abolish a 15 per cent credit in favour of bigger personal tax cuts.

Labour introduced the tax credit in the 2006 Budget and along with New Zealand First it has reacted angrily to National's plan.

"It was quite clear, we've already seen the responses from businesses in the innovation area, that without that credit we were in serious risk of increasingly losing research and development offshore," Dr Cullen said.

New Zealand First is a strong advocate of incentives for research and development and also for exporters.

National's finance spokesman, Bill English, is not changing his mind, but he is hinting businesses that were genuinely looking at new research and development investment could be helped by other assistance programmes. "We believe that it was low-quality expenditure, that a significant part of the cost would be chewed up by businesses reclassifying existing activity," Mr English said.

"We can work with those firms that are involved in genuine increases in research and development and we've got the capacity to do that with the extensive business support programmes which are still in place."

BENEFITS IN A NUTSHELL

* Finance Minister Michael Cullen

Why is your tax policy better than National's?
It does much more for those on low incomes. National actually increases tax compared with what's already been legislated for. It doesn't require us to strip away investment growth in the future - we maintain the research and development tax incentive and the present full operation of KiwiSaver. Under National 700,000 people aged 18 to 64 will see a reduction in contributions into their KiwiSaver account.

* National finance spokesman Bill English

Why is your tax policy better than Labour's?
Because it delivers more cash into more people's pockets to help through a recession. And it gets the incentives better in the long-term so we can strengthen the economy to get out of this recession.

* United Future leader Peter Dunne

Why is your tax policy better than both Labour's and National's?
Ours is simpler, much easier to understand and it delivers more if you include income splitting. And it's affordable. I think Labour's is too convoluted and skewed toward the lower end of the scale. National's is equally complex and will be difficult to administer.

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Opinion

Which political party is best placed to manage the current economy?

12 Oct 11:07 PM
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