Editorial: Tax plans give voters stark choice

Now the cards are on the table. Both major players in the election have shown their hand. The National Party's proposed tax cuts can be stacked against Labour's promise of family tax credits, and some stark distinctions noted. The first is one of principle: when governments concede they are taking more in taxation than they need, should the surplus be left in taxpayers' pockets or redistributed to those with the supposed greater need? Labour has decided to redistribute the money to households with dependent children; National plans to lower taxation across the board.

Unfortunately, National has not been as daring as it might have been. Its scheme would have been more impressive had it not succumbed to temptation to have a dollar each way. Plainly rattled by Labour's Working for Families package last week, National now says it will replace that package with a system of family taxation that would carry the same level of child support. While every taxpayer would keep more personal income under National, the plan deliberately favours lower- and middle-income earners.

Their interests have displaced those of the economy overall in National's concerns. Not long ago the party's stated priority was to reduce the corporate tax rate to a level competitive with Australia, and to do away with the top rate of personal tax, 39 per cent, needlessly introduced by the present Government for a punitive political purpose. Now, National has decided it may not be able to reduce the company tax rate to 30 per cent until April 2008 and the best it can do about the 39 per cent personal rate is raise the threshold to $100,000 of income in April 2007.

In the meantime it plans to tackle the economic discouragements of high marginal taxation by lowering the rates at which overtime and secondary employment are taxed. The reduction is substantial: those earning an extra $40,000 or $50,000 would see the tax on that money drop from 33 per cent to 19 per cent. Even so, it would seem simpler for employers and fairer for all income-earners if the top personal rate and the company rate were simply to be lowered to 30 per cent.

Deciding to keep Labour's family benefits, National has at least promised to provide those benefits in a different way. Labour's "tax credits" are welfare payments in all but name. They are paid out by the Inland Revenue Department on application by the taxpayer. The money is collected from pay-packets and returned, much like any other welfare entitlement, to those who are alert enough to know they qualify for it and know where to go. The mechanism needlessly turns self-respecting income-earners into applicants for state support. National promises to deliver the same benefit through tax rates that take account of dependent children before the money is extracted from earnings.

National puts the cost of its tax reductions at $3.9 billion when fully in force. That is more than twice the amount the Government has allowed for its family package. Not all of National's figure is likely to come from Budget surpluses. Some of it will depend on savings in Government expenditure and borrowed money. Party leader Don Brash and finance spokesman John Key are confident they can find sufficient savings but voters might be more wary. It is never a good idea to accept tax cuts from politicians who have not yet cut their cloth accordingly. Tax cuts are the easy side of the equation; expenditure cuts come with a cost to political popularity and, depending on their timing, they can carry an economic cost, too. Labour is bound to challenge the fiscal responsibility of yesterday's largesse; voters have four weeks to assess whether National would have the backbone to balance the ledger.