KEY POINTS:
Now that the Budget is behind us, the National Party has less excuse for indecision on most of the important economic issues facing the country at the coming election. As late as eight days ago finance spokesman Bill English could not answer a question as basic as whether National would keep the top tax tier, 39c in the dollar, introduced by the present Government.
The top rate was established more out of spite than necessity, revenge of a kind for the flattening of the tax scale by Sir Roger Douglas and his acolytes in the previous Labour Government. The flatter the scale the better is the incentive to work and earn more, and the less reason there is to make tax avoidance arrangements. Investment is more likely to be influenced by real market returns rather than tax advantages.
These considerations are outweighed in Labour's mind by the philosophy that the primary purpose of Government is to reduce inequality. It believes a "progressive" tax scale is one that takes not just more from those with more wealth, but takes a higher proportion of their wealth. That is the reason Finance Minister Michael Cullen has been resisting across-the-board tax cuts for so long, and even now he proposes only to raise the income thresholds at which the higher rates apply, leaving the rates intact. In fact, by cutting only the bottom rate and leaving proportionately more in the pockets of the lower paid he has made the system more progressive in Labour terms.
Would National change the thrust of taxation if it wins power this year? Almost certainly. But more important, will it say it will change it before the election? That, sadly, remains doubtful. So far the party has been anxious to avoid any commitments that may be contentious at the election, and has even foreclosed its options on asset sales for a first term rather than face that issue in the campaign.
The day after the Budget, party leader John Key said tax cuts remained "a top priority for National, an essential part of our five-point plan for the economy to make New Zealand a wealthier, more successful country. We will put the right incentives in place to encourage people to work and save and get ahead under their own steam."
That implies a flatter scale. But simply abolishing the top rate would reduce government revenue considerably. Just on half the Labour-led Government's total income tax revenue has been taken from the top 11 per cent of salary earners. The threshold changes announced last Thursday will reduce that a little. From October the 11 per cent of taxpayers who earn more than $70,000 a year will supply 46 per cent of personal tax revenue. That is, 343,000 people out of 3.26 million New Zealanders over the age of 15. To relieve the burden on that small proportion of voters, and hopefully improve the earning incentives for all, National would need to find a great deal of savings in government expenditure. And Dr Cullen is leaving no surplus to speak of.
If National promises to abolish the 39c rate, and realign the top personal rate to the company tax rate, it will claim that lower rates will keep high earners in New Zealand and improve their incentives to work, resulting in no loss of tax revenue. Conservative governments have seen their Budgets turn to grief on this belief.
For credibility, the party will need to stick its neck out on expenditure cuts, too. It is not sufficient to say, as Mr Key did the other day, "National will direct spending away from low-quality programmes that push up inflation towards frontline services like doctors, nurses, teachers and police." That sort of double-speak fools nobody. We need to hear serious policy soon.
