What sort of tax cuts?

Tax cuts have been a National Party / APN / Fairfax(or INL) talking point for many years. While most people were doing just fine, the traction gained by this issue was not sufficient to determine the vote of enough people to see the government change. Since before 1999, most people were more concerned with education and health. Besides, previous tax cuts seemed to be eaten up almost immediately by higher interest rates and higher prices.

The past several years, however, have also seen oil prices and interest rates steadily rising thanks to US President Bush's conversion of the Clinton fiscal surpluses into historically large deficits by unnecessarily invading Iraq. If that wasn't inflationary enough, the effects of Bush's gross incompetence have been inflicted on global food prices. The falling US dollar has, in part, caused capital to flee to commodities in an attempt to preserve its value. The effects of President Bush's bio-fuels policy, in displacing food for fuel crops, have made food matters even worse.

Locally, those global pressures are combining with the effects of labour market policy settings here in New Zealand. The unions are now weaker than in the previous downtown in the 1970s and eighties, which was also caused by US wars and consequent deficits combined with rising oil prices. Present laws have undercut the ability of workers to win wage increases to meet rising prices, so they are less able to seek relief from employers. That certainly helps keep domestic inflation lower, which is arguably a very good thing. We don't waste time spiraling into inflation as we pass the buck as to who will pay for the higher prices. Instead, we will go straight to the situation where there isn't enough money to go around and the local economy falters. We aren't there yet, but unless something changes, I can't see how it can be avoided.

Rising prices without rising incomes can only result in falling consumer demand as discretionary incomes shrink. As reported by Bernard Hickey and others, in previous blog posts, many homes are now eating their home equity or slipping ever further out onto credit cards. Immigration stats suggest lower-paid / low-skilled (ie: young) workers have been leaving for Australia where wages for low-skilled people are seen to be higher. Rather than a brain-drain, some portion of NZ's work force could be seen as discretionary economic refugees.

These pressures have been building for some time, just in time for election year. When you're short of cash, you raid the money pot, so public sentiment about tax cuts has been firming up. Labour gave in last year and announced there would be tax cuts. So both major parties, Labour and National are promising tax cuts.

We still don't know how much or in what form. They're keeping that secret lest the other match their policy and negate its vote-winning power at the coming election. The Greens, of course, want to get rid of income tax entirely and move to tax on wastes. People averse to income tax should be all on board for that policy.

Reading the media coverage, it seems those on higher incomes are most in favour of tax cuts. But with rising prices hurting those on lower incomes, does it make any sense to give tax cuts to those who can best afford to meet the demands of rising prices?

How could tax cuts be composed? I see several options, each with a myriad of permutations, but my favourite is to have some portion of income be tax-exempt. Perhaps the first $5,000 or $10,000. This would benefit all taxpayers equally, but deliver most relative benefit to those on lower incomes. That would work out at (roughly) $20 / week (at $5000) or (roughy) $40 / week (at $10,000) for all wage earners who earn at least those levels of income.

Yet the real dollar amount in actual tax cuts would be either $1000 or $2000 per tax payer. Much more significant to someone on $25,000 than someone on $100,000. Marginal tax rates need not be changed.

Whether government accounts can stand such a reduction is another matter. I've hard $2.1 billion bandied about as the possible total for sustainable tax cuts. That would equate to just over $1000 each for 2 million taxpayers. That would suggest the tax exemption for the first $5000 of income was sustainable without endangering public services still recovering from underinvestment during the 1990s.