Tax Cuts Best for Students – Best For Everyone!

Rodney Hide Speech to Victoria University students, GBLT 4, Law School, Wellington, Monday August 8, 1.15pm.

ACT has campaigned on tax cuts since we started in politics. Tax cuts were considered a fringe issue. Now tax cuts are the number one election issue.

That’s a difference that the ACT party has made.

Even Michael Cullen is now promising tax cuts – a packet of chewing gum a week in three years’ time!

The National Party is promising tax cuts too. They just haven’t told anyone what they are.

They were waiting for the Budget to release their policy, then the announcement of the election date, and now National is just waiting.

But tax cuts are now firmly on the political agenda. ACT’s tax cuts are far superior to

Labour’s interest free loans scheme and will allow students to pay off their student loans considerably faster.

Tax_cuts_are_good_for_everyone

Tax cuts allow people to keep more of the money that they earn. That’s a good thing.

Tax cuts put more money into people’s pockets.

ACT’s tax cut package puts $40 a week into the average worker’s pocket each week.

They are $40 better off. That’s not bad.

But tax cuts do more than boost take-home pay packets. Tax cuts boost growth.

That’s because tax cuts boost the return to working, to entrepreneurship and to investment.

Taxes are the price you must pay to work, to invest, to be in business. Cut that price and you boost business, productivity and the economy.

The Treasury have said ACT’s tax policy would boost economic growth by one to one-and-a-half percent a year.

That’s a lot. That would mean an extra $2 billion a year compounding – each and every year. That’s money that we are now missing out on.

Taxes impose a deadweight cost because they discourage production. That deadweight cost is estimated at 50 cents for each extra dollar taken in tax.

That’s a dramatic figure. That means that the cost of the $2 billion investment in the Cullen Fund is $1 billion a year. The Cullen Fund is a net loser for New Zealand.

That’s why ACT says the Cullen Fund should be canned and returned to New Zealanders as a tax cut. That would boost growth and put us in a much better position to look after the elderly in the future than a dopey state investment fund.

Don Brash was right when he called the Cullen Fund “financial smoke and mirrors”. He was wrong when he turned around and supported it.

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The key tax to cut is income tax. That’s the tax that does the most economic damage. That’s because taxing income discourages precisely what we need to succeed as a nation – people working, earning, and investing in New Zealand.

The key cut to make is to the rate of tax – especially the top rate and the business rate of tax. It’s these rates that affect people’s behaviour.

Working overtime to earn an extra $100 only boosts your pay packet on the top rate of tax by $61. But with ACT’s top rate of 25 per cent you would get to keep $75.

That’s a better incentive to work and to produce.

The important impact of cutting rates of tax is on investment. ACT’s tax cuts boost the return to investing in New Zealand by 23 per cent. That means more investment, more jobs and higher wages.

Everyone benefits because increased investment drives up wages.

Tax-free thresholds and changes to the lower rates of tax don’t boost growth because they don’t change the incentive to invest or to work more. That’s because they leave the tax rate on the last dollar earned the same.

Labour’s Working For Families package is even worse. It boosts some families’ pay packets with a handout but massively increases their effective tax rate as the government claws the handout back as you earn more.

Working families will lose up to 90 cents in an additional dollar earned.

That leaves little incentive or opportunity for people to improve their lot.

Far better to boost pay packets with tax cuts that boost the return to work and to investment and thereby boost the economy.

Tax_cuts_are_affordable

Tax cuts are easily affordable.

All it needs is the return of the surplus – and a commitment to hold government spending.

The surplus for the last financial year is $8 billion.

There’s plenty of room for tax cuts – even with current spending.

The forecast surplus for the next four years averages $5.3 billion.

That’s with Labour’s plans to boost government spending 45 per cent faster than the

economy is growing over the next five years. That’s from $45 billion this year to a whooping $57 billion in 2009.

The way to achieve and to sustain tax cuts is to return the surplus to taxpayers and to hold government spending.

That would boost pay packets and growth.

ACT’s_tax_policies

ACT will drop the top tax rate to 25 cents in the dollar on taxable income over $38,000.

ACT will drop the company tax rate to 25 cents in the dollar.

And ACT will drop the middle tax rate of 21 cents to 15 cents in the dollar up to $38,000.

That means a tax cut for every worker and business.

The total value of the package is less than $6 billion. But its benefit is immense – to workers, to students, to business, to the entire economy.

And all it needs is the return of the surplus and a commitment to fiscal discipline.

Tax_cuts_versus_free_money_for_students

Letting people keep more of their own money beats hand-outs every time. After all, a handout is only money first raised through taxes anyway.

Take student loans.

Tax cuts are far superior.

Consider a graduate who borrowed $10,000 and earns $25,000. They would take 18 years to pay off their loan under the status quo. Even by making their loan interest free, as proposed by Labour, it would take them 12 years. But under ACT they would pay off their loan in just 7 years. In the 5 years difference between ACT and Labour, the graduate would have $9,872 extra in the hand from ACT’s tax cuts. Between year 7 and year 18 they’d have $24,338 extra in the hand.

Or take the graduate, who has a $15,000 loan – about average. They start out earning $30,000. They’d take 17 years to pay it back under the current system. Even by making their loan interest free, as proposed by Labour, it would take them 11 years. But with ACT they would pay it off in just 8 years. In the three years difference between ACT and Labour, the graduate would have $7,739 extra in the hand from ACT’s tax cuts. Between year 8 and year 17 they’d have $24,972 extra in the hand.

How about a larger loan? Well let’s take the scenario of someone who has a $30,000 loan and a starting salary of $50,000. They would take 13 years to pay it back under the current system. Even by making their loan interest free, as proposed by Labour, it would take them 10 years. But with ACT they would pay it off in just 7 years. In the three years difference between ACT and Labour, the graduate would have $16,701 extra in the hand from ACT’s tax cuts. Between year 7 and year 13 they’d have $34,014 extra in the hand.

That’s the power of decent tax cuts. They beat Labour’s hand-out, they benefit everyone, and the benefit doesn’t stop once you have paid off your loan.

Tax cuts also don’t produce the perverse outcomes that the Working for Families package and free money for students produce either.

For example, “free” money encourages student debt. What student wouldn’t take out a loan when the money is free? The result will be a ballooning of student debt under Labour.

Treasury has not costed Labour’s student loans bribe for a very good reason.

Westpac economist Brendon O’Donovan said the scheme carries large fiscal risks and potential long-term impact on the economy. He predicts the cost of the scheme could blow out to an annual bill of $1 billion, far higher than the $300 million Labour claims it will cost.

That won’t happen under ACT. There won’t be free money but graduates will pay off their loans faster and more cheaply than if there were.

Graduates and students can see for themselves the impact of ACT’s tax policy on their student loans by visiting ACT’s web page at http://www.act.org.nz/tertiaryeducation See for yourself that tax cuts beat handouts – for everyone.

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We can’t build a prosperous nation by robbing Peter to pay Paul as Labour does.

We can build a prosperous nation by getting government spending under control, cutting taxes, and thereby allowing people to keep more of what they earn.

Tax cuts will boost pay packets, make student loans manageable and fair, and boost our economy.

There’s only one-way to ensure fair and decent tax cuts this election: Party Vote ACT.

ENDS

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