TRANS TASMAN POLITICAL LETTER

2 February, 2010

FOR IMMEDIATE RELEASE

Tax Debate – Big Resistance Lining Up Against Tax Change Plans

The Trans Tasman Political Newsletter reports there are already

Some big political guns lining up against a rise in GST. Labour
is against it, the Greens are against it. The Maori Party’s Hone
Harawira says he will fight it.

There are fears a rise in GST will hurt the poor most. The Tax
Working Group notes after reducing the top tax rate to 30%, and
compensating low income groups for a GST increase to 15%, the net
gain in revenue would be only around $200m.

So why would the Govt think about it? Finance Minister Bill
English says the Budget will address “imbalances and inequities”
in the tax system. Most commentators think he is referring only
to loopholes in tax laws regarding property.

But Trans Tasman notes English is also saying the Govt must
consider the economic impact of tax changes. Identify the
“imbalances” he wants to correct. Kiwis are notorious for their
borrowing and spending, and their lack of saving. What would
change their habits, turning them more from spending to saving?
An increase in consumption tax.

The dynamic effects of lowering tax rates on personal-income and
raising GST to 15% (to yield $2.2bn in revenue) could be
transformational, increasing incentives for work, investment and
savings, lowering those for consumption and borrowing.

Professor Bob Buckle, the Victoria University economist who
chaired the Tax Working Group, argues though a rise in GST might
not raise a huge amount of extra revenue (after compensating low
income groups) it will create a “behavioural change” in a
desirable direction.

As for the issue of a GST rise hurting the poor, he says the Govt
should cut tax rates on low incomes as well as high incomes
(perhaps by raising thresholds as Phil Goff suggests).

The switch from income tax to GST would also encourage saving,
because it would not be taxed, thus fostering investment and
economic growth. (Australia’s Henry report on tax reform is
suggesting dropping taxes on interest earned on savings.)

The Trans-Tasman Editors say Cabinet will have to balance the
dynamic economic effects against any political downside. But this
is where economics should outweigh politics - if the Govt is
serious about achieving a step-change in economic performance.

ends

© Scoop Media