That would be true as long as people are living at an income that provides them less than a ‘subsistence’ existence. With the range of benefits offered by government this should not be the case for even the majority of the poor. Remember that politicians use statistics to lie – generally most of the households that earn under $17,600 (the bottom 20%) are students, or businessmen/farmers who are putting their money in a trust.

http://www.infometrics.co.nz/article.asp?id=4323

In this post on tax incidence I was simply trying to dispel the myth that if taxes get cut the full benefit goes to labour. The sentence you quoted was the sort of thing I was trying to dispel.

BTW, these threads are never dead, if you want to reply about something I’ll try to write back to you as soon as possible 🙂

I’m a bit late commenting to this post but I don’t particularly agree with this.

While some people likely would just spend this extra money on shoes and plasma tvs and others would save the extra money, I think there’s a third group of people who are currently spending beyond their means with large mortgages or overdrafts that are slowly increasing. If these people continue to spend the same amount, but can actually afford it now, what sort of affect do you think this would have?

GST is equivalent to a cut in a flat tax rate. The benefit will again depend on the tax incidence, however this time the household is the consumer. Withholding tax is just like income tax.

Now, business tax is on net profit so it is a little different. If a firm has its business tax cut, then it has extra profit avaliable, however since it was choosing labour etc to maximise profit in the first place it shouldn’t make any difference to what they do. In the longer term it would allow further entry into markets which would increase competition and reduce price pressures I guess. But it seems silly putting the business tax rate below the top personal tax rate, as it allows people to avoid tax. That should be the constraint on it.

Annual inflation is 1.8% yes. But the only reason it is in the target band is because the government introduced a whole lot of subsidies which knocked down the price level. As we care about the rate of price growth, these subsidies should be ignored. When we ignore them annual growth is around 2.1%. Now, part of the reason this is ‘so low’ is the large increase in the exchange rate which has reduced tradable inflation. Once this is taken into account, along with the intense margin pressures that some firms are facing, underlying inflationary pressure is above 3% (just look at non-tradeable inflation growth and take off the effect of the subsidies).

Last year would have been a better time for tax cuts, at least a shifting of the tax thresholds to account for fiscal drag. However, cutting taxes now is probably not a good call. Didn’t National say that they would cut taxes, but that they wouldn’t come into effect until 2009. That is a better idea, as capacity pressures will be lower by then, however announcing them now will simply lead to people increasing borrowing (as they expect their lifelong income to be higher). If this is the case, the inflationary impact of this announcement depends on the degree with which people are liquidity constrained.

*Without an offsetting increase in the cost of Labour, ie kiwisaver.

Furthermore, if we think that the incidence of tax is such that it reduces the cost of labour, and if labour and capital are complements (which is not a given, but not impractical), tax cuts may lead to greater businesses investment. However, business investment takes time to increase productive capacity, and as a result short term inflation may still become entrenched. Also it would be easy to make the opposite argument, where tax cuts retard investment.

Ultimately, whether you want to cut taxes or not, it would be good to put in place policies that will increase the natural rate (although any equity tradeoffs would have to be taken into consideration). I doubt that tax cuts would provide much of a supply side response, and as a result, we have to accept that they would be inflationary. However, if our economy is now at a higher natural rate of growth, this money should be put back into the system, just not now when unemployment is at a record low and firms are heavily capacity constrained.