When reading a post on public address I came across this gem from NZI.
the next two tranches of the proposed income tax cuts should be cancelled on the grounds that they would contribute to the structural deficit, are unlikely to do much for growth, and do not support the most vulnerable households
Ok, so they are saying that the tax cuts will both significantly increase the deficit, not lead to growth, and won’t help poor households. Now:
Very few of the benefits of these proposed tax cuts flow to the most vulnerable families during the recession: most of the benefits accrue to upper-income households
Right, so that covers off the third point. And:
Nor are these tax cuts especially well-designed for growth creation, with the top marginal income tax rates left virtually unchanged
And that covers off the second point.
Now, when I look at this, it doesn’t make sense to me and I can’t see all three things to hold with the tax package.
The future take cuts are only for high income earners so don’t have a direct benefit for the poor (debatable given that out credit markets are still functioning and labour types are complements, but I’ll give them that for fun).
The future tax cuts DO involve cutting the top marginal tax rate, so if they do believe marginal tax rates are important for growth this is a bit funky. This sounds like they are presuming that the cut is TOO SMALL.
They then say that the cost is substantial – but if the cost is too much the cut in the top MTR must be TOO BIG.
When the tax package involves cutting tax rates, it is pretty much impossible to say it fails in all three ways. It is like the impossible trinity.
Either the package is too expensive for the return or the structure is wrong (either on equality or efficiency grounds). A tax cut CAN’T fail (in the same direction) on all three grounds.