No tax cuts?

So Bill English has said there is now no room for tax cuts, specificially:

New Zealand had to get out of the tax-cut “mode” it had been in for the past five years, he said, because of the new economic conditions, which see budget deficit forecasts of up $12 billion for the next 10 years.

So since not cutting taxes in the face of inflation is actually “increasing real taxes” Bill English is saying we need to get rid of the Budget deficit by gradually increasing taxes.

There is another way – cut real spending. If New Zealanders are in “tax-cut mode” because they think real spending is too high, and would rather have a government that is a smaller share of GDP, then we should cut taxes and actually do something about spending.

Mr English is attempting to soften the ground for what could be some radical ideas emerging in the next few months from the comprehensive tax review being undertaken by leading tax experts.

I am glad to see that they are looking at ways to improve the tax system. But this is only part of what needs to be looked at. I know that we are being told they are cutting spending, but I’m not sure if there is much more scope for cutting morning teas to public servants.

We need to look at the hard issues (namely: Working for families, interest free student loans, our high level of infrastructure spending) and then we need to ask, is this what we should be spending societies effort and production on?

Note:  To be fair I have a lot of respect for the fact that Bill English admitted the limits on tax cuts and spending.  That sort of transparency is an important part of good government, so it is awesome to see.

  • ben

    I have no hope for a country who is led by such weak men. New Zealand already has among the largest governments in the OECD, yet Bill English says he can’t find any way to cut spending, and his boss has just announced another $152 million spending to get 17,000 youths into employment – yet another extension of welfare, and I strongly suspect necessary only because of all the other labour market distortions – minimum wage, Kiwisaver, welfare – that make it difficult or unappealing for the unskilled to find paid work.

    Like his predecessor, Bill English is taking the easier road. The price for keeping his job an extra three or six years, perhaps, is permanently larger government and permanently lower GDP. Cynical, cynical, cynical.

  • FreneticMonkey

    New Zealand voted for Labours WFF and interest free student loans in 2005. Maintaining existing entitlements was a key promise in Nationals 2008 campaign.

    The answer to “is this what we should be spending societies effort and production on?” is a resounding YES.

  • FreneticMonkey

    “The price for keeping his job an extra three or six years, perhaps, is permanently larger government and permanently lower GDP”

    God forbid politicians do what the ignorant VOTERS want ben.

    The PRICE for keeping his job is DEMOCRACY.

  • @FreneticMonkey

    While I do agree with this line of logic there is one issue. In 2005 voters expected to be a lot wealthier by now then they actually are – so they were still voting for a lower level of government spending as a % of income.

    As a result, after such a significant shock it is unclear that society wants to fund these sorts of things to this level anymore.

  • FreneticMonkey

    Well you will have to wait until 2011 if you want carve chunks out of the welfare state and make our tax system less progressive. I look forward to an election campaign fought on these issues 😉

  • @FreneticMonkey

    I didn’t realise that the current government would have a mandate to increase the size of government relative to income but not keep it constant or decrease it 🙂

  • FreneticMonkey

    Most people think of their entitlements in absolute terms not as a percentage of GDP Matt.

  • @FreneticMonkey

    FreneticMonkey :
    “The price for keeping his job an extra three or six years, perhaps, is permanently larger government and permanently lower GDP”
    God forbid politicians do what the ignorant VOTERS want ben.
    The PRICE for keeping his job is DEMOCRACY.

    While I agree with your general point, I couldn’t help but think of Eric Crampton’s work showing that voters are in fact ingorant, lol

  • @FreneticMonkey

    Their entitlements you say. Most people think of their willingness to pay for people “entitlements” based on their income. Given GDP has dropped, and the population has risen, a lot of people have a lower income now. The most appropriate way to look at this is as a % of GDP.

    Personally I would prefer it if everything was pegged to inflation (including tax brackets) and government targets were pinned to a “medium term” % of GDP. As if we did this people would know what sort of society they are funding when they pay their proportion of income to the state.

  • FreneticMonkey

    Im afraid that the problem with Democracy is that we only need a 51% of beneficiaries to enslave the productive 49% of the population. Either reject democracy or take your licks. 😉

  • @FreneticMonkey

    I am not sure we are going to get a society were 51% of people are beneficiaries. And if we do I don’t think I’d stay in the country 😛

  • FreneticMonkey

    “While I agree with your general point, I couldn’t help but think of Eric Crampton’s work showing that voters are in fact ingorant, lol”

    Remember the 2008 election had record low voter turnout.

  • FreneticMonkey

    Well what is your definition of beneficiary Matt? someone who recieves more in income support and services (health+education etc) than they pay in tax?

    I am not sure what percentage we are up to now…

    Although I suppose you have to take a whole of lifetime view…

  • FreneticMonkey

    “And if we do I don’t think I’d stay in the country”

    Yeah sure, and the northern European social democracies with the highest rates of income tax have to keep their productive citizens captive with barbed wire, machine guns and attack dogs ;-).

  • @FreneticMonkey

    My view (not of a beneficiary per see but of someone who would vote in conjunction with have a benefit solely state) would be someone who receives enough above what they pay, over their lifetime, to influence their voting decision.

    I don’t know, I think even many people who receive a large range of services would pull back if they felt things were too socially unfair. I don’t think the only reason communism failed was because it turned into mass dictatorships – I think people also resented the idea that hard work would not be rewarded, even if they weren’t the people working hard.

    When we have a situation where someone who works 1 more hour loses 98% of the additional income (as we have in some places at the moment) I think we have a situation that will be untenable for the voting public – once they are aware of it.

  • @FreneticMonkey

    High rates of income tax but a high provision of public services – not transfers. I was under the impression that we were discussing a situation where I work as hard as I can and my money just gets given to other people – in that situation I would probably skip on over to somewhere that is a bit warmer 🙂

  • “Remember the 2008 election had record low voter turnout.”

    His study used the 2005 electoral survey, whether turn out was bad that year or not I have no idea.

    What type of selction bias do you think low turn out implies?

    One argument could be that non-ignorent people realise that their vote will not impact the outcome and thus they stay home. Thus low turn out=ignorant voters.

    I’m sure you could make an argument the other way, i.e. low turn out=non-ignorant voters, I just haven’t thought of one yet, hmmmm

  • FreneticMonkey

    “When we have a situation where someone who works 1 more hour loses 98% of the additional income (as we have in some places at the moment) I think we have a situation that will be untenable for the voting public – once they are aware of it.”

    Im sorry Matt but who pays the highest effective marginal tax rate in New Zealand? WFF recipients and those on the unemployment benefit who work a few hours a week.

    Where are your posts calling for their tax rate to be cut?

    No you want the top rate of personal income tax and the corporate rate cut right?

  • FreneticMonkey

    “What type of selction bias do you think low turn out implies?”

    Well i think that non-voting indicates either feeling unable to affect the outcome or being indifferent about the outcome.

    As rational actors i am sure that none of us here at this economics blog VOTED as we would be more likely to die in a traffic accident on the way to the polling booth than have our individual ballot affect the outcome. (that applies in America, i may be overstating the case for NZ)

  • @FreneticMonkey

    Huh, I didn’t realise I had asked for anything specifically to be cut – I just said we could cut spending as well as lifting taxes to fill a budget deficit 😛

    Also we could cut EMTR’s by reducing WFF’s benefits, not just by giving middle class families tax cuts …

  • FreneticMonkey

    I think i might have read Crampton’s work, didn’t he find that left-wing voters were less ignorant?

  • FreneticMonkey

    “Huh, I didn’t realise I had asked for anything specifically to be cut”

    what about here?

    “We need to look at the hard issues (namely: Working for families, interest free student loans”

    “Also we could cut EMTR’s by reducing WFF’s benefits, not just by giving middle class families tax cuts …”

    Once again i think democracy gets in the way of your solution to EMTR

  • FreneticMonkey

    Gotta say i love your blog and i really appreciate you taking the time to debate these issues with me. If i get too trollish then please hit me with a stick.

  • FreneticMonkey :
    I think i might have read Crampton’s work, didn’t he find that left-wing voters were less ignorant?

    From memory more ignorant, I would have to check though, it will be on his blog.

    Or we voted because we place an intrinsic value on the act of voting:)

  • @FreneticMonkey

    I overuse namely tbs, however those were simply examples. Did I choose examples I implicitly prefer, yes. Should I have made it clearer they were examples, yes. But did I ever say anything about top tax rates and corporate tax rates, no. Did I say I know better about policy, no. Did I say that we can look at both spending and taxes to close a deficit, yes.

    “Once again i think democracy gets in the way of your solution to EMTR”

    Ok, this time it was obviously an example – I was just saying there was another way to change the EMTR.

    And just a sec, why can we ignore democracy to increase taxes but we can’t cut spending – this is a lop sided argument. Ultimately democracy gave us a preference at a point in time. Incomes are lower. We have to try to adjust things given this. The answer isn’t to solely focus on our change by increasing taxes and just leave spending unchanged (in fact it will be higher in real terms, and higher as a % of societies income).

  • @FreneticMonkey

    Everything is fine. You aren’t insulting me so you are an ideal commenter 😀

  • FreneticMonkey

    “All of those are about what I was expecting, at least in terms of direction of the effect and relative magnitudes. What did I find most interesting? Left-wingers are far less ignorant than centrists or right-wingers. The effect is almost as big as switching from the lowest level of education to the highest. So, props to our friends from the left.”

  • FreneticMonkey

    “And just a sec, why can we ignore democracy to increase taxes but we can’t cut spending – this is a lop sided argument.”

    Matt democracy means we don’t cut entitlements unless we have explicitly campaigned on doing so.

    I think government does have permission to raise taxes through bracket creep but not through raising tax rates.

    I would like to see government saving in the good times so that it doesn’t have to cut back in the bad times. NZ does not have as bad a govt debt problem as the rest of the developed economies right?. I seem to remember a net positive financial position for the crown at the peak of the asset bubble….

    I have not seen you argue vigorously for addressing the horrific EMTR faced by beneficiaries.

    “But did I ever say anything about top tax rates and corporate tax rates, no.”

    but you DO want to see those rates cut right?

    “If New Zealanders are in “tax-cut mode” because they think real spending is too high, and would rather have a government that is a smaller share of GDP, then we should cut taxes”

  • FreneticMonkey

    you know i have to try really hard not to resort to Ad hominem the way Cullen did with the journo’s re. tax cuts. Lets not forget the median income in New Zealand.

  • FreneticMonkey

    Basically i just regurgitate the latest thing i read, Philippe Van Parijs “A Capitalist Road to Communism”. So all i do now is bore people to death arguing for the highest sustainable level of unconditional basic income.

  • @FreneticMonkey

    “Matt democracy means we don’t cut entitlements unless we have explicitly campaigned on doing so.”

    I look at it on the otherside – we don’t cut the proportion we spend on entitlements of expected future income.

    “I think government does have permission to raise taxes through bracket creep but not through raising tax rates.”

    I do not agree here – I find bracket creep abhorrent.

    “I would like to see government saving in the good times so that it doesn’t have to cut back in the bad times”

    Indeed, if we were just experiencing a cycle. But the government believes national income is PERMANENTLY lower – the permanent bit is important which is why its in capitals 🙂

    Permanently lower income means that New Zealander’s have less to spend on government services, or else must sacrifice more to get it.

    “I have not seen you argue vigorously for addressing the horrific EMTR faced by beneficiaries.”

    I think I’ve mentioned EMTR’s in the past, but indeed I have not discussed them for a while. When I get on to discussing structural issues in the NZ economy (if I ever get time) this is definitely an issue I would raise.

    “but you DO want to see those rates cut right?”

    Well I don’t want to cut the company rate. With income taxes I would like to see them inflation adjusted, but I think the level of progressivity should be determined in a democratic fashion.

    I am more concerned with things like effective capital gains tax and the taxation of different types of income – as these are inefficiencies that are not the result of any social idea of progressivity.

    “If New Zealanders are in “tax-cut mode” because they think real spending is too high, and would rather have a government that is a smaller share of GDP, then we should cut taxes”

    Indeed – if New Zealand did enter tax cut mode because they thought that they should keep more of their income then that is fine, we shouldn’t betray that. My point here is if society does want to spend less on services and keep more of its income to spend privately, and if this is the “tax-cut mode” Bill English is complaining about, he is the one betraying the democratic mandate given to him.

    National was elected on the back of a promise of higher tax cuts. They have reacted to lower national income by getting rid of the (future) tax cuts and not touching (future) spending. I’m not sure if this represents the platform they were elected on the basis of – and recognising that there are two sides here is important.

  • @FreneticMonkey

    If we want a society with a basic level of income then that is great – many economists are actually very pro this type of idea.

    However, this is not the type of society that has been elected in – so we can’t really say there is a democratic mandate for it 😉

  • FreneticMonkey

    you right there is no mandate for basic income, which is a real shame. it is absent from the public debate. when Goff got attacked along the ‘dole for millionaires’ line i cried.

    our universal superannuation goes to millionaires and yet it is supported strongly by parties representing over 95% of New Zealanders.

    ive said it before and ill say it again means testing is just mean

    If WFF was replaced with a universal child benefit it would be untouchable.

  • FreneticMonkey

    “National was elected on the back of a promise of higher tax cuts.”

    I think the media/political/pundit reaction to the delay and now cancellation of the tax cut promises has been pretty positive, National’s current polling suggests that the public endorse this approach.

    During the campaign Bill English in the ‘secret tape’ described the voters which National was elected “on the back of” as the ‘Labour plus’. They thought they could get the same level of public services as Labour was providing AND a tax cut. Remember Nationals tax cut package was largely just a deck chairs on the titanic re-arranging of Labours tax cuts.

    Except they added that stupid independent earner rebate because manufacturing the headlines for the news coverage of their tax cuts was the most important aspect of it’s construction.

    Oh-oh im revealing that i hate democracy just as much as you guys do…..

    Looks like we get the government that we deserve huh? and if they cant make everyone happy then at least they can make us all equally unhappy 😉

    Do you recall the debate about the so-called ‘surplus’ during 2005?
    National spent the boom arguing that Labour should have lower government savings and now they are in power during a recession they want the opposite?

  • FreneticMonkey

    “I do not agree here – I find bracket creep abhorrent.”

    you think that voters are not rational enough to calculate the effects of bracket creep and implicitly endorse it as a policy?

  • @FreneticMonkey

    There is still an argument that lower surpluses would have lead to higher growth which would have put us in a better situation.

    Or the idea that lower surpluses would have lead to higher private savings.

    @FreneticMonkey

    No, I’m sure people realise that their taxes are rising. I find it abhorrent because it allows politicians to increase taxes without arguing about it, or debating it, or explaining it. As it isn’t inflation adjusted BOTH SIDES are doing it – and I just find it irritating.

    I prefer stability with real wage bills so people aren’t stuck having to make decisions in the face of MORE uncertainty – which is what bracket creep does. It is issues like this that screw up the allocation of resources in society, and lead us to all be a little bit worse off 🙁

  • steve

    actually don’t we already have a situation where 51% of people are “beneficiaries”? with working for families and the independent earners rebate, while tax rebates, are effectively benefits. anyone earning about the average wage or lower is eligible for assistance from the state.

  • That is lucky for you that they are looking to improve tax system there. Here Tax is only imposed on poor people so that can rich become more richer.

  • It is just so discouraging for those of us who work and pay our taxes. I think there is such a disincentive to be successful – the government will only redistribute the wealth. I shudder to think about what will happen to healthcare with Obama. Will those of us afflicted with chronic diseases (like diabetes, Crones, etc.) continue to receive the services that we need to live productive lives (to be able to work and pay taxes)?

  • Wow, seems like New Zealand is facing some serious deficits with their budget. Increasing taxes could withdraw that gap, however it may affect how people spend money. Thus, the economy could face a hit like here in the US.