David Farrar states that this is how Labour has framed the idea of tax cuts – a $150,000 pay increase for Jack Paul Reynolds, and only a few dollars for the rest of us. David states that we must look at the macroeconomic impact, and that we can’t focus on who gets what, specifically he says:
If the debate becomes one of simply who gets how much, they will have problems
However, I think the debate about who gets what is important. However, I do not think that it actually falls in Labour’s favour.
Jack Paul has specific skills, he is hard to replace, and is seen to add a lot of value. The “elasticity of demand” for his service is very very
high low. Furthermore, he has a lot of high paying outside options – he has a good reputation as a CEO. This means that his “elasticity of supply” is very high (note that I am using quite a discrete margin in this case).
What does this mean? Well, when he labour income is taxed, the FIRM will pick up the tab – as a result his gross wage is representative of this. Now this also indicates that, when taxes are lower, the tax payment by the firm will be lower. As a result, over time his gross wage will adjust DOWN to represent this lower tax rate.
As a result, the direct impact on Jack’s Paul’s pay packet is likely to be very low proportional to both income and what other people receive. It is Telecom that faces most of the “incidence of tax” in this case – not him.
As a result, a tax cut isn’t a $150,000 pay increase for Jack Paul. Nowhere near in fact. National should be using basic economics to debunk these sorts of myths, so that Labour can’t try to pitch it as a class war.