While the media was focused on other stories, Bill English quietly killed off National's tax cut policy this weekend. But that doesn't mean we can take our eyes off our tax system
It's been fascinating to find out that I'm paying off Bill English's mortgage as well as my own. So much for the party of individual responsibility. But while everyone is fussing about where the finance minister lives, they're ignoring his words.
The New Zealand Herald ran a remarkable down page story yesterday that has gone largely uncommented. At the National party conference over the weekend the finance minister told Audrey Young that New Zealand has to get out of the tax cut "mode" it's been in for the past five years. Of course it was the National Opposition, with able support from ACT, that put us in tax cut mode, but putting that aside, here's what else he said to reporters:
"There is no possibility of just cutting taxes. The Government is short of revenue. The only question is whether there is a different mix of tax."
In his speech to party delegates, he was just as direct:
"The fact is tax revenue is managing to cut itself very dramatically so there isn't scope ahead for us to go around saying we are going to lower your income tax, full stop."
This, of course, is an administration built on a foundation of tax cuts (and tough law and order). Tax cuts were a core election promise. As recently as May, English announced that he had lowered his medium-term goal for the top tax rate in this country from 33 cents to just 30 cents.
It seems that medium-term is becoming a little more long-term.
On one hand you could accuse the government of rank hypocrisy. It spent years hammering Labour on the need for tax cuts, mocking them for their chewing gum attempts at tax reform, and as soon as they get the chance, they rule out tax cuts.
On the other, you can praise this government for not being blind ideologues, following policy in to the valley of debt. Previous National governments would have stood on principle and cut anyway, so the emerging pragmatism of this administration should be welcomed.
But, to extend the metaphor into anatomically uncomfortable territory, there's a third hand in this debate. And like some street-side card shark, it's that hand you'll want to follow.
Softly, softly, English announced a review of our tax system in May, to be led by Victoria University's Professor Bob Buckle. It began meeting last week and is due to report in December, about the time that the government should be able to make some more realistic claims about the country coming out of recession.
I had understood not to expect too much from this committee; its recommendations would be at the tinkering end of the scale rather than significant reform. But I'm starting to wonder.
First, look at the composition of the Buckle committee... including Rob McLeod, Mark Weldon, and Gareth Morgan. These aren't tax neutrals. They're passionate advocates for tax cuts, especially business tax. If you thought the Foreshore and Seabed panel was stacked, well, this lot matches it.
The Sunday Star-Times named another member of the review team this weekend, Professor Norman Gemmell. While claiming that he didn't want to "get ahead of the group", he went on to to give chapter and verse as to why GST should be raised and the top tax rates cut. According to the report, Gemmell believes our consumption tax (GST) of 12.5% is "low by international standards".
I'm sure Profesor Gemmell knows much, much more about tax than I do, but when even I can find out in two minutes that Canada has a GST rate of 5% and Australia 10% and other countries we typically compare with have graduated systems with essentials such as food on all-but zero tax, I begin to wonder... was he misquoted? Is he seriously comparing us to Angola and Uruguay? Does he think I'm stupid? Or has he got an agenda to cut income tax regardless and will say anything it takes to prepare the ground for such a change?
What's interesting is that on the very day that English announces that, "Over the next five years or so we will need to get in as much revenue as we can without actually raising the tax burden", one of his review panel is in print offering a (neo-conservative) solution.
And is it just a coincidence that Gemmell's thinking is so perfectly aligned with English's own? The finance minister just last week told Scoop that New Zealand faced similar questions to the Australians, who also have a tax review under way.
“They face the same choice as us. Do you tinker with your system or do you do something bold like change the direct/indirect tax mix? If they did something like put their GST up and dropped their income tax rates and their company rate quite a bit, that would have an impact on us.”
Is the government preparing us for a tax overhaul on the basis that, "Australia's done it, so we'll have to do it too"? It's a justification they're using a lot at the moment (see the defence reviews and the folic acid saga as examples). If so, a lot rests on the Australian Labor Party's review.
One side question: If we do have to mimic Australia on tax, why has National all-but ruled out a capital gains tax? John Key says he's rather loosen up the amount of land available for housing via his RMA reforms than introduce one. Yet Australia taxes capital gains on all asset sales.
Medium-term tax cuts... no tax cuts... a re-mix of taxes... The government is sending mixed signals on its plans for tax, and that makes me nervous. While the Key administration has backed away from cuts, is it instead re-gathering its forces for what could be a nasty attack on how the tax burden is shared in this country?
I can perhaps engage in an argument that our tax system relies too heavily income tax; what I can't accept is an increase in GST for the sake of the wealthiest New Zealanders.
It's a solution that moves the tax burden from the rich (those in the top tax bracket) to the poor (because we all consume). And that's no solution at all.
Gemmell says that the tax system is "inconsistent and unfair", and in that he's not wrong. But making it even more unfair for New Zealand's lowest earners is not the way forward. I only hope the Buckle committee has the sense to see that.