Tax cuts tangles

Tax has caused problems for both major parties at the sharp end of the election campaign, but the difference is that one party is using it to dominate the conversation with less than two weeks to go

Talking about tax has taken on a perculiarly risky air about it this past week or so. Tax is meant to be boring, the stuff of grey-suited accountants. But suddenly it's more like a political Red Arrow – something you only get into if you want to take your life in your own hands.

John Key and Bill English have been getting their messages all mixed on tax cuts, until they finally came together at the announcement yesterday. And said almost nothing.

National will – sound the trumpets – cut income tax a little bit should it get a third term. Which raises a lot of questions and it a pretty significant call to make so close to tough economic times and when we're carrying record amounts of debt. So what do we know about this big decision. Well, next to nothing.

They will be in the next term, not long before the next election, which is earlier than even Treasury recommended (2018/19). And politically cynical. They will be targeted at low and middle income earners.

"We think the tax structure for income tax is about right at the top end," English has said.

How much? Well, Key was last week throwing around figures like Pollock at the easel – "$10, $20, $30". When the announcement came there was no number at all. And so it's been labelled the "block of cheese" tax cut. Because if those getting the cut are lucky it might turn out to be around $10 a week. Or it might be closer to $5 a week, on other estimates.

Oh, and they only come if certain "economic and fiscal conditions apply".

It's a non-announcement with no clear answers. But more than that, it makes a mockery of National's claim to be the 'steady as she goes' party that's a safe pair of hands with the economy. National is in no position to mock Labour and the Greens for their economic creds.

Already, government revenue isn't what National hoped it would be. Growth looks sound in the next year or two, but our major markets are all struggling economically one way or another, exports are down and we're still carrying that very heavy debt. Add to that the tight reins on government services National has run, and the Greens' claims that spending on education and health are set to decline in real terms, allowing for inflation and population growth, and you have to wonder at the judgment that says tax cuts – when our rates are already so low by international standards – are more important.

You can only spend a dollar once, so those few dollars back in some folks' pockets means a lot of money not spent elsewhere.

John Key says it shows National's direction and its "core belief" in lower taxes. How low is enough, you might ask. Does it ultimately want to lower taxes to ACT's or the Conservatives levels?

But here's the thing. National lost control of the agenda this campaign with the release of Nicky Hager's Dirty Politics. This "announcement" means voters and the media are talking about what it wants to talk about in the final part of the campaign. It's an oxygen sucking tactic that National's strategists must think is better than other things that other parties may want to talk about.

And Labour has already shown it can stuff up a conversation on tax, with Cunliffe's inability to talk about the detail of his own capital gains tax policy last week.

His deputy David Parker showed him how it's done (mostly, and with the lesson of hindsight) on The Nation this past weekend, in this exchange:


English: Here's a question. How long do you have to live in a home before it's a family home?


Parker: If I buy a home for a family home, it's the day I move in. What's difficult about that, Bill?


English: What if I own a rental and I move out of the home I'm in and live in the rental for, say, two years. Does that mean that I could then avoid capital gains tax on it?


Parker: If you change your family home, it's the new family home that becomes your family home. What's difficult about that, Bill?


English: So IRD will have to know—


Parker: You can vent all of these scaremongering examples, Bill, but they've all been dealt with in economies like Australia that are so much stronger than ours, because they've got a capital gains tax excluding the family home. Before they had a capital gains tax, Australia used to have lower rates of home ownership than us. They've got one. They've now got higher rates of home ownership than ours, and they've got a stronger economy and higher wages.

Parker avoided English's trap. Having said that, the question of defining the family home remains fraught. Going by Parker's explanation, what's to stop a "speculator" with a rental property moving into it, renting out his/her home for a month, telling the IRD the rental is now his/her "family home", putting it straight on the market, selling it, paying no CGT and moving back into the original home?

It's a tax full of loopholes and given Labour's had a whole term, it should have sorted out those problems rather than leave them to some working group when they get elected.

But perhaps Parker's more interesting statement in that debate came a few minutes' earlier. Labour is also promising tax cuts, in its second term and here's what Lisa Owen asked and his answers:


10, $20, $30 a week? Or haven't you done your sums either?


Parker: I'm not promising them. Look, at a higher level than National can afford, cos we're running larger surpluses, cos we gather a bit more revenue through growing capital gains tax, excluding the family home.


So you are promising bigger tax cuts than National?


Parker: No, we're actually not promising tax cuts. We've said that we've left open the possibility of tax cuts. Our promises are to run Budget surpluses and to reduce net government debt to 3% of GDP by the end of our second term.


So you're leaving open the possibility, as you put it, of tax cuts that are at a higher rate than National?


Parker: Yes, we are.
 So while Labour isn't "promising" tax cuts, Parker is talking about not only matching but exceeding National's tax cut plans. It's not something that's been much reported or discussed. But it seems remarkable given those same economic conditions and the need for spending on public services and debt reduction, Labour would try to out-bid National on tax cuts.
You'd think Labour would rather be talking about the billion dollars extra it's putting aside for health and education. But tax is the conversation for now, a topic National has chosen. The question now is whether it's the fiscal dog whistle it wants it to be (where voters hear the words "tax cut" and little more) or whether its policy without a policy becomes a rod for its own back.