Taxes II: The Problem with Lowering Taxes in N.Z

June 26, 2006

Although ACT, and to a lesser extent National, argue that lower taxes will make New Zealand more competitive with Australia and the U.S, they fail to appreciate that New Zealand suffers from serious under investment in key areas such as transport and energy infrastructure which are at least as important to economic outcomes.

Since 1984 an increasing percentage of government spending has gone into health and welfare. This is largely unavoidable because of the aging profile of the population. Furthermore, the elderly are very politically powerful and significant government cuts in health spending or pensions would arguably be political suicide. To pay for this increased health spending the government has reduced spending in other areas such as transport and defence. New Zealand now has no air force to speak of and is unable to cooperate in serious military exercises with its former ANZAS partners- Australia and the U.S.

Recently, the government has increased transport spending, but major projects are now subject to increasing costs and delays, thanks in part to the Resource Management Act. Cuts in transport spending reduce productivity since the more time people spend travelling, the less time they spend working and completing tasks. This is particularly true for tradesman and small business owners. Long journey times, to and from work, also make jobs less attractive to employees and are thus a negative factor in the competition for skilled workers in the international job market. Subsequently, it is counter productive for the government to cut transport spending so as to lower income tax rates.

New Zealand’s rate of spending on research and development has been very poor since 1984, although the Labour Government is now beginning to address this. Research and development spending is a major factor in the international competitiveness of New Zealand companies and a big factor in the nation’s brain drain since clever people like the interesting jobs that R and D spending generates.

In the energy sector there has been little provision for New Zealand’s growing population, with Auckland now increasing prone to power failures. In theory the country could save substantial amounts of power through power conservation. Most older homes and commerical buildings in New Zealand are very poorly insulated, so there is a lot of potential for the government to encourage energy conservative through incentives. However, the government currently spends very little on energy conservation.

Overall there is very little leeway in New Zealand for cutting taxes since any cuts in energy, transport, or research and development spending would be counter-productive, while cuts in other areas would be very politically unpopular. Similarly, defence spending has already been cut to the bone and it would be foolish to cut it any further. In practice, National realises that significant tax cuts are unrealistic and most of its proposals for tax cuts are modest, while Act is getting little electoral support for its flat tax proposals. Cutting taxes may have worked in the 1980s but it just isn’t going to have a major impact today.

There is however, a lot of scope for debating how tax is weighted since many economists are now debating the merits of income tax compared with taxes on capital, as well as the feasibility of taxes on pollution. In the future, political parties may decide to appeal to voters by reducing income tax and increasing other taxes but this appears unlikely at present.

Since serious tax cuts are no longer politically feasible, New Zealand’s die hard libertarians should campaign over other issues such as- political correctness in education, the debt culture, welfare mis-management, and the red tape which frustrates small businesses as well as large contractors involved in infrastructure projects.

Leave a Comment » | Economic issues, NZ economy | Permalink
Posted by mikecourtman

The Overrated Significance of Tax Rates

June 22, 2006

With the libertarian and neo-conservative right, as well as some elements of the liberal left, there seems to be an ideological obsession with tax rates and their importance in economic success. However, in the real world there is no strong correlation between tax rates and the economic success of particular countries.

Looking at New Zealand political blogs, it is apparent that there is a strong contingent of libertarians and neo-conservatives that harp on about the endless benefits of low taxes and economic deregulation. There is also a smaller group of centre-left liberals that argue that high taxes will turn New Zealand into a Scandinavian style success story. When you look at the tax policies of particular countries though, you don’t find a lot of consistent evidence to support either case.

Economic libertarians cite the economic success of the U.S as compelling evidence of the superiority of low taxes in a successful economy. However, there are plenty of other countries with strong economies that have much higher tax rates, including Norway, Switzerland, Finland and Denmark. High tax Sweden struggled in the 1990s but is now doing relatively well with 4.1 percent growth last year. As Steve Sailer points out, according to neo-liberal theory, Sweden’s economy should now be in tatters and its work ethic shattered by socialism. Similarly, the third world is littered with low tax economies, such as Nigeria, that are still struggling with high levels of poverty and corruption. Tax rates in most economically successful East Asian counties are relatively low but these countries also tend to have high levels of trade protectionism that economic libertarians also strongly object to.

The centre-left cites the success of Scandinavian economies as evidence that high taxes can produce stable growth with high levels of equality. However, countries that have tried to copy Scandinavian tax policies have had little success, a good example being Britain in the 1970s. Britain was forced to revise its economies policies and reduce its tax rates after being ignominiously refused assistance by the IMF in the late 1970s. In the period from 1945-1975 New Zealand did well under a post-war high tax regime but was force to lower tax rates in the 1980s as national debt and inflation reached unsustainable levels.

Clearly its is possible to run a successful economy under both high and low tax regimes but there is little evidence to suggest that switching from one to the other will lead to a sustainable improvement in a countries economic performance. Furthermore, many developing countries have consistently failed economically under both high and low tax systems. Obviously factors other than taxes, such as culture, ethnicity, resources, geography and history are more important in long -term economic success. Nor can tax ideologues argue that tax rates would be decisive if only there was universal free trade. China is developing nicely with relatively high levels of protectionism (through subsidies and currency manipulation) and protectionist Japan and Korea are now emerging from extended recessions with their industrial sectors still in good shape. Centre-left proponents of ‘fair trade’ also fail to acknowledge that developing countries won’t benefit from ‘fair trade’ if they lack the infrastructure needed for exporting and can’t maintain basic law and order.

Tax fanatics should move on from their ideological cul de sac and start looking at other, more decisive factors in economic development than general tax levels.

Leave a Comment » | Economic issues, Libertarianism | Permalink
Posted by mikecourtman

Peters’ New Role

June 12, 2006

Peters’ New Role Winston Peter’s foreign affairs appointment in the new Government has been ridiculed by many political commentators in the mainstream media. Most pundits seem to believe that the nation’s international image will be severely tarnished by Peter’s politically incorrect antics and nationalist/populist reputation. However, few commentators seem to be asking the question- what’s in it for Peters and New Zealand First and what message should New Zealand really be sending to Asia?

In the Bolger government of 1996, Peter’s assumed the finance position but his nationalist position on key issues such as privatisation soon proved unacceptable to the National Party hierarchy. In retrospect, Peter’s has admitted that he underestimated the degree of difficulty in working closely with other parties in the new MMP environment. The present confidence and supply arrangement with Labour allows New Zealand First to have some influence over Labour’s initiatives in social policy, while Peter’s has the opportunity to peddle his influence on the international scene. This means that Clark is willing to put the brake on Labour’s social policy initiatives in exchange for continuing control over general economic policy where there is less disagreement with New Zealand First. Although New Zealand First has little direct involvement in policy-making it is in a strong position to act as a watchdog over Labour and keep the press informed about issues it deems to be of national interest. In immigration policy for example, New Zealand First is now in a stronger position to spot instances of procedural incompetence and excessive leniency by Labour politicians and government civil servants.

As treasurer in the 1996 National-NZ First government Peter’s was too distracted by tensions with the National party hierarchy to have much influence over any particular area of policy. In the present government he has a more focused role and a more realistic chance of influencing policy-makers and international opinion. The present arrangement with Labour also appears to be benefiting Ron Mark, arguably N.Z First’s second most influential politician. In the area of law and order Mark is already having a significant impact- notice the debate he has stimulated over raising the drinking age and in the governments new commitment to increase police numbers.

However, it is arguably Peter’s impact on international opinion that is the most important aspect of New Zealand First’s present arrangement with Labour. In the Asia- Pacific region Peter’s has a poor image because his support for limited immigration is conflated by the media into a general anti-Asian stance. This is somewhat ironic because most countries in East Asia also support limited immigration. Japan for example, has a highly restrictive immigration policy. Peter’s is no doubt trying to persuade Asian governments, and the Asian media, that New Zealand First supports increased trade with Asia and continuing opportunities for Asian students to study in New Zealand. Its also needs pointing out New Zealand First’s economic policy is more in tune with the economic policies of many East Asian countries, such as Malaysia and Korea. Since the Asian crash in 1997, many Asian countries have been sceptical of neo-liberal reforms and would like to see more countries in the region promoting ‘developmental’ economic policies. New Zealand’s poor R and D spending and low savings rate are hardly likely to strike a cord with East Asian economic policy-makers.

Many elements of the Asian media have a chip on their shoulder in regard to the immigration policies of Australia and New Zealand. This is especially true of the media in Malaysia and Singapore. The Singapore Times for example, often argues that Australia can take in many more immigrants and that it is still influenced by its previous ‘Whites Only’ Policy. Current immigration patterns to Australia and New Zealand do not show any clear bias against East Asian immigrants so the ‘Whites Only’ claim is largely unfounded.

Rarely mentioned in the Asian media are the environmental implications of large-scale immigration to Australia and New Zealand. Australia is an extremely arid country, which is struggling to balance the water needs of its farming and residential users. Australia’s thin soils and low topography make it especially vulnerable to problems like erosion, water pollution and excessive salt accumulation. New Zealand’s economy is heavily dependent on farming and tourism and these industries could also be undermined by a substantial population increase. In contrast to Australia, New Zealand is a mountainous country with a shortage of flat arable land and much of this is disappearing under urban development.

Politicians like Peters need to emphasis to Asian leaders that Australia and New Zealand are resource rich but environmentally vulnerable countries that need Asian markets for their products. From an Asian perspective, large scale Asian immigration into Australasia could compromise the region’s ability to supply primary products to resource poor Asian markets and provide viable business opportunities for the East Asian Diaspora.

1 Comment | East Asia, Immigration, nz politics | Permalink
Posted by mikecourtman