Tuesday, May 24, 2005

ACT tax policy

Hide said "Treasury says tax cuts of this magnitude would add 1 to 1.5 per cent to New Zealand’s growth rate."

Till I hear it from treasury's own mouth I will assume that means - "maybe 1% if you cut taxes but don't reduce spending"

Cutting tax rates in themselves have a positive effect on economic growth but cutting government spending has a negative effect. Often the former has a lesser effect than the latter (as demonstrated by international studies).

It would be interesting to see a regression of the effects of taxes and other similar policy instruments on economic growth.

Of course this would probably favour the right leaning argument since you not only make a short term decision but you also borrow against a future you and your children. (So we need a lot of data!)

I am perfectly willing to accept that this might come up with the argument that tax rates should be lowered but we need to be honest in the debate and say exactly what spending we should cut in order to reduce those taxes and "spending the surplus" doesn't count because the surplus would have eventually have been spent on something - you need to spell out which of those things you will now NOT buy.

The basic things to consider are
1) If I cut taxes by W I can cover it by cutting the spending on X (lets say education) then this will cause economic growth of Y and negative effects Z.
2) If I change to a flat rate of tax (by raising the lower rate and lowering the top rate - otherwise it confuses two effects) then this will reduce tax avoidance by X and cause economic growth of Y but having a higher bottom tax rate will cause negative effects Z.

If your Y's are bigger than your Z's go ahead but it never seems to get presented that way. Usually it just focuses on ideology where you can seldom find any agreement.

For example, this sort of debate is often surrounded by arguments about "tax is theft". It seems much of the problem here is created by the system that allows all sorts of deductions from personal income tax and results in people being offered jobs based upon the before tax rate. They can then get all upset about the theft. Maybe people should be encouraged to offer after tax wages.

In an efficient national market it should make no difference since all employees will ask for "minimum wage" (i.e. where work = leisure) and all employers would pay minimum plus tax and compete fairly. Without the tax the employees would still get minimum wage and the employers profits would still be about the same.


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