published as "Claim of high tax rate unfairly represented", NZ Herald, 9 September 1998, p.A15

 Reply to Patrick Caragata on Taxes 

Keith Rankin, 22 August 1998


Patrick Caragata, in his reply (NZ Herald, 29 July 1998) to Susan St. John (Herald, 23 July), claims that from 1914 to 1994, there was a steady rise in the propensity of Governments in New Zealand to levy taxes.

If so, that means Ruth Richardson must have been the most taxing Finance Minister (1990-93) in New Zealand's history.

Tax increased during the two world wars and the Great Depression of the 1930s. Likewise, in the post-war years, income taxes did increase relative to GDP. Most of that occurred in years of moderate or high inflation, with people moving into higher tax brackets as their wages were adjusted (a process known as "fiscal drag" or "bracket creep"), and as a result of declining GDP, in 1967-68, 1977-78, 1982, and 1986-1992.

It is quite mischievous to present the 1960s as a period of low taxes, and the early 1990s as a period of high taxes. In the 1960s, top personal tax rates and company tax were set at around 50%, much higher than the 33% from 1988.

The main difference between the two periods lies in changes to the ways that families and businesses received social assistance. There was, in the 1960s, a comprehensive range of income tax allowances, along with a regulated labour market that paid men a family wage rather than a market wage.

The tax allowances were accounted for as deductions from tax, whereas most of their modern equivalents are accounted for as benefits. The family wage was like a tax, paid directly from employer to employee, whereas family support since 1988 has involved the government as an intermediary.

As well as high rates of income tax, the 1960s featured high levels of indirect tax, high tariffs on imports, and death duties. Many New Zealanders remember the black budget of 1958 and the Muldoon mini-budgets of the late 1960s. Death duties were abolished by Ruth Richardson about a year after the 1991 benefit cuts.

In the 1980s we were told that the kind of tax system we had in the 1960s and 1970s created many economic inefficiencies because of both the high rates of tax and the "distortions" created by the many allowances and exemptions. Nevertheless, Dr Caragata, ostensibly an advocate for low taxes and market freedom, seems to prefer the tax scales of the 1960s to those of the early 1990s.

The best way of distinguishing a high tax regime from a low tax regime is the corporate tax rate: eg at 45% in 1974; 33% after 1988. By that criterion taxes were much higher in 1974 than in 1994.

Once we make the necessary accounting corrections, the high growth period that ended in 1974 can be seen to have been a period of high taxation.

Likewise, the high growth decade following the trough of the Great Depression was very much a high tax decade compared to the 1920s. On the other hand, the low tax period from 1988 has been one in which per capita growth rates have been little more than half of the average for the century.

There are two reasons why taxes appeared to be high in relation to GDP in the Ruth Richardson years of the early 1990s. The first reason is that GDP fell. The second reason was that almost all benefits were accounted for, correctly, as benefits; ie as a part of the social wage.

This change in social accounting was reinforced by the tax surcharge on New Zealand Superannuation. The surtax made it look as if superannuitants contributed huge amounts to the national coffers, when in fact the surtax was a clawback on a benefit. Similarly, by making benefits taxable in the 1980s - a simple accounting exercise - the total tax take appeared to increase, when really it did not.

Dr Caragata is concerned about "low-quality" government spending. It is clear from his emphasis that he sees welfare payments as being the majority of such "low quality" spending, ignoring Susan St. John's point that welfare benefits are in fact spent by beneficiaries, and not by the government.

If we can claim that the spending of beneficiaries is low quality, then it's only a short step to claiming that the similar spending of waged workers is also low quality, and that wages should also be slashed.

Dr Caragata's misplaces the critical years 1988-1994. By ignoring the 1988 tax cuts and emphasising "Bill Birch's tax cuts in 1996" as "pioneering the way down the tax mountain", he has managed to put those years of negative growth into his group of high tax years (1971-1994).

This is a kind of economic gerrymander; drawing the boundaries in the wrong place in order to yield the result that best suits one's ideology.

When the problem of the "tax burden" is formulated properly, the problem simply disappears. Taxes, like wages and profits, are a burden to those who pay them and an income for those who receive them.

The present push to cut income tax is a cynical attempt by a small number of privileged people who benefited from huge tax reductions in 1988 to win another similar gain. Tax rates appear to be high today only because low income earners get very few tax concessions. These privileged people are using the high taxes paid by low income earners to justify further tax concessions for themselves.

Ruth Richardson was not an advocate of high taxes. The idea of implicating her as such is as absurd as Dr Caragata's conclusion that tax benefits to the rich should replace social welfare benefits to the poor.


Rankin File