Short straws and tall poppies
The government’s decision to go ahead with across-the-board income tax cuts and make a surprise drop in the corporate rate, even if offset by a rise in consumer taxes, show it's a world away from its predecessor, which saw tax as a means of sharing rather than generating wealth.
You could call it the “tall poppies” budget, because it will benefit those who are likely to do most to lift New Zealanders’ living standards, reduce the government’s deadweight impact on the economy, and provide greater rewards to those who deserve it.
Prime Minister John Key and Finance Minister Bill English have refused to be sidelined by accusations they are only helping “rich pricks” – by people who do not know the difference between wealth and income.
Only short straws came from Michael Cullen’s 1999 pre-Christmas “eat it!” tax rise – which pushed the top marginal tax to 39c in the dollar. This boosted the outflow of highly-paid and skilled New Zealanders and distorted the tax system, which in turn deflated economic growth prospects.
A series of ways to attract those expats back proved just as bad, while loopholes encouraged many non-salaried taxpayers to lower their tax burden through trusts and other vehicles, allowed well-off others to claim tax subsidies through Working For Families, boosted the purchase of residential property to claim tax deductions, and even gave free rides through the student loan scheme.
Today’s budget won’t provide any “step change” in the economy – but it will finally unwind some of these more egregious drags on the economy, while also trying to keep government spending increases to a minimum during a time of recovery.