ECONOMICS Taxing Times

The Government giveth, and the Government taketh away. In these days of handsome fiscal surpluses, it taketh away more than it giveth.
In the 2004/05 financial year, it has budgeted to spend $44.5 billion. It will collect revenue of $48.9 billion, mostly from taxes, including corporate tax of $7.1 billion.
Low and middle-income earners will be the major beneficiaries by far, but businesses can’t complain they were overlooked. The several pre-budget announcements included funding of $7.5 million this year and in the next two years for the “market development assistance scheme”. The rationale: New Zealand businesses are long way from export markets and this money will provide part-funding for trade promotional activities to help them develop links with overseas businesses and customers.
The Government also allocated up to $10 million year extra to New Zealand Trade & Enterprise for the next three financial years, rising to $12 million year in 2007/08 and subsequent years, to strengthen the agency’s global network and boost its capacity to help local industry to develop and execute successful international market development strategies.
There was extra funding of $1.7 million this year and $800,000 next year to support negotiation of free trade agreement with China, closer economic partnership with Thailand and three-way CEP with Chile and Singapore.
The Government presumably would like us to think it is pouring public money into an export drive. Against total spending of $44.5 billion, however, the export stuff is dribble and was announced while exporters were smarting at Customs impost described by farm leaders as “terrorist tax on traders”.
Customs Minister Rick Barker virtually admitted the fees are tax when he announced the Government’s intentions on 6 November last year. In the wake of the 11 September 2001 terrorist attacks, he explained, the United States was insisting that traders had security systems in place to prove that goods crossing its borders had not been interfered with. European Union and other nations with which New Zealand traded would also implement the tougher standards. The Customs Department would need about 130 extra staff and new x-ray and other technologies to ensure that high-risk cargo could be checked and cleared without delay. Alas, the cost of establishing and maintaining these measures would blow the department’s budget – “so the Government has decided that those who benefit from New Zealand’s reputation as safe and secure trading partner should contribute toward the cost of meeting these new requirements”, said Barker. The new security fee would recover about $8 million from the export sector, $4 million from importers and $8 million for security screening of goods trans-shipped through New Zealand.
But are traders the sole beneficiaries of the tighter security? That became crunch question for aggrieved business organisations, which set up the Travel & Trade Industry Coalition to evaluate the Government’s proposals and lobby against them. They argued that protecting the economy from the effects of terrorism is public good, like the police or armed forces, and specific sectors of the economy should not be singled out to pay for public good.
A paper commissioned from Capital Economics buttressed the coalition’s argument that the general protection of public safety is crown responsibility. It is public good in that: (1) any benefit to any one resident does not detract from the benefit to any other resident; and (2) it is not possible to exclude citizens from these benefits if they refuse to contribute to their share of the costs voluntarily. As result of (2), government spending on public goods has to be funded from taxation, virtually by definition, the paper contended.
Capital Economics’ analysis “did not find it remotely plausible that the net benefits of the additional Customs spending accrued 100 percent to cargo carriers and exporters, let alone importers” and found there was “a strong and incontrovertible public good argument for general taxpayer funding and very little case, if any, for taxing imports”.
As to outgoing goods and travellers, it said “there is very credible public good case for general taxpayer funding, and convincing evidence from the Government’s statements and its behaviour that it was motivated by general public good considerations in taking its expenditure and regulatory decisions”.
The Government bought some of the argument. It will cough up half the $8 million it had originally planned to take from exporters. Even so, business was left grumbling that both the American and Canadian governments are meeting their own costs as well as contributing to industry costs. Canada’s government is funding up to 75% of industry costs in addition to public good general expenses.

Bob Edlin is regular contributor to Management.

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