Tax Hikes are Healthy?

Browsing through Wellington’s morning daily, The Dominion, breakfasting readers recently ran the risk of choking on their cornflakes. “Tax rises good for us, says Anderton,” screamed the headline.
The accompanying report told readers that deputy prime minister and Alliance party leader, Jim Anderton, believes New Zealand can increase personal taxes without fuelling the brain drain.
New Zealanders living overseas would come back regardless of the higher tax rate, he said, so long as they could be sure of getting good jobs and being well paid, that the economy was growing, and that the nation provided good social services. Likewise, the Government’s plans for building “knowledge economy” would be secured by assuring the country’s top brains of better health and education and an economy developed around technology.
For those curious about just how high taxes must climb to be good for us, the article recalled Anderton’s suggestion that the top tax rate could be lifted from 39c to 47c in the dollar for people earning more than $100,000.
An antidote to the heartburn this prescription was bound to induce among Dominion readers earning more than $100,000 was dispensed few days later by ACT Member of Parliament, Dr Muriel Newman. Her contention is that, in an age when financial markets are more open and capital more mobile than at any time in the country’s history, tax of 33 percent on all profits effectively drives up the cost of capital and creates disincentive to investment.
Tax, she said, acts as wedge between what workers earn and what they get paid and creates gap between what consumers pay for goods and services, and what they cost. GST adds 12.5 percent premium across the board, and the huge cost to small business of administering our extremely complex tax laws exacerbates the problem. Newman urged “a radical reduction in income tax – to something like 20 cents in the dollar” to stimulate the economy “in way this country hasn’t seen for many years”.
Other OECD countries “have recognised the negative consequence of high tax regimes and are now focusing on reducing taxes and simplifying tax laws” to increase national productivity and family wellbeing, added Newman pointing out that President George Bush’s tax-cut package had recently become law in the United States.
But Laura D’Andrea Tyson, dean of the Haas School of Business at the University of California in Berkeley and chair of the council on Foreign Relations Task Force on Japan, is not impressed. Writing in Business Week she suggested that when it comes to tax cuts “fuzzy math and fuzzier economic logic have prevailed over fiscal responsibility and fairness”.
Bush’s budget was, she said, aimed mainly at helping high-income taxpayers. About 37 percent of the new tax cuts would go to the wealthiest one percent of taxpayers who pay only about 25 percent of federal taxes and own 40 percent of the nation’s wealth. The average percentage gain in after-tax income for those in the top one percent would be about three times larger than the gain for those in the middle and about seven times larger than for those in the bottom 20 percent.
The cuts, said Tyson, came on top of dramatic increase in income disparities during the past two decades. Most Americans believe people who worked full-time should be able to earn enough to keep their families from poverty, but “this is not the case for millions of American families”, and the Bush budget did little to improve the situation.
Example: an individual employed full-time at the minimum wage earned $7.21 an hour in 1999, far below the $8.21 an hour necessary to keep family of two adults and two children out of poverty. About one-quarter of the workforce earned less than this living wage.
Tyson’s hypothesis suggested that the 20 percent income tax rate advocated by Newman would widen wealth disparities in this country. But what about company tax rate of 20 percent?
A study by economics consultancy, Infometrics, found reducing company taxes from 33 percent to 20 percent over six years would not incur fiscal losses for the Government, but would generate an extra 1.1 percent on GDP growth, 3.6 percent lift in investment, 1.1 percent increase in employment, an extra 1.5 percent in exports. Infometrics confined its econometric modelling to lower tax rate only on retained earnings. Tax rates on the dividends received by individual shareholders would remain unchanged.
In other words, the study acknowledged political realities. The Labour-Alliance Government in which Anderton serves might look at company tax rate that boosts the economy, but the high-income set can forget about measures that would lighten their tax burden and exacerbate wealth disparities.

Bob Edlin is is regular contributor to Management magazine.

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