Scoop Election 08: edited by Gordon Campbell

On John Key’s shifting rationales for tax cuts (& leaky homes)

May 18th, 2010

[Leaky homes below]

john key, Maurice williamson, john banks, Kerry prendergast
See: PM’s Presser Audio & Report – Leaky Home Loan Scheme

When asked by Scoop at yesterday’s post-Cabinet press conference to name a couple of countries where tax cuts had resulted in economic growth, Prime Minister John Key cited the United States. Surprising, given that

(a) over half of the benefits from the Bush tax cut programme have accrued to only five per cent of the population,
(b) they cost more than the health reforms enacted by Barack Obama and
(c) since they were deficit financed, the Bush tax cuts have also added a huge $379 billion bill in interest payments to their initial $2.11 trillion in revenue foregone.

More to the point, the Bush tax cuts did not result in economic growth. For wider yet related reasons, the Bush era ended in the worst recession in decades. As New Zealand’s own recent history has also shown, there is no causal link between tax cut programmes that disproportionately benefit the wealthy, and economic growth. At best, such tax cuts appear to trigger only brief, import-driven retail binges that drive up inflation – what we get in tax cuts, we pay for soon after in higher interest rates – and leave us with a worse current account deficit.

Undaunted, Key is now urging New Zealanders not to feel jealous when they see that the bulk of the rewards from Thursday’s tax cuts will go to the wealthy few. That outcome is quite deliberate. The reason for doing so, Key explained, is to try and ensure that the well-paid – doctors and other professionals – stay in New Zealand, and do not head off overseas:

“We can be envious about these things but without those people in our economy all the rest of us will either have less people paying tax or fundamentally less services that they provide,” he said.

He added that those on the top rate, expected to be cut from 38 per cent to 33 per cent, consumed more and therefore paid more GST.
“But … those who pay the top personal rate fit into some core and critical categories for our economy. They include doctors, entrepreneurs often, scientists, engineers, lawyers, accountants, school principals, nurses,” he said.

The top rate kicks in on income above $70,000.

“On Thursday [you will see] a deliberate attempt to make sure those people stay and put their skills to work here in our economy,” Mr Key said.

This is complete garbage, of course. Given the recent OECD research that shows we already have one of the lowest tax burdens in the world, why would such people be driven to emigrate to countries where they would face a higher tax burden? High taxes are not, and logically cannot be, the reason they are emigrating. Almost certainly, it has more to do with the kind of society that these failed policies have generated over the past 30 years. In any case, there doesn’t seem to have been any research into the reasons why they are going – or into how big the payoff would have to be to achieve Key’s desired outcome of keeping them at home.

In passing, Key’s spin that tries to depict the wealthy paying more of the GST take as being a socially beneficial act – they spend more in GST, so they therefore deserve to be given more to spend – is breath-taking. The relevant issue with any consumption tax like GST is the degree of discretion involved. In reality, the poor pay a higher proportion of their income on GST, because they enjoy less discretion about spending a bigger share of their income on the basics to survive. How ironic then, that in virtually the same breath, Key should present his tax reforms on Thursday as serving the cause of fairness. Somehow, this goal will be achieved by rewarding the affluent who have been avoiding tax, by lowering the tax they will have to face in future. Yep, that sounds fair.

In fact, all these nominal goals – economic growth, fairness, retention of professionals – are rationales for the politics of greed. The one certain thing is that the programme of tax cuts on Thursday will increase income inequality in this country. To date, Key has been silent on how tax policies that promote income inequality will foster (a) economic growth (b) fairness and (c) make New Zealand a more desirable country for people to live in, and raise their children.


leaky home, leaky building

Leaky Homes formula

The core formula unveiled at yesterday’s post Cabinet press conference to address the leaky homes problem consists of a 25/25/50 deal. Central government (ie taxpayers) would meet 25%, local government (ie ratepayers) would stump up with 25% and the victim would meet 50% from fresh bank loans backed by central government.

Many of the basic details were still hazy. Such as, what would happen if the leaky homeowner then defaulted on their new bank loan. There would be safeguards, we were assured, to make sure that what got fixed was only what was originally intended and that no “betterment” was sneaked into the repair job. How this oversight would be carried out was unclear. The new plan was voluntary, and people could still choose to sue local government for its lax consent processes – but if people registered for the plan, they would have to forego the right to continue down that legal avenue. Only claims pertaining to the past ten years could qualify and could be registered with the scheme and – Key advised – it had been estimated that the formula would cost $1 billion, though this would not be capped. Those who met the conditions would be paid out, in terms of the formula. Where this money would from exactly – in the case of central and local government alike – was not entirely clear.

Given that Key presented the scheme as a means of resolving the leaky homes issue “ for once and for all” some commitment to fresh regulation and oversight would have been welcome, even if only as a signal that lessons had been learned and that the open slather errors of the past would not be repeated. No such assurance was given. No determination to ensure that those responsible would be pursued was made. We were all, somehow, held to be responsible. No apology was provided either, even though some of those on stage – John Banks and Maurice Williamson for example – were part of the government that had championed the deregulation of the industry that has now left taxpayers and ratepayers to pay for the consequences.

No matter how often the self regulated or unregulated market ends in disaster, it is still seen to be a good thing to scrap regulations on business, and to remove oversight of their activities. Cut taxes, even if there is no social benefit in doing so. Remove regulatory oversight, even if the public gets to pick up the tab later. Bob Dylan must have had the likes of John Banks and Rodney Hide in mind when he concluded long ago that “There’s no success like failure / and failure is no success at all.”


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    1. 5 Responses to “On John Key’s shifting rationales for tax cuts (& leaky homes)”

    2. By Stuart Munro on May 18, 2010 | Reply

      It is not the tax rate but cost of living & pay rates that drove me overseas. My friend, who is a doctor, does 6 week stints in Australia – and who wouldn’t, for two and a half times the money & 60% of the workload.

      When it comes to Tax, the PM is pretty Mexican – which is to say Juan Key. Happens to any small stupid country that follows the policies America can because of the advantages it can derive from its enormous economic geopolitical influence. If you don’t have the influence it can’t work. Notice the Philipines hasn’t become a financial hub either.

      Leaky homes – what are we, 15 years on, and the culprits still haven’t been hanged? This country needs a good dose of vigilante justice.

    3. By mike on May 18, 2010 | Reply

      The reason why nobody has yet been hanged over the leaky-homes saga is that “blame” is diffused in varying degrees among many many individuals.

      More to the point, it is a classic example of “system failure” arising from the modern belief that frameworks of interlocked expertise (architects, regulators, inspectors, builders) will always produce the best results. This is an “ideological” problem just as profound as belief in “self-regulating market economy”.

      The truth is that only a system of “qualified experts” could have produced a failure as catastrophic as that of the NZ leaky home syndrome.

      The lesson: build your own house next time!

    4. By David (Northland) on May 18, 2010 | Reply

      Of course, such a debacle doesn’t stop the government from considering self-regulation again in terms of the Building Act 2004, to allow for more flexibility!

      Round and round we go.

    5. By jimmy on May 18, 2010 | Reply

      I seriously cannot understand the way people eat up the ‘cutting red tape’ mantra. Lesson of the day, you always pay. It can be either more costs to build your house or a wopping bill for everyone when the house leaks.

      Once again National gets an F- for economic policy.

    6. By mike on May 18, 2010 | Reply

      Hmm, guessing those “cutting red tape” and “self-regulation” comments might be directed at my comment.

      To explain. I certainly don’t think that “self-regulation” among builders will ever work, unless we had some kind of craft-guild system that better respects traditional designs and solutions evolved through centuries of trial and error.

      Building one’s own home, which is what I suggested, will inevitably lead one to understand how houses actually work, why gables are useful at keeping the rain off vulnerable spots, where walls meet roofs, for example.

      Do we have an epidemic leaky house syndrome among self-built homes? No.

      Although the media loves to sensationalise the very occasional collapse of a self-built concrete wall, for example, they don’t make a comparison with the failed construction of 10000’s of houses by “the experts” (i.e. professional builders).

      If you want to more fully “get” what I am talking about I suggest you track down the book “The Human House” by local NZ architect Tony Watkins.

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