Magazine article New Zealand Management

Economics: Tax: Key's Elephant in the Room

Magazine article New Zealand Management

Economics: Tax: Key's Elephant in the Room

Article excerpt

Byline: Bob Edlin

Slashing public expenditure isn't the only way to balance the budget, British political writer Mehdi Hasan told readers of The Guardian earlier this year. We need to talk about tax, too, he argued.

He did not pretend to like paying taxes but he recognised how tax revenues civilised a country by funding high-quality public services, the welfare state, national defence, much-needed infrastructure projects and so on. Progressive taxation of income kept inequality in check, for good measure, by redistributing from the rich to the rest.

There were just two ways to close a fiscal deficit when an economy is operating at full potential, Hasan maintained. One is to cut spending, the other is to raise taxes (the Key Government's plans to sell shares in state assets have the same revenue-raising effect).

Hasan's beef was with deficit hawks who assume that cutting spending is the preferred route to fiscal balance, rather than raising more revenue via the tax system. Fiscal policy had been reduced "to a sterile debate over public spending" in recent years and "deficit reduction" had become a convenient euphemism for cutting public expenditure.

Britain's deficit had been caused not by rises in public spending, however, but by a collapse in tax revenues triggered by the economic crisis. Poll after poll in Britain showed overwhelming public support for a tax on bankers' bonuses; a mansion tax on multimillion-pound properties; a windfall levy on the oil and utility companies; a Robin Hood tax on financial transactions; and a one-off wealth tax of 20 percent on the richest 10 percent of households. Political leaders accordingly had to lift their self-imposed taboo on discussing tax, if they were serious about the deficit.

Tax has not been a taboo topic for political discussion in this country. But the Key Government, having reduced income taxes when it lifted GST, is determined not to raise them again. Nor will it entertain the idea of a special levy to deal with the particular challenge of rebuilding Christchurch.

Yet the financial statements for the first seven months of the Government's financial year (to 31 January) show a deficit resulting from too little revenue rather than too much spending. …

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