John Armstrong's opinion: Labour's tax policy is just tinkering around the edges

John Armstrong
Source: 1News

Tinkering while Rome burns? That’s for sure. Labour’s tax policy is so scant, skimpy and scrawny that it hardly warrants being classified as a policy at all.

Lumping together a few feeble and timid alterations to the tax system — the changes do not deserve to be dignified by being described as reforms — does not an election policy make.

The meagre offering unveiled by the dominant governing party this week deals with just three matters — yes, that’s correct, a mere three elements out of the scores of issues variously ancient and modern which make for never ending debate about the adequacy of tax settings.

It goes without saying that tax policy is a prime instrument of economic management. Labour seems to have forgotten that. Or, more likely, doesn’t want to know.

In short, Labour’s tax policy is the tax policy you have when you don’t want to have a tax policy.

It is what you get when a party’s election strategy is driven by a safety-first mentality.

For evidence of that assertion, take a closer look at the policy’s three planks.

One is a pledge not to do something, specifically not to raise taxes on fuels.

A second element of the policy is to close loopholes exploited by multinational corporations to stop them avoiding paying tax in New Zealand by shifting their profits offshore.

That is a modern variant of the promise uttered by every finance minister since the dawn of time to “crack down” on tax avoidance and tax evasion. That “commitment” would be only be worthy of mention if the Inland Revenue Department was not already doing its utmost to thwart the egregious practices of foreign-based companies who mount such raids on the New Zealand exchequer.

That leaves the only surprise contained in the policy — Labour’s intention to raise the top rate of income tax from 33 per cent to 39 per cent on earnings above $180,000.

To read the rate change as a nod to those who reside on Labour’s left flank would be a mistake.

Like other aspects of the policy, that promised hike in tax paid by the seriously well-off has precious little to do with the mechanics of tax and everything to do with the politics of tax.

Labour’s package of tax all-sorts measures been panned not so much for what it contains, but more for what it doesn’t. And deservedly so.

The absence of any hint that Labour might revisit the much-needed reform of the country’s dilapidated and increasingly not fit for purpose taxation system is especially disappointing, but ought surprise no-one.

Jacinda Ardern hauled up the white flag of surrender on that front after Winston Peters and his fellow New Zealand First MPs blocked the introduction of a capital gains tax back in April last year.

So frustrating, demeaning and undermining of her authority was that sorry experience that she vowed that what was her third attempt during her time in politics to get a capital gains tax off the ground and into the statute books would be the last while she held the office of prime minister.

Some 18 months later, however, New Zealand First looks to be out of government if not out of Parliament altogether.

The odds now strongly favour a Labour-Greens Administration emerging from next month’s general election.

Long-time advocates of a capital gains tax, the Greens’ current policy wish-list — as displayed in the party’s “Poverty Action Plan” — includes a detailed model of a wealth tax.

James Shaw, the party’s co-leader and finance spokesperson, has rated the introduction of a wealth tax as a priority for his party in any post-election negotiations on the formation of the next government to which the Greens happen to be party.

Were it possible for Ardern to come up with the right phrasing which enabled her to exercise a u-turn without incurring too much embarrassment, a wealth tax would still be stymied, this time by a pledge in Labour’s tax policy of “no new taxes” for at least the next three years.

That blocking mechanism may yet turn out to be rather academic.

It is not just Winston Peters’ rebuffing of his coalition partner’s efforts to reform the tax system which has destroyed any appetite on Labour’s part for revisiting the issue.

The ravaging of the economy at the hands of Covid-19 has pushed major structural reform in every sphere not just onto the back-burner but off the stove-top entirely— and likely so for the foreseeable future.

When it comes to policy which could be described as “transformative”, forget it.

That was last year’s thing. That was BC — Before Covid.

There is another Labour pledge which likewise slams the door shut on any meaningful tax reform.

Labour is not the only party committed to raising the top tax rate. The Greens’ action plan also contains an intention to lift the top tax rate by introducing two new tax bands. The first would see income earned over $100,000 taxed at 37 per cent and income earned above $150,000 taxed at 42 per cent.

The net result is that someone earning $200,000 would pay around $4,500 more in income tax a year under the Greens’ policy than under Labour’s.

The difference would not seem to be so large that a compromise could not be reached during post-election negotiations between the two parties.

There is a problem, however.

Alongside the promise of “no new taxes”, Labour’s tax policy also contains a promise that once the change in the top tax rate flagged this week is implemented, there will be no further increases in income tax for the next three years.

The Greens have taken strong exception to what the party clearly regards as an attempt by Labour to pre-determine the outcome of post-election talks.

Shaw has warned Labour that if the Greens holds the balance of power, the party retained the option of walking away from those talks and might instead sit on Parliament’s cross-benches, rather than being a partner in a coalition government.

Even allowing for the dubious games that parties play by making rash positioning statements during election campaigns, Shaw was not making an empty threat. Labour would very likely need the Greens’ votes to have the numbers to get the required legislation implementing any lift in the top tax rate through Parliament.

Shaw’s innate politeness can make it difficult to judge when he is angry or not. He seemed to be genuinely miffed —and understandably so.

It is important to note that the stand-off between the supposed centre-left allies is not a function of the Greens’ penchant for adopting more extreme stances in order to out-flank Labour. Not on this occasion anyway.

It is the product of Labour’s nervousness about promoting a tax rise in an era when the prevailing dogma has been “tax cuts good, tax hikes bad”.

True, Labour has previously axed tax cuts scheduled by National before they took effect. That is not the same thing as raising them of one’s own volition.

True, Labour went into the 1999 general election with a manifesto commitment to raise the top tax rate to 39 per cent for income earned above $60,000.

The rise did not hinder the party. Labour cruised into power, but more because of the unpopularity of the tired National government it replaced.

As Grant Robertson, the architect of Labour’s policy, keeps stressing, the number of people who will end up paying tax at Labour’s new top rate — around 2 per cent of all income earners — is tiny.

It would mean $23 a week less for someone earning $200,000. Don’t worry, though. Destitution doesn’t beckon for the wealthy. Such a change in tax on that income would add up to a cut in net weekly income of all of 1 per cent.

It is a fair guess that the great bulk of those in that category would not be Labour voters anyway.

The policy is so cautious, you have to wonder why Ardern and Robertson even bothered to conduct this exercise in minimalism. They bothered for reason that they need something to wave by way of raising fresh revenue to rebut National’s and ACT’s charges that Labour is borrowing billions upon billions of dollars without giving a toss about the fiscal and debt repercussions down the track for the government accounts

At the same time, the last thing that any government would wish to do is to increase taxes such to depress economic activity even further than is already happening under the Curse of Covid,

Another reason for caution is the horror story which was Labour’s tax policy at the last general election. Ardern and Robertson got themselves into a terrible tangle as the pair endeavoured to lay the groundwork for the introduction of a capital gains tax without being upfront with voters as to their intention.

It was a mistake that neither politician will make again. This time Labour’s priority is to get tax policy off the election as early as possible during the six-week campaign, rather than risking the possibility of such a contentious matter pushing its way onto the agenda much closer to election day.

That their tax policy has been a non-event won’t worry Ardern and Robertson in the slightest. More likely, they will be delighted.