Alex's politico-economic blog roll: Raise the retirement age; 50% top tax rate; Public benefits of private ownership

Here's my politico-economic blogroll for the week to December 10. Not much from the economics blogs this week. Maybe they were working and being productive.

From the left.

1. Abolishing gift duty deemed urgent. Labour MPs are pretty annoyed about the urgency in Parliament this week. Walking around the place you can hear them all muttering under their breath about how unjust it is they have to be here while Charles Chauvel gets a nice holiday in the Americas.

Labour Finance spokesman David Cunliffe blogs on Red Alert that the govt's legislation for the abolition of gift duty was one of the first to be rushed through.

That’s right, at a time when Kiwi families are doing it bloody tough, when the recession is biting this year worse than last, when top earners have had two rounds of generous tax cuts, and when the government is confronted by evidence of large scale tax avoidance, their priority is abolishing gift duty.

Making it easier to transfer assets to the trusts or the kiddies (on lower tax rates) above the existing threshhold of $27k each per annum.

Surely not a prioirty in the Mana electorate, not a priority in New Lynn, nor quake-ravaged Christchurch.

Surely not an example of personal responsibility – where everone pays their fair share.

Surely not bringing relief to the squeezed middle. 

For National it is clearly a prioirty to bring yet further relief to the top.

2. Lift the retirement age. Marty G at the Standard is in favour of raising the retirement age to 67, saving NZ$1.5 billion. This comes after the retirement commissioner proposed raising the age (now 65) by two months a year from 2020 so it is 67 by 2033. Key and Goff are not having a bar of it though. Populists.

We have to face the reality that the retirement age should rise. Otherwise we are going to be carrying an exponentially growing cost from the combination of the aging population and rising life expectancy – devoting more and more of our wealth to supporting people who otherwise could support themselves.

I would rather we were using that money to support education, R&D, and clean tech. These are vital areas for our future that are being under-invested in while so much money is being taken up in super payments.

3. I like big bills and I cannot lie... Marty G also proposes a new tax structure. It includes 50% income tax for those on NZ$100,00. Yikes. That's Muldoonish (may have just created a new word there). Go on Marty, start a new left wing party and campaign on that buddy.

He starts off by saying govt brings in about NZ$60 billion in tax each year.

A better system would begin with a guaranteed minimum income. If every taxpayer received a tax credit of $250 a week, that would form a minimum income of $13,000 post-tax a year for everyone. That’s at or above the level of most benefits and more than most families’ Working for Families – and not far from the post-tax individual poverty line ($15,000 – most adults with incomes below $2,000 will be living with others on higher incomes, so would avoid poverty).

Of course, that’s big bikkies. 13,000 times 3.1 million taxpayers is $40 billion.

About half of that is going to be paid for by more or less eliminating the benefit/super/WfF/student assistance system which isn’t needed any longer, apart from topping up some special cases.

For the remaining $20 billion, some could be raised by making the income tax system more progressive, say starting at 10% and rising to 50% by $100,000. 50% isn’t a crazy top tax rate – its typical of many other developed countries and we got along just fine with much higher. The net tax bill for people with incomes under $100,000 would be lower than it is now even if the income tax on their earnings was higher because they’ve got the minimum income, and you could tweek the rates and thresholds to whatever point you like.

He likes Gareth Morgan's Big Kahuna idea too

The rest of the gap would be filled by a comprehensive capital tax like Gareth Morgan suggested in his ‘Big Kahuna’ idea (this is a tax on owning capital, not on capital gains) or a land tax on the Georgist model (the philosophy of the Georgist model is that an owner of land is depriving everyone else of the ability to use it, so they owe a rent to the rest of society). It would take only a 1% capital tax to fill the gap or about a 2% land tax.

Yeah, that’s going to be a lot for people with large capital or land assets. For example, say you’re a ex-currency trader with $10 million worth of property in New Zealand, you might be looking at a $200,000 per annum bill (you would be allowed to defer taxes, with interest).

4. Smart Goffy, smart...Rob at The Standard thinks Phil Goff's squeezed middle classes speech was a smart one. National MPs had great fun in the house this week explaining how similar the title to Goff's speech was to one given by new Labour leader Ed Milliband in the UK given a few weeks earlier.

This is smart work from Labour and Phil Goff. Squarely targeted at a middle New Zealand that saw little of National’s tax cuts and far more of their job losses and rising prices. Maintaining the economic line set out at Conference that allows for more hands-on direction of the economy. A focus on a “clean, green, clever economy”. Honest about the challenges and not taking the easy route of impossible promises. And pointing out the obvious, that National has failed to deliver on the economy, and has no viable plan to do so.

If I have one criticism of the speech, it is that the genuinely poor deserve as much air time as the “squeezed middle”, much more than the single throwaway line that they got. Working for Families lifted children out of poverty – be proud to build on that legacy! But beyond that, and of course a desire to see detail that will have to wait for the policy of election year, I have little to fault. I’ll be proud to be backing this Labour Party into election year.

5. With the Christmas spirit? Russel Norman writes at Frogblog how the Greens opposed the first reading of Peter Dunne's Taxation and remedial matters Bill because it would abolish gift duty.

Gift duty was designed to prevent people giving away all their wealth on their death bed to avoid paying estate duty. Estate duty was abolished in 1992.

Inland Revenue estimate that New Zealanders today spend up to $70 million a year on fees to set up gifting programmes to avoid paying the duty. (Gift duty kicks in when people gift more than $27,000 per annum.) As a result, gift duty only raises $1-2 million in tax revenue each year. If you believe IRD’s figures, gift duty is a very inefficient tax that serves only to make lawyers and accountants rich, so shouldn’t we get rid of it?

Maybe, but tax efficiency isn’t the only way to measure the worth of a law. Gift duty has incidentally acted as a check on the amount people can move into tax avoidance vehicles like trusts. Trusts can be used for the purposes of tax minimisation, defeating creditors, lowering personal worth to qualify for Working for Families, or depriving partners of their matrimonial property rights.

6. Get rid of investment clauses. No Right turn has a go at investment clauses in US free trade agreements. We're negotiating one with them at the moment.

One of the worst features of modern free trade agreements are investment clauses. First emerging in NAFTA, these allow foreign companies to sue governments for profits "expropriated" by regulatory changes. Quite apart from the practical effects, which have seen the US government sued over its efforts to prevent the spread of BSE, the Canadian government sued for regulating dangerous fuel additives, and the Mexican government sued for demanding companies clean up their toxic waste, such clauses are also objectionable on principle.

They basically say that democratic societies are not allowed to regulate where it might cause someone to lose money - even where such regulation is clearly in the public good. Such clauses freeze regulation and forbid us from acting on new challenges (or responding to old ones once the public will is there). The only people who win from them are sociopathic corporations who want to pollute, lie, and sell us unsafe products.

From the right

7. You watching Phil? David Farrar at Kiwiblog says Labour should take note of Obama's tax cuts....

This week Obama stuck a deal with Republicans which sees him try to revive the US economy with tax cuts instead of extra spending. Labour in NZ should take note. Obama has agreed to:

• Extend the Bush tax cuts for two further years which were due to expire at the end of 2010
• Reduce for one year the Social Security payroll tax from 6.2% to 4.2%
• Increase the threshold for the death tax from $1m to $5m ad reduce the rate from 55% to 35%

It will be interesting to observe the President’s poll ratings in the next month.

8. Raise the age. Farrar too thinks we should raise the retirement age and he likes the new Super formula being propposed.

The compromise of having the increase be halfway between the CPI increase and the average wage increase is excellent. It means that in real terms national super will still grow pretty much every year, but that it will become more sustainable.

NZ has the most generous public superannuation scheme in the world. Those currently retired and soon to retire should continue to get it. But those retiring after 2025 (my preferred date) should be on a new scheme along the lines outlined by the Commissioner.

9. Privatise the bastards. Yes same into as last week, but Roger Kerr has another post on the 'public benefits of private ownership'. Go on Roger, start a new right wing party with Don Brash...

At the heart of socialism is an ideological belief in “public ownership of the means of production, distribution and exchange.”

Like Karl du Fresne, I am amazed at the persistence of this belief in New Zealand.  Around the world governments have been progressively pulling out of owning commercial businesses for over 25 years.  Even Cuba has embarked on privatisation this year.

There is very broad agreement among economic researchers that privately owned businesses, on average and over time, outperform publicly owned ones.  This is an empirical finding, not an ideological one.

A large number of other myths about privatisation persist in New Zealand.  For an elaboration and a rebuttal, see this report for the Business Roundtable by Phil Barry.

Governments have important roles to play in the economy.  We need them to focus on these roles and to perform them well.  We don’t need central and local government politicians to be distracted from them by trying to run commercial business.