David Seymour says taxation "can provide an effective social safety net" but that wealth redistribution is just used "to counter policy failings". Fixing those should be the priority

By David Seymour*

If a government function is underfunded, it does not follow that we need to tax people more, or even that our current level of taxation should be tolerated.

If the Government wants to boost funding of a programme, it should also seek to cut wasteful spending. This way, we can close funding shortfalls without subjecting earners to an undue tax burden.

For example, the Government employs an army of 2500 policy analysts (salaries averaging $90,000) and over 5000 managers (salaries averaging $124,000) – that's almost $900m. Why not have fewer top-down planners and more frontline workers with skin in the game?

A union like the PSA would be met with a more positive response from parties of the right if it offered guidance on identifying areas of waste. In theory, they should have great insight. Yet the word ‘waste’ does not occur once in the PSA’s series on tax.

Increasing our productivity would also raise revenue for core services like healthcare and education, without punishing New Zealanders with higher rates of taxation which could in turn stifle incentives to work and produce, suppressing productivity and constraining the country’s ability to provide quality services – private or public.

The state currently spends over $17,000 for every person in New Zealand. That’s over $85,000 for a family of five. This figure continues to increase in real terms. The unions will always say that’s not enough, that we could solve any given social problem if only that figure was higher.

But the reality is that the public sector is not the only source of societal good. The private sector does far more to increase the welfare of New Zealanders, by producing wealth in the form of goods, services, and housing, all shaped to meet the diverse demands of individual New Zealanders. Every cent ‘invested’ in a public service is a cent that can’t be deployed in this private market.

Except it’s actually worse than that – Treasury estimates that every dollar taxed bring 20c of ‘deadweight’ costs – the effect of reduced incentives to work or grow a business. In other words, every dollar of tax taken must provide at least $1.20 worth of benefit in order to be justifiable.

Taxation and wealth redistribution can provide an effective social safety net, and establish an acceptable minimum standard of living for those unable to work. But if we are committed to increasing the welfare of all New Zealanders we must increase the size of the metaphorical pie produced by businesses and individuals across the country, rather than simply rearranging the slices.

Wealth redistribution is often introduced to counter policy failures. For example, bad land-supply regulations create a housing crisis which leads to calls for a higher accommodation supplement. Or ineffective regressive tobacco taxes cause poverty leading to calls for higher benefits. ACT’s conclusion is that it’s always better to fix the underlying policy.

The good news for supporters of a high-tax, redistribution-heavy welfare state, is that they have New Zealand’s governing party on their side. Steven Joyce openly boasts about the increasing proportion of the tax burden that falls on high earners, and calls government surpluses (taxpayer deficits) ‘dividends’ for New Zealand.

And National’s Budget, while showering families and low-earners with tax credits, failed to adjust for bracket creep in the top bracket, increasing the rate of wealth redistribution while increasing spending on social and corporate welfare. The headline of every other Government press release is focused on the input – the dollar figure of new spending. Outputs be damned.

So in a sense, the PSA needn’t have released their series on tax – they’ve already won the argument.

Meanwhile, ACT is left as New Zealand’s only party advocating opposing higher taxes and new spending. ACT would cut the tax rate for every income bracket and ensure no New Zealander pays more than 25% of their pay rise in tax. This is could be enacted without cutting a cent of spending – ACT would simply return growing surpluses to the taxpayers who produced them.

And we’d bring corporate tax rates (all but ignored in the PSA’s tax series) down from 28% to 25%, with a long-run goal of cutting them further, keeping competitive with other countries doing the same. These tax cuts would be funded by cutting $1.1 billion of wasteful corporate welfare (funding for sports events, Callaghan Innovation, overseas promotion of New Zealand businesses, etc).

And ACT would end bracket creep permanently by indexing income tax bracket thresholds to inflation. This means that if a future government wants to increase the proportion of tax taken from New Zealanders, they’ll have to announce a change in settings and be held accountable by voters, instead of letting inflation stealthily eat away at Kiwis’ take-home pay.

ACT says that if we let New Zealanders keep more of their earnings to invest in businesses, their communities, their families, and themselves, we’ll all be better off.

David Seymour is the leader of the ACT Party, and the MP for Epsom. This piece is his reaction to the PSA's "Ten perspectives on tax" series, all of which have been posted on this website.