Tax is always an ideological hot button. Those key equations tax = bad and tax cuts = good have been hammered into our brains over the past three decades in much the same way that the virtues of egalitarianism were taken for granted by a previous generation. In its attitudes to tax, New Zealand has been the last colonial outpost of Thatcherism. Change, however, may be in the air.
A fortnight ago, the political year kicked off with National announcing its plan to subsidise tax payers against the effects of inflation, and thereby stop the dreaded ‘bracket creep’ that sees people being pushed by inflation into higher tax brackets while their actual purchasing power remains static, or even in some cases, declines. In reality, it was National’s same old tax cuts package, but in less toxic packaging this time.
On the other side of the political fence, Sir Michael Cullen’s Tax Working Group has just delivered to government its final report, which is due for a public release in a couple of weeks. The TWG is widely expected to recommend a meaningful capital gains tax, an innovation that has been decades overdue. The report may also suggest – the findings are non-binding – that a capital gains tax could be made revenue neutral by exempting the first $10-14,000 of earnings from income from tax altogether. Much media energy will be expended on guessing how much revenue the new capital gains tax might generate. And/or how it could be avoided.
While that’s interesting, it isn’t really the point. One major reason for instituting a meaningful capital gains tax is to ensure that all ways of generating wealth contribute their fair share to the general good. People who routinely pay income tax on their wages should be welcoming the prospect that at long last the fortunate few who make their money from capital gains are going to be treated the same way for tax purposes as wage-earners have been for decades.
Lest we forget, taxes are also a positive social mechanism. Progressive taxation (a) sends key signals as to where resources should be allocated (b) mitigates income inequality, and (c) provides the state with the necessary funds to distribute where they will do most good; eg to fund social services, to support those most in need, to build infrastructure, and to invest in enterprises that offer long term social and economic benefits.
Tax cuts on the other hand tend – at best – to deliver only a sugar fix that fuels consumption, while wasting the opportunity for productive social investment. Look no further than how Norway saved its oil earnings and created a massive trillion dollar investment fund for the long term benefit of all Norwegians – while Britain, in line with the Thatcherite dogma of the time, wasted its North Sea oil earnings on tax cuts. It isn’t very hard to see which country has been left in better shape today by its tax and savings policy.
Business of course, always clamours for the corporate tax rate to be reduced. Across the Tasman, there has been a few telling examples of how tax cuts can detract from social investment. The Aussie economist John Quiggin recently pointed this out:
Between 1986 and 2001, the company tax rate in Australia was reduced from 49% to its current level of 30%. At the same time, infrastructure privatisation policies handed responsibility for substantial areas of investment over to the private sector. The outcome, documented in a recent address by Reserve Bank governor Guy Debelle, has been a steep decline in private business investment, briefly interrupted by the mining boom.
How come? Aren’t tax cuts meant to unleash the entrepreneurial spirit, and free up the means for all sorts of innovation and productive investment? No, they evidently don’t:
Rather than investing their steadily growing profits, businesses are returning them to shareholders through dividends and buybacks, which now account for nearly 80% of all profits. A major contributor to this trend has been the increasing share of profits going to the financial sector, for which high dividends payouts have long been a point of pride. The flip side of this is low rates of re-investment, made possible by the banks’ exceptionally high returns on equity, which in turn are boosted by the various sharp practices now being exposed by the Royal Commission [into banking.]
As Quiggin also pointed out in December, the round of fresh corporate tax cuts being p[toposed by PM Scott Morrison would benefit the average Australian by .1% (ie. a couple of dollars a week for households earning over $100,000) and would take about 25 years to materialise.
In other words, tax cuts tend to be of social value and complement a range of predatory practices. Here in New Zealand we have still experiencing the fallout from nine years of a National government fixated on tax cuts as the ultimate political good. The result has been a collapsing public health system, an underfunded education system that is driving half its recruits out of the profession, an unaffordable housing market and soaring levels of student debt. Faced with these symptoms of neglect, what would National have delivered if it had been re-elected in 2017? Another sugar fix, in the form of a further round of tax cuts. Thanks to Winston Peters, we dodged a bullet on that one.
Ocasio-Cortez and the 70% rate
Last month, the debate over tax rates and tax cuts kicked into life again overseas as well. The recently elected New York congresswoman Alexandria Ocasio-Cortez (AOC) has called for a 70% top tax rate in the US on income over $10 million – mainly in order to help fund the process of de-carbonisation within the US economy, under a so called Green ‘New Deal’. Fox News, already obsessed with AOC, went apopleptic. As did some in the Republican Party who – whether out of malice or ignorance –reacted as if she were calling for a 70% tax rate on all income.
At the Davos gathering in January, zillionaire Michael Dell (of Dell Computers fame) denounced the 70% top tax rate idea in a widely shared clip that demonstrated everything that’s wrong with the current debate on tax. Dell, the Washington Post panel moderator and the chuckling Davos audience all seemed to be totally ignorant of the historical basis for AOC’s proposal – at least until they got owned by one of the other members of the Davos panel. (The clueless Wapo moderator then claimed that the top rate was only higher briefly during the early 1980s, which was actually when Reagan began cutting tax rates!) If you haven’t seen this clip, it’s well worth watching:
Essentially, the US had very high top tax rates at a time from the 40s until the 1970s when its economy was fabulously successful and productive, at home and abroad. As has been widely noted, high tax rates on the high income stream used to be the political norm, and did not impede growth:
“Under Eisenhower, the top earners paid a 91% marginal rate, falling to Ocasio-Cortez’s proposed 70% under Kennedy and Johnson, before falling to 50 percent after Ronald Reagan’s first big tax cut, and then down to 38 percent after the 1986 tax reform.”
This doesn’t mean that tax avoidance wasn’t actively pursued during that golden period, especially by wealthy entertainers like Bing Crosby and Frank Sinatra, who reportedly used real estate and oil industry investments to shelter their incomes. (Boxers like Joe Louis who didn’t have good tax advisers, ended up with huge tax bills that made them paupers in their old age.) Back during this heyday of US commerce, CEOs were not paid very much, so had little incentive to seek tax shelters. It has been an interesting sidebar to history that as the US economy has receded in global importance, the salaries of its CEOs have vastly increased.
One little-noted aspect of the cutting of the top tax rate and the flattening of the tax brackets is that people in New Zealand who earn $80,000 and people who earn $500,000 tend to be taxed at the same rate. That not only seems unfair, but sends the wrong signal to those setting the remuneration for the top tier of earners. Just as there is no causal link between tax cuts and economic growth – there are plenty of historical examples of tax hikes and growth spurts going hand in hand – there is even less evidence that CEO pay is a precursor of, or reward for, improved economic performance.
The proposal by Ocasio-Cortez to raise the top tax rate on very high incomes is, if anything moderate by US historical precedent, and moderate in comparison with what many current economists are advocating. This 2012 paper and this paper make a strong case for the social benefits of levying even higher tax rates on high incomes than what AOC is proposing. The Lockwood/Nathanson/Weyl paper even makes this point about the pernicious outcome of low tax rates on high incomes:
Taxation affects the allocation of talented individuals across professions by blunting material incentives and thus magnifying non-pecuniary incentives of pursuing a “calling.” Estimates from the literature suggest high-paying professions [lawyers, financial traders] have negative externalities, whereas low-paying professions [nurses, teachers, scientists] have positive externalities.
In other words, if you don’t seriously tax the rich and simultaneously address the effect of marginal rates on middle incomes, you channel people towards socially useless or socially damaging professions, and starve the rewards available for socially useful occupations. So far, National’s tax indexation solution for middle incomes addresses only one half of that problem.
For an accessible argument in support of AOC’s proposal, this recent New York Times article by the Berkeley economics professor Emmanuel Saez makes it clear that she is NOT making a simplistic ‘soak the rich’ argument.
Similarly, Nobel economist Paul Krugman has usefully debunked the “she’s just a pretty face with weird ideas” line of attack. As he says, Ocasio-Cortez is more grounded in empirical economic research than her GOP critics. What Krugman says here has obvious relevance to the upcoming tax debate in New Zealand:
What if we take into account the reality that markets aren’t perfectly competitive, that there’s a lot of monopoly power out there? The answer is that this almost surely makes the case for even higher tax rates, since high-income people presumably get a lot of those monopoly rents. So AOC, far from showing her craziness, is fully in line with serious economic research….Her critics, on the other hand, do indeed have crazy policy ideas — and tax policy is at the heart of the crazy. You see, Republicans almost universally advocate low taxes on the wealthy, based on the claim that tax cuts at the top will have huge beneficial effects on the economy. This claim rests on research by … well, nobody. There isn’t any body of serious work supporting G.O.P. tax ideas, because the evidence is overwhelmingly against those ideas.
The short term sugar fix of tax cuts is better described as what it is: a political bribe meant to disguise the wider advantages thus being delivered to the few who stand to make even greater gains from lower tax rates. The losers, once the temporary sugar fix wears off, would be those on low and middle incomes, who still wouldn’t be able to afford to pay the top dollars required for privatised medicine and education. Krugman, again:
Why do Republicans adhere to a tax theory that has no support from nonpartisan economists and is refuted by all available data? Well, ask who benefits from low taxes on the rich, and it’s obvious. And because the party’s coffers demand adherence to nonsense economics, the party prefers “economists” who are obvious frauds and can’t even fake their numbers effectively.
Which brings me back to AOC, and the constant effort to portray her as flaky and ignorant. Well, on the tax issue she’s just saying what good economists say; and she definitely knows more economics than almost everyone in the G.O.P. caucus, not least because she doesn’t “know” things that aren’t true.
Exactly. New Zealanders, on the other hand, have been schooled since the mid 1980s to believe things about tax policy that aren’t true.
Like reggae, country music derives much of its power from making tweaks to a limited set of templates. That’s why say, the likes of Kacey Musgraves can sound so fresh while not really straying all that far from the source. Last month, the Texas country singer and songwriter Robert Earl Keen celebrated his 63rd birthday. Over the course of a long career, I think he’s never written a better song than “The Road Goes On Forever…” which is a highly concentrated short story set in song form.
The story of Sonny (“The loner who was older than the rest/He was going in the Navy but he couldn’t pass the test”) and Sherry the waitress has everything going for it: full characterisation, romance, crime, crucial details (“She stepped out in the alley with a single shot 410”) an avoidable tragedy, and a twist ending. Plus, its a great song to boot:
And just to show that was no fluke, here’s another fine song by Keen, about life in the hellhole that is Corpus Christi, Texas. Again, great lyrics:
My brother had a wife and family
You know, he gave them a good home
But his wife thought we were crazy
And one day we found her gone
We threw her clothes into the car trunk
Her photographs, her rosary
We went to the pier and got drunk
And threw it all into the sea…
Now my brother lives in Houston
He married for a second time
He got a job with the union
And it’s keeping him in line
He came to Corpus just this weekend
It was good to see him here
He said he finally gave up drinking
Then he ordered me a beer