Monday, February 08, 2010

Against upwards redistribution

John Key plans to open the year by talking (as always) about tax. He's quiet about the prospect of increasing GST, but seems quite keen on a land tax, pointing out that it is not fair that wealthy investors are able to use loss-making property investments to avoid paying income tax, while eventually pocketing a tax-free capital gain. And he's right, its not. But something else that isn't fair is the government's plans to use the revenue from a land tax to provide top-bracket tax cuts.

One of the reasons the government wants to do this is because it wants any change to be fiscally neutral, and not increase the overall burden of taxation. But what this means is that the burden of taxation will be shifted from some onto others. Because it directly taxes wealth, a land tax is an inherently progressive move. But that could all be undone if the resulting revenue is redistributed in the wrong way. To point out the obvious, 60% of kiwi families own their own home. But only 8.7% of kiwis pay the top tax rate [XLS]. Hiking taxes on the first group so you can cut them on the second is simply upwards redistribution, from the middle class to the rich. And that is simply inconsistent with kiwi values. If the government wants to be truly progressive, it should use a land tax to cut taxes at the bottom. That way, everyone benefits, not just the rich. But when has National ever been interested in that?

(I also think that in the midst of a recession, a focus on fiscal neutrality is a mistake. We have bills to pay and a decade of deficits to avert. That can be done in two ways: cutting costs, or increasing revenues. And I would rather do the latter, by taxing the wealthy more, than the former, which will cut and degrade services such as schools and hospitals ordinary kiwis depend upon).