Tuesday, January 25, 2011

A good policy ruined by magical thinking

Phil Goff gave his "state of the nation" speech today, aimed at launching Labour during election year. Last year, he targeted inequality, focusing on the need to narrow the gap between rich and poor. Today he gave some details about how Labour plans to do that. Their first step? A $5,000 tax-free bracket, to be paid for by cracking down on tax avoidance and restoring the top tax bracket. It's good, redistributive, left-wing policy. The problem is that Goff's numbers on how to do it don't add up.

According to Treasury's 2010 tax model data, a $5,000 tax-free bracket would cost $1.58 billion (10.5% of all income in the zero - $5,000 range). Reintroducing a 39% top tax-bracket on "incomes comfortably into six figures" would claw back only $290 million if the threshold is $150,000, or $558 million if it is $100,000. Which means that 60 - 80% of the threshold will be paid for by reducing avoidance. Goff's statement that

No one knows exactly how much is lost by people dodging their tax - but it’s been estimated in the billions.
is carrying an awful lot of weight here.

Like Goff, I want to see those loopholes closed and that avoidance stopped. People should pay their fair share, and those who don't are cheats and parasites. It speaks volumes about National that in a recession when the government needs all the money it can get, they're not doing this. But the core problem here is that we just don't know how successful those efforts will be, and how much money they'll yield. Which makes relying on them to fund over a billion dollars in low-income tax cuts an exercise in magical thinking, about as intellectually defensible as right-wing promises to fund tax-cuts for the rich by "cutting waste". And when you've just promised that you "won’t make any promise that I can’t keep or that the country can’t afford" and to "be more fiscally responsible than National", you've just handed them a stick to beat you with (and that's without getting into the risk that some Labour MP, somewhere, will be cheating in exactly the same way).

And all of that said: this is a good, principled position taken by Labour, and one which clearly puts them on the side of the many against the few. Its also good politics - in a recession, the idea that some people are not paying their fair share attracts even more moral outrage than usual; if National dismisses it with their usual claim of the "politics of envy", then they're on the side of the cheats, if not cheats themselves. I just wish Labour had presented it more carefully, as something that would take them a few years to implement after they found out how much more revenue a crackdown would yield, rather than exposing themselves in this manner. Overpromising and relying on magical thinking benefits no-one; it just leads to disappointment and adds to the public's cynicism about politicians. And that's something Labour should be trying to avoid.