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ALTERNATIVE BUDGET - A PERSONAL VIEW Roger Douglas MP, Manurewa Monday 30 June 1980
H.S. HOUTHAKKER: "We are gradually moving towards a situation where everybody is subsidising everybody else. Most economists will condemn this trend, because it is most unlikely to promote the efficient allocation of scarce resources, but it should be realised that from the political point of view it may have positive aspects…. One could be more sanguine about the trend, however, if it did not contain an element of self-deception in the sense that the beneficiaries of any particular programme feel that they are getting something for nothing" (Joint Econ Committee, The Economics of Federal Subsidy Programme, Staff Study Part 1. (Washington DC: U.S. Gov. Printer May 1972) INTRODUCTION New Zealand is at an economic crossroads. Further tinkering will be disastrous for our future. The time has come for bold innovation, for taking the tough options we have ducked for thirty years. The time has come for a Budget which sets new directions, gives New Zealanders the opportunity to shape a prosperous destiny, and the inspiration to carry themselves and the country through adversity to that destiny. The measures I propose here would form such a Budget. They are my personal suggestions. They are not the only measures that would achieve the objective of prosperity. But no measures will succeed without the essential ingredient that lies at the heart of my Alternative Budget - a fundamental change of attitudes and methods. My Alternative Budget aims:
The Alternative Budget proposes, therefore, to:
These changes will make it possible to:
The basic principle underlying the Alternative Budget is to increase the output of necessary goods and services, and to share that increase among those who contributed to it, and those who are disadvantaged and thus could not contribute.
THE FAILURE OF PAST POLICES Thirty years ago New Zealand led the world. We had one of the highest average incomes. Today, we live on borrowed money. In spite of record export income, we cannot balance our overseas accounts. In spite of record taxation, the Government cannot pay its way. Our inflation rate is among the highest in the western world. Our production is static - in fact, falling, in many industries. We have more people out of work than at any time since the 1930s. Thirty years ago our standard of living was third in the world. Today, we are thirtieth. The reason - our increases in productivity and in real exports have been, along with Britain's, the lowest in the developed world. New Zealand is heading towards becoming one of the poorer nations. By the end of this century, we could well have fallen to sixtieth or seventieth in standard of living. That would put us behind such countries as Taiwan and Malaysia. The Government must face up to this fact. No longer can Governments take the easy way out; there are no soft options. For twenty years they have pandered to vested interests and parochial pressure groups. Too much of our capital and resources have been spent on mindless duplication - airports, ports, roads, and the like - the infrastructure. Too little has gone into productive investments. For twenty years Governments have tinkered with the problems - unemployment, inflation and balance of payments deficits. Each time they fixed one, they made the others worse. To continue this way will put us hopelessly in debt within ten years. Our population will have shrunk, tax per head will have risen even further, production will be stagnant, living standards will have slumped, and a large section of our work force will be out of work. The Welfare State will have crumbled. As a nation we will be despondent.
THE WAY OUT This need not happen. All it needs is for the people of New Zealand to grasp the fact that our present difficulties are not a passing phase. We must stop being the "soft option society". We must stop believing the Government can somehow solve all our problems with a few kicks, and an occasional tightening of the belt - or a capital-intensive energy miracle. There is no fairy godmother. We must stop fighting each other for a greater share of a diminishing cake. We must start talking to each other, instead of shouting at each other. We need a period of self-examination. We need a decade of co-operation. Only when we are prepared to face the long-term cost of double figure inflation, which distorts values and rewards the wrong kind of change, will we make progress. We should say that inflation can be controlled. But, it needs fundamental realism of the kind that is apparent in Switzerland and Germany - and that means the Government taking the people into its confidence. Change will be costly. But refusal to change will be disastrous. We will pay a ruinous price if we allow to continue the high structural unemployment, which the rich accept gladly and the poor fatalistically. What we need is the kind of economy where people can have a degree of responsibility for their future, together with the freedom that makes that responsibility worth fighting for. Nothing worthwhile is gained without struggle, and discipline. This Alternative Budget provides the weapons for that struggle and points the way to a responsible society - a different and better society than the British, American and European societies we have aped in the past.
POLICY PROPOSALS Here are the detailed proposals: 1. Replacement of Company and Farm Tax with Capital and Assets Tax The present system of taxing companies and farms, encourages tax avoidance, and discourages productive investment. I would abolish company tax and personal tax for farmers, and tax capital and assets instead. Exemption from the assets tax would be provided for genuine land development areas. The Commissioner of Inland Revenue would be given the power to assess the contribution made by owners of private companies. This contribution would be taxed as personal income. Further studies are needed to identify the exact figure at which the new tax should be set. Existing information suggests it should be less than 5 percent. Because personal taxation has been abolished for farmers, the tax on farm capital might need to be one percent higher than the tax on other assets. Thus, for two farms each valued at a net $200,000, the tax would be $10,000 each. Farmer A, who earned $15,000 would have a net income of $5,000. Farmer B, who earned $100,000 would have a net income of $90,000. Productivity and profitability would then be rewarded, not penalised. Under present tax law, Farmer A would pay approximately $5,000 tax, not $10,000; Farmer B would pay $50,000, not $10,000. No wonder production is static. The capital and assets tax would apply to all individuals, due allowance being made for any tax paid by companies. An exemption limit of $100,000 per family would be set for personal wealth, to cover such items as the family home, car, boat, caravan etc. This exemption would be indexed to inflation every five years. Therefore, few New Zealanders would be affected to any degree. Those who were affected would be encouraged to invest in productive assets rather than unproductive luxuries. A $200,000 boat over above $100,000 exemption limited would be taxed at the same rate as a $200,000 farm or business. Thus companies and individuals would weigh carefully their investment decisions. The advantage of a capital and assets tax compared with company and farm income tax is considerable. The tax would be known in advance and could be budgeted for. It would be a fixed cost like interest. In the case of farmers, the capital and assets tax would :
2. Replacement of Estate Duties with Gift Duties Hand in hand with the introduction of a capital and assets tax, would go the replacement of estate duties with progressive gift or accession duties, paid cumulatively over the whole lifetime of the recipient. The Alternative Budget proposal is for the first $100,000 worth of gifts received to be exempt from tax, the next $100,000 to attract tax of 10 cents in the dollar, the next $100,000 20 cents in the dollar, and so on, until a maximum rate of 50 cents in the dollar is reached. The level at which the tax rates apply would be indexed to inflation every five years. ADVANTAGES: Would encourage the spread of wealth, because the total tax paid would be less if it were spread among a number of people, than given wholly to one. Thus, $500,000 given to one person would attract $100,000 of tax, but if given to five would attract no tax at all, if recipients had received no previous gifts. It would be more equitable. Under the present system, someone with no wealth receiving $100,000 would lose the same in death duties as a millionaire heir receiving $100,000 from the same estate. Under progressive cumulative gift tax, the person with no wealth would get his $100,000 tax-free, while the millionaire would probably lose half his inheritance in tax. 3. Assessment of Taxable Assets I would have taxpayers or companies initially assess themselves as to their net capital value for tax purposes, according to rules laid down. Future valuation would be based on prices paid, for farms, land, shares etc. with adequate safeguards. If rates were based on prices paid, the Valuation Department, as established, could be closed down with a consequent saving to the taxpayer of $6 million a year. To discourage dishonest self-assessment, the Government should legislate for a penalty of 500 percent on tax due in any one year for deliberate under-assessment. 4. Reduction of Personal Income Tax I would substantially cut personal income tax for all wage and salary earners and self -employed. This would be possible because of the savings in Items 5, 6, 7, 11, 13 and additional revenue under Items 8, 9, 10. These savings and extra revenue would have totalled almost $1800 million in 1979-80, compared with a personal income tax take that year of $4000 million. In other words, they would have permitted personal income tax to be cut almost in half. Because the current Budget deficit is far too high, and should be reduced, tax relief of $1400 - $1500 million a year in income tax is suggested. Several methods of distributing the savings are possible. One would be to set a single tax rate system of, say, 35 cents in the dollar, along with large individual and family rebates, to help the lower and middle-income families. Another would be to allow a high threshold below which no tax would be paid. Another would be to accept the present tax system, with, say, a top rate of 48 cents in the dollar and apply generous rebates to existing tax levels Such a system would provide the following tax relief: TAX RELIEF $18 a week for the single tax payer $23 a week for the married taxpayer - no children $28 a week for the married taxpayer - one child $33 a week for the married taxpayer - two children $38 a week for the married taxpayer - three children $43 a week for the married taxpayer - four + children $26 a week for married couple, both working - (half each) $31 a week for married couple, both working - one child (half each) $36 a week for married couple, both working - two children (half each) $41 a week for married couple, both working - three children (half each) $46 a week for married couple, both working - four + children (half each) For those with incomes over $16,000 tax would be reduced by an additional: 7 cents in the dollar on income between $16,000 - $22,000 12 cents in dollar on income over $22,000 Taxpayers with incomes below $250 a week would require increases in their gross pay of up to $80 a week to equal the tax relief provided in this Budget. e.g. A married man with four children on $190 a week would require a pay increase of $75 or 40 percent a week to equal the tax relief provided. Increases in wages of this magnitude would result in price increases well beyond any increases as a result of this Budget. Obviously the tax reductions made in this Budget would be in lieu of any wage increases that normally flow from increases in sales tax or devaluation. 5. Abolition of Export Incentives I would remove all export incentives. Saving to taxpayers - estimated at $200 million a year. Export incentives to Fletchers alone would have been worth $15 million for the year 1979-80. Removing export incentives would ensure that local consumers are not left paying higher prices on the home market to subsidise overseas sales. Removing export incentives would ensure that all industries are treated the same, thus eliminating investment distortion. It would eliminate the 'rip-offs' that go on under the present system. It would also eliminate the considerable Government and private sector administrative costs associated with export incentives. In addition, it would make the tax system more equitable. The twenty percent devaluation should more than make up for the loss of Government assistance, so that existing exporters should still find it profitable to export, unless they are currently 'ripping off' the system and their exporting base was never viable. 6. Abolition of Agricultural Subsidies I would remove all subsidies and allowances to farmers and the rural sector generally. Saving to taxpayers - $400 million a year. Removing subsidies would ensure market forces operate. Farmers, long term, would move into what they consider to be the most profitable areas of farming. It would also ensure that we do not continue to unnecessarily prop up products for which there is no longer a growing overseas market. Waste would be eliminated, as farmers would ensure that any expenditure incurred was more than matched by revenue gained. Requiring farmers over a period of time to live according to their market returns would also make sure land prices were related to production, as would the change to taxing assets, not income. The cost to farmers of the loss of subsidies and increased cost associated with devaluation, would be made up by:
7. Abolition of Subsidies to Industry I would remove all subsidies and allowances to industry, including the sales of natural resources below market price. Saving to taxpayers - $50 million a year. Removing subsidies would have much the same effect for industry as for farming. It would encourage industry to see that its resources were used efficiently and would help ensure that future investment went into competitive, not subsidised, areas of the economy. It would eliminate cost, profit and investment distortion, caused by the various subsidies. For exporters the cost of the removal could be made up by capitalising on the twenty percent devaluation, either to sell more goods overseas, or to raise export prices. Local manufacturers could make up the loss by improving productivity and thus capitalising on the switch from company tax to assets tax. 8. Increased Government Charges In line with the removal of subsidies, I would make the business sector pay, wherever possible, the full price for any Government services. This would include payment of the full cost of processing applications for various licences. Saving to taxpayers through increased Government revenue - $10 million a year. The aim of the change would be to put the cost of the service where it should be - with the receiver of the service. 9. Abolition of Life Insurance Tax Deductibility I would make all life insurance policies sold in the future no longer tax-deductible. Tax relief would continue on all existing policies up to existing maximum levels. Additional revenue to the Government - $50 million a year. This move would eliminate the existing distortion in investment patterns, by putting life insurance companies on the same footing as other companies. On the other side of the ledger, life insurance companies would no longer be put to the disadvantage of being required to invest a certain proportion of their policy income in housing, Government, or Local Body stock. The necessity to do this would be eliminated over 5 - 8 years. Removal of tax-deductibility would :
10. Universal Retail Sales Tax I would shift some of the burden from income tax to a new 10 percent tax on virtually all services and products other than food and housing. This would have returned an additional $800 million in 1979-80. The new tax would be at the point of sale to the consumer. It would initially be in addition to the existing sales tax on wholesale goods. Shifting some of the tax burden from free income to spending would:
11. Devaluation I would immediately devalue by twenty percent. This would provide a realistic exchange rate. It would increase exporters' earnings - farmers, by raising their income in New Zealand dollar terms, and manufacturers, by making viable resource based exporting more profitable. It would give added protection to viable New Zealand resource based industries, that is, those that have the best potential to compete internationally. It would make travel within New Zealand more attractive thus saving overseas funds. And, it would allow the Government, over a period, to dismantle some of the existing protective mechanisms for industries. In most cases, these benefits would far outweigh the disadvantage of higher costs of machinery, raw materials, and components to manufacturers. And, the seven- percent increase in the cost of living that would follow twenty- percent devaluation would be more than compensated for by the planned income tax reductions. As Mr L. C. Bayliss, Chief Economist, Bank of the New Zealand said recently: "When a country's foreign exchange rate is substantially overvalued, the ability of its export industries to compete on international markets is eroded - because export prices will then be too high. Such a situation has serious adverse effects on employment, profits, wages and investment. At the same time imports are priced relatively cheaply at home and thus undermine import-competing industry sales on the domestic market - with equally adverse consequences on employment, wages, profits and investment. There are also equivalent adverse effects on invisible earnings and payments." 12. A Minimum Living Income This Alternative Budget is aimed to get New Zealand moving. In itself this will eventually ensure a higher standard of living for those on lower incomes. But, in the meantime, special measures are needed. Three elements are included in the Alternative Budget strategy for a minimum living income for all New Zealanders:
Taken together, these three elements should ensure an adequate standard of living for all New Zealanders, especially those with young families. Thus, I would raise the minimum wage fixed by legislation to ten percent above the present level of net superannuation pay-outs to allow for the effects of devaluation and Universal Sales Tax. 13. Rationalisation of Benefits I propose only one Social Security benefit, paid as of right to all those unable to work full-time or over 65. Net savings/cost to taxpayers - $300 million a year Those who would qualify for the benefit would be those who retire from the workforce at 60 and have no other substantial income, those now eligible for unemployment or sickness benefits, single-parent families with children under ten, and widows/widowers for a period after their spouses death. Because this would involve some major changes to eligibility for benefits, the programme would be phased in over three years. The benefit would be paid at the minimum wage rate provided for in Item 12. Beneficiaries would quality for the family benefit where applicable. All benefits would be tax-free, but additional income would be taxed, with benefits being reduced by 25 cents in the dollar for all income over $20 per week. The results of the rationalisation would be:
The most up-to-date world survey of welfare programmes for the aged appears to be the one made in December 1973 by the United States Department of Health, Education and Welfare. This massive survey covers 126 countries - every country in the world with some type of social security programme. In all that list there is not one country with a tax revenue-funded pensions system which gives substantial and continuing cash payments to all citizens from the age of 60, regardless of income and irrespective of whether or not they choose to retire. No other country in the world is as lavish as New Zealand now is with its age benefit. Among the 105 countries that offer old age pensions, the great majority specify a normal (male) pensionable age of 65. In the wealthy Scandinavian countries the pension is payable at 67 and in Israel not until 70. Most other countries also stipulate retirement from employment as a condition for receiving the pension. For those people who elect to continue working, the pension is either withheld or reduced. Ironically, the one major exception noted by the study (and hence the nation which in this respect comes closest to New Zealand) is none other than the Soviet Union. For Russian men, the old age pension is normally available at the age of 60 on retirement. However, large numbers of pensioners are allowed to continue working and still receive full pension, either because they do unpopular jobs for which there are manpower shortages, or because they work in less desirable areas such as Siberia. For New Zealand, though, perhaps the most significant comparison is not with the Soviets but with Big Brother across the Tasman. In Australia, despite recent liberalisation of the federal age benefits scheme, old age pensions are still not available without restriction until the age of 70. Pensions can be had at 65, but only subject to a sliding scale income test. A single person earning $A75 a week, for example, receives only half the normal pension. If his earnings exceed $A126 a week, his pension reduces to zero. Yet, even with Australia's relatively limited welfare system, politicians in Canberra are arguing about whether it is already more than the country can really afford. The question that has to be asked is - can New Zealand afford a pension scheme that no other country in the world contemplates? 14. Measures to Encourage Saving - Tax Credit Scheme New Zealand desperately needs a higher rate of investment. If we are to avoid over-dependence on foreign capital, the level of savings must be increased. The alternative is to raise investment money through tax. Already, several measures designed to increase saving have been introduced in the Alternative Budget. They are:
The Alternative Budget now proposes the introduction of a tax credit scheme. Individuals would be able to invest up to twenty percent of current income in any industry designated high priority by the Government and pay no tax on income earned from the investment for three years. 15. Heavy Penalties for Tax Evasion I would impose heavy penalties for tax evasion. Offenders would have to pay both the tax owing and a penalty of five times that tax. Under present high tax rates, evasion has become an accepted pastime. Under the drastically reduced tax rates proposed in this Alternative Budget, there would be no excuse for dishonesty. Apart, perhaps, from land speculators and a few people who expect to inherit large fortunes, there would be very few New Zealanders who would be worse off as a result of this Budget. Indeed, most would benefit immediately from cuts in taxation or the opportunity to earn more income tax free or at lower tax rates than are currently payable. But immediate benefits to individuals, even the majority of individuals are NOT what the Alternative Budget is all about. Its goals are more fundamental - to encourage savings and productive investment and thereby to generate real growth in the economy. Only with growth can we restore full employment, raise living standards and finance a generous welfare state. And only with greater savings and a more rational pattern of investment can we achieve that growth. A healthy society demands a healthy economy and we can have both in New Zealand once again if we take some bold and intelligent decisions now. APPENDIX I Farm Loss Cuts Compo Pay A lawyer who earned in excess of $37,000 a year from his practice before an accident is to receive only $16 a week in earnings-related compensation. The notional sum was set by the Accident Compensation Commission and later upheld by the Accident Compensation Appeal Authority, because the man owned a farm that operated at a loss. His two incomes, when combined for tax purposes, showed a loss. The man did not pay income tax and only the minimal accident compensation levy. He had sought to have earnings-related compensation based solely on his law practice income. The fact that for tax purposes the farm loss was brought in should, he considered, have been disregarded. The Appeal Authority ruled that both sources of income had to be combined. There could be no doubt that if both the appellant's businesses had returned a profit the Commission would have had to aggregate them to ascertain the relevant earnings. In that situation, it would be to the claimant's advantage as his relevant earnings and earnings-related compensation would be higher. |