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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. |