Economic growth arises from a combination of public and private
sources. Private sources include more labour, and more private
capital such as machines and buildings. Other sources of growth
are essentially public.
Taxes represent public revenue. Thus tax cuts, as a growth
dividend, are a return on the public contribution to economic
growth. Private growth dividends, on the other hand, are
represented by such things as higher real wages, and by increased
company dividends.
Growth dividends as tax cuts, representing additional public income,
can be thought of as additions to existing social dividends.
Sometimes the difference between public and private contributions
runs counter to intuition. For example, any growth arising from
the Employment Contracts Act is publicly sourced. Legislation
is a public contribution. Workers work harder while receiving
fewer wages as a result of such legislation. The additional "surplus
value" arising from this circumstance should be thought of
as public income, and therefore should rightfully be distributed
by way of an increased social dividend.
It is easy to account for the current round of tax cuts as growth
dividends. Before 1 July 1996, workers on aboveaverage incomes
received tax concessions of $2,779 per annum; tax concessions
that easily fit the criteria of "social dividend":
Net Income = Gross Income less 33%
tax plus $2,779
From 1 July 1996 to 30 June 1998 the formula for higher income
recipients was changed to:
Net Income = Gross Income less 33%
tax plus $3,933
From 1 July 1998 the formula for higher income recipients will
be changed to:
Net Income = Gross Income less 33%
tax plus $5,130
It is readily apparent that the public growth dividend paid in
the 1996/97 year was $1,154 ($3,933 minus $2,779). And the public
growth dividend to be paid in the 1998/99 year will be $1,197.
There is a problem with the above analysis. Lower income earners,
who are also members of the public, have been excluded. They have
received smaller growth dividends. Why should they get less?
It gets worse. Many homemakers and caregivers received no growth
dividends at all. These people are equal owners of the public
property and social inheritance which form the basis of our public
wealth. And their public contributions - measured by what they
do for little or no pay, and by what they sacrifice - are the
equal of the public contributions of the higher income earners.
Thus, as it stands, tax cuts are not true growth dividends. Rather,
they act as ways of converting our publicly generated incomes
into additional private incomes to those with the highest private
incomes. Nevertheless, there is a way we can think of these income
tax cuts as public growth dividends. We can say that every adult
not receiving a benefit conforms with the formula:
Net Income = Gross Income less 33%
tax plus $3,933 minus LIS
LIS stands for "Low Income Surtax" and is a balancing
item in the formula. Currently LIS is zero for all adults grossing
$34,200 or more, about the average annual individual wage. LIS
is positive for adults grossing less than $34,200, and can be
interpreted as a partial confiscation of the social dividends
(and hence the growth dividends) of lower income workers.
The tax cuts of 1996 and 1998 were explicitly claimed to have
been targeted at lowmiddle income earners. What happens
with tax cuts targeted at high income recipients; for example
the 1988 tax cuts? The essence of the 1988 tax cut was a cut in
the top rate (and the corporate rate) from 48% to 33%.
Minister of Finance Bill Birch has suggested (Sunday StarTimes,
5 October) a tax cut similar to that of 1988 to follow the 1998
tax cut. Presumably it will be offered as a cherry for the 1999
election, and will be implemented in two stages, one in 1999,
the other in 2000. Mr Birch proposed a cut in the top rate from
33% to 25%. In the same newspaper, Roger Kerr, chief executive
of the New Zealand Business Roundtable, suggested a flat rate
of 20%, which amounts to an extension of Mr Birch's proposal.
And Dr Brash, in a speech on 6 October, also suggested a 20% tax
rate, while carefully avoiding terms like "flat tax".
From Mr Birch's comments, it seems that he has in mind a 15% tax
rate up to $21,000 of income (as at present), and 25% for all
earnings in excess of $21,000. If we continue to take 33% - the
present corporate tax rate - as the value of public inputs into
private production, we can express the situation in the year 2000
of an individual grossing $38,000 as:
Net Income = Gross Income less 33%
tax plus $5,140
This would constitute a growth dividend for such an earner of
precisely $10 ($5,140 minus $5,130). There would be small growth
dividends for persons grossing between $9,500 and $37,750. And
very big growth dividends for people grossing significantly more
than $38,000.
It would be more natural however to regard such a tax cut as a
devaluation of the public contribution to economic growth. Or,
to put it another way, as a privatisation of the social dividend.
The formula could be expressed instead as:
Net Income = Gross Income less 25%
tax plus $2,100
This formula would apply to all incomes in excess of $21,000.
This tax cut would amount to a reduction of the
social dividend, from $5,130 to $2,100. No growth dividend can
result from this kind of tax cut. Rather, it would be a privatisation
of $3,030 of the preexisting social dividend. The big 1988
tax cut can thus be interpreted as a privatisation of the quite
high social dividends paid throughout the majority of the postwar
era.
A flat tax proposal such as that of Roger Douglas in 1987
and Roger Kerr in 1997 would amount to a complete privatisation
of the social dividend, with huge gains for those on higher
incomes; gains made possible mainly as a result of our social
inheritance - our social capital if you will - and current public
contributions; publicly sourced gains accounted for as private
windfalls. By far the biggest private windfalls would pass to
the highest earning 10% of the population.
There is nothing wrong with a flat rate of income tax, per
se. It is just that a flat tax needs to be accompanied by
an explicit social dividend, a cash payment paid in full to all
adults; a payment that would increase with the growth of the national
economy; a true growth dividend. Such a social dividend would
in turn contribute to economic growth, acting as an incentive
to further public contributions; as an incentive to the accumulation
of social capital.
An appropriate flat tax - an efficient and socially just flat
tax - should never be allowed to fall below 33%. The public contribution
to private production cannot realistically be assessed as less
than onethird.
The recent spate of commissioned reports (eg the Scully Report
commissioned by Inland Revenue, and the Sieper Report commissioned
by Treasury) that purport to claim that economic growth rates
will increase with tax rates of 20% or less have either missed
the boat, or have been widely misinterpreted.
The main way in which many economists miss the boat is to treat
taxation as a "burden", as a cost but not as an offsetting
public income. Such studies make no sense at all when we come
to see taxation as a legitimate return on a set of critically
important social assets, and when we come to see taxation distributed
in part in the form of social dividends, and in part in the form
of noncash social wage entitlements such as public education
and public health care provision. The social wage is a fundamental part of everybody's incomes in Norway, for example, as many New Zealand viewers were able to observe from Television New Zealand's Sixty Minutes programme on October 5.
There are some ironies in the present tax debate. Donald Brash made the following faux pas just at a time when television viewers in New Zealand were being treated to a glimpse of the high tax, high social wage, high living standard, high growth Norwegian economy. And at a time when the South East Asian countries are facing the double jeopardy of financial debacle and environmental tragedy:
Tax is not a "burden" in Norway. But it is a defining issue.
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