OWEN JENNINGS: Tax is a means to an end, not an end in itself

Tax is likely to be the big policy divide in this coming election. No matter how you put the parties together, it seems almost certain that parties led by Labour will seek to increase taxes and conversely, those led by National are not suggesting any increases; even potential reductions.

The media’s current fascination with TOP conveniently overlooks their plans to raise taxes.

This debate typically starts at the wrong point. Tax funds the state’s activities. Surely, the first question should be what are the essential tasks that only the state can or should undertake, and how little of our personal and company-earned money is required to manage those tasks, effectively and efficiently?

Tax is a means to an end, not an end in itself. We keep putting the trailer ahead of the car.

We claim government is a business and should be run like one. No! It is not. And we shouldn’t encourage that thinking. Much of its affairs need to be run in a ‘business-like’ manner but if we see the whole of the state’s activities as a corporate that devotes its energy to increasing its income, we will continue down the dead-end road of poor performance and voter frustration.

Too much of the time of our politicians and bureaucrats is spent doing what businessmen do – trying to increase income instead of focusing on curtailing expenditure or improving the quality of the spending.

Part of the psychology involved in paying taxes relates to PAYE. Too many earners do not know how much of their pay packet goes in taxes. There was an occasion when I visited a large sawmill to speak to the workers. I joined the staff for smoko. I had earlier asked the pay clerk to write down the fortnightly amounts of tax paid by various employees without names. I then asked the staff what they thought was the amount of taxes they had paid in the previous fortnight. No one got within 70% of the amount. All estimates were far too low. They were, to a man, taken back and vowing to learn more.

A further point of frustration is that those who claim our tax system is unfair and fosters inequality typically quote Scandinavian countries as operating superior tax systems. The interesting thing is the top 10% of taxpayers in New Zealand pay a bigger share of the tax burden than their equivalents in the Nordic countries, at over 45%. Our northern counterparts have their top 10% shouldering less than 40% - even as low as 35% - of all income taxes paid.

The same shrill calls for a heavier tax burden on the wealthy rarely want to look at the “net” position of taxpayers. We know that the top 10% of taxpayers are contributing as much as 75% of the tax burden after transfers for Government outgoings are netted off.

Of that 10%, the top couple of percent are carrying an enormous load.

So, if fairness is the yardstick we are already flogging the well off while the rest of us take more than we pay. What do the left wish for? 80% of net taxes paid by the top few? 90 percent?

The level is already in the danger zone when relocation is factored in. It is very easy for the wealthy to move out, taking their innovative, entrepreneurial, employment-creating skills, leaving the rest of us to pick up more of the tab.

Here's something for promoters of a capital gains tax to consider. The CGT tax collected in Australia in the last couple of years has fluctuated wildly, with as much as 70% swings. Meanwhile the cost of raising a dollar of CGT in the poor years has exceeded 75% or $0.75 cents for every $1.00 raised. Avoidance levels are running over 30% against a pure model, with significant distortions emerging having a negative effect on investment decisions.

Taxing capital may make the envious feel better, but it doesn't do much for the country.

As the silly season gains a head of steam and the promises of using your hard-earned wages grow like ‘topsy’ with would be politicians muscling in on your money, take an extra minute to learn what you are currently sending them, what they are intending to add to those forced remissions, and ask yourself, am I getting a “fair” deal, good value for money?

Then figure out which political party is most focused on obtaining best quality spending and how to deliver those services with less, not more of the money they demand from you.

Owen Jennings is a former ACT MP