Square Pegs in Round Holes

Why Tax Reform is Politically Dead

The media has been all in a lather over tax "reform" this week. Every substantial recommendation of the Government's Tax Working Group has been slammed.

The hype about the Working Group had been substantial: it was a core government initiative (thus, would be taken seriously by the government); everyone knew that the tax system is stupid and distorting (therefore, public support existed for "reform"); the government had taken nothing off the table (thus, it was not bound not to act--very important to the Prime Minister); the folk making up the Working Group were acknowledged experts (that is, they were not ideologues whose views could be easily dismissed); the Report would present a "once in a lifetime opportunity" to put things right (so, we were to expect major changes).

But, lo and behold, surprise, surprise it turns out that the people don't like tax--and certainly not more of it. Maori reject land tax upon their ancestral land. Nobody wants to see GST increased. Taxes on rental properties will sharply decrease the rental housing stock, pushing rents up. Every proposal by the Working Group is going to hurt some group or sector--and those interest groups have lost no time in airing their opposition publicly. The upshot: the people want benefits and entitlements; but they also want someone else to pay for them. They are being heard.

The Prime Minister and Treasurer are now scurrying around trying to put out fires.

We note that some of what has been recommended is just plain immoral, if not barking mad. The Working Group has conceded that if GST were to be put up, benefits would have to be increased to compensate. The Prime Minister has already conceded that this has his support. Have these pointy-heads never heard of the beneficiary trap? They were supposed to be setting New Zealand up for tax reforms which would increase our rate of economic growth and they end up recommending a bigger and tighter beneficiary trap. And our short-sighted Prime Minister agrees.

What is obvious, but apparently not to our governors, is that the only way to have political headroom for tax reform is to lower taxes. If you are lowering taxes substantially, then you may get away with moving from direct to indirect tax, or putting a tax upon (say) rental housing stock. It becomes politically arguable. But as soon as the stake was put in the sand than any tax changes had to be "revenue-neutral" the thing was lost. The "once-in-a-lifetime" opportunity to get things right has dissipated (if it ever existed); we are now going to get a mere tinkering and fiddling around the edges.

But, of course, the government has no room to lower taxes. It already is spending far beyond its means. Because it refuses to cut government spending substantially it has no room to cut taxes, so tax reform is dead. Square pegs do not go into round holes.

And why, you ask, will the government not cut spending? So it can retain popular support and be re-elected in two years time. Yup. That's the objective. But, we have to admit, it is precisely what our craven electorate wants. Our government is our god, and it is reasonable to expect our gods to take care of us. And if they take care of us, we will take care of them. That's our established religion in a nutshell.