Tax – the Achilles Heel of a transformative agenda

The concepts of tax and active tax policies remain the Achilles Heel of those wanting to progress a truly transformative agenda for New Zealand.  By transformative I mean an agenda that recognises that the free market mechanism is seriously imperfect and requires proactive government action to address the consequences of such imperfections.

This Achilles Heel has been exposed again and again during consecutive election campaigns, as any transformative proposal is forced to run for cover at the suggestion that a new or higher tax may be the result.  Indeed, the very notion that parties are forced (or feel compelled) to pledge ‘no new taxes’ immediately negates any prospect of a truly transformative agenda.

Government is bad, ergo tax is bad

Underlying this Achilles Heel is a reluctance by those with a transformative agenda to openly confront the unwritten convention as to the function and objectives of government.  In particular, NZ’s approach to economic policy remains founded on the principle that limits need to be placed on government action.  The objective, apparently, is to constrain/reduce the size of government.

This principle maybe implicit or unspoken, but that does not make it any less malign.  In short, the undercurrent is that ‘government is bad, ergo the smaller the government the better’.

This is reinforced by a government (despite its stated aspirations to be transformative) signalling its credentials as ‘prudent economic managers’ by a set of self-imposed Budget Responsibility Rules (BRR).  The nature of the stated BRR are very much in line with the ‘government is bad’ convention.

These rules are now set to constrain the ability of this government (and, potentially, future governments) to implement an active approach to tax or spending or borrowing – what economists call fiscal policy.  More malign is the passive acceptance that a budget surplus is a metaphor for budget responsibility.

Noticeably, the BRR do not convey any explicit or stated objective for government or fiscal policy.  Rather, they reinforce the notion that a surplus is seen as an end in itself, rather than as a means to an end.

Critically, there is little discussion or assessment as to whether (or how) achieving surpluses (or reducing debt) contributes to any of the economic, social, and/or environmental objectives/outcomes that the government considers desirable.

Consequently, if we accept that government is bad, then we arrive at the allied principle – tax is bad.  Ergo the less tax and at lower rates, the better.

A positive role for tax

Any transformative agenda needs to avoid this delicate dance around the unwritten convention.  A positive role for active government, for tax, and for an active tax (and fiscal) policy needs to be promoted.  Anything less is abdicating any responsibility to future generations.

For starters, taxes are the price we collectively pay to collectively receive goods and services publicly provided by the government.  I use the word collectively advisedly.  In other words, these are areas where the user-pays argument is irrelevant and cannot apply.  Indeed, the very characteristic of their collective nature is fundamental to the need for public provision of these goods and services (and hence the collective payment via tax).

However, it is important to go beyond the standard schools, hospitals, roads, and water etc., in terms of public provision.

I refer also to the elements of a cohesive society that are necessary for productive economic endeavour.  For example, the rule of law, respect for and adherence to contracts, community networks, private property, cultural heritage, diversity, opportunity to participate in and to contribute to family, whanau, society, community, hapu, iwi, nation.  The existence and provision of a safety net that insures against ‘extreme’ hardship (through provision of welfare benefits, services, housing) reinforces these foundations of a cohesive civil society.

Hence, tax can be repositioned as the price we pay to provide and ensure and insure

• health and education services
• roading and other ‘built’ infrastructure
• opportunity for individuals and communities to participate and contribute
• respect for private property, rule of law, and contracts, protecting and advancing diverse culture and heritage
• a safety net guarding against extreme hardship.

But, this is my income

The response to those that claim ‘tax is theft’ (e.g. “I earnt this income, so only I should decide how I wish to spend it”) needs to be rebutted with a clear, unambiguous, unapologetic statement.

“No, you did not earn this income all by yourself.  Rather, you were able to earn this income because (previous) governments and communities have provided

• a healthy and educated population – from which you could obtain trained workers, and informed consumers that you can now sell/trade/engage with for your business venture(s); and trained co-workers that enable your own efforts to be (more) productive
• roads and other built infrastructure that enable you to converse and engage with communities, customers, clients, and co-workers in your daily efforts
• a framework within which you can enforce contracts (business, consumer, employer, employee, community, private property) and where necessary settle disputes
• a community that respects the rule of law, private property, heritage, and cultural diversity – enabling individuals to accumulate private, as well as, communal wealth
• a safety net insuring against extreme hardship – the existence of which reinforces the broad acceptance of the rule of law, as well as furthering social inclusion and enabling you to undertake the economic activities through which you reap your income and accumulate your wealth.”

Function of, and objective for, government 

But, I hear, if we don’t have limits on tax then governments could become huge.  If the BRR spending cap of 30 percent of GDP is not enough, then how high should it go? 35 percent, 40 percent, 50 percent, or higher?  This is where it is important that the transformative agenda has a clear foundation spelling out just what is the role and objective of government.

A truly transformative agenda should argue that the function and objective of government must go beyond minimising costs to business, narrowly defined efficiency and productivity measures.

For example, I note the “all taxes are distortionary by taking the economy away from its optimal allocation of resources and so incur a cost” argument.  However, this argument assumes that the free market mechanism automatically leads us to a desired outcome or objective.  In turn, this assumes, that the optimal allocation of resources from the free market mechanism (including the consequent distribution of income, wealth and opportunities) is also desirable.

Thereafter, the ‘distortionary’ (or otherwise) nature of any tax can be measured against the agreed objective.

Next steps

This is where the Treasury Living Standards Framework might provide a start.  Note, it is only a start. Its current structure is concerning in that it remains embedded in euro-centric perspectives of measures of value.  However, the acceptance that there are concepts other than economic growth that are worth valuing is a huge step forward.  I derive further optimism from the presence of the tag-line ‘intergenerational wellbeing’.

From here, transformative steps would be to establish and agree the dimensions of wellbeing that are important to the people and communities of Aotearoa.  Thereafter the BRRs should be revised or refreshed so as not to constrain the ability of government to progress improvements across these dimensions of wellbeing.  Rather they should be re-framed with an economic responsibility lens.

This would also enable a transformative definition of ‘prudent fiscal management’ to be explicitly embedded in the Public Finance Act.  So that the very real current and future individual, government, and community costs of entrenched poverty and inequality are properly presented as liabilities on the nation’s balance sheet.  Thereafter, such books will indeed be a true and correct record of the state of the nation, noting intergenerational wellbeing as the barometer of prudent management.

As a consequence we can avoid the prospect of again having to cut taxes and spending to mollify the gods of fiscal surpluses and to placate the fiscal debt repayment hawks.