Wednesday, December 20, 2006

tax, demand and supply

Our Scroogy Minister of Finance, wallowing in a surplus that in terms of proportion of GDP really is now as big as Oil Rich Norway, has told us a tax cut would only come to $10 per week each, so we shouldn't be greedy.
"Norty, norty children", he sneered at us in his kindly way,"you'd only spend it"
And that is probably true.
We might spend it on all the things Cullen is privatising by the back door by requiring our schools, hospitals, doctors and others to make up for their chronic under-funding of operational spending in order to generate oversize "surplus'es". After petrol Government costs and charges have been the fastest growing element in the CPI basket. Instead the surplus money is cynically being held out of operational funding so the Labour Party can throw money at electorally embarassing developments.
All that aside however returning a year's school fees to the public might not be the best use of the available surplus. Instead Cullen is looking at reducing business tax - a tiny tiny amount. Here's a radical suggestion then. Why not cut business tax to 10% like they did in Ireland. Currently business tax brings in $9.54 billion or 17% of the total. At 39% it is hugely complex and fundamentally encourages people to invest in avoiding paying any. Cut it to 10% and suddenly Australian business will be rushing to set up in New Zealand. Moreover our businesses will be more competitive compared to Australia too.
Inflation basically comes down to a mismatch between demand for and supply of structurally unresponsive assets suh as land and labour. If there is an increase in demand beyond the availability of supply prices rise (eg after the Great Death in 1348). Within an economy an increase in prices for the same level of supply (eg labour) creates a demand for more money which eventually leads to a weaker currency. That is because essentially it takes more money to buy pretty much the same thing. The same can apply to goods and services. However this can be offset if an increase in demand is matched by an increase in supply. When this happens there will be an increase in demand for and a supply of money so there will also be growth.
Some commentators try to pretend that any form of stimulus is inherently inflationary. They mostly do so because they represent those interests who believe that the rich should get richer and the poor should stay poor. It is however perfectly possible for the rich AND the poor to get richer as happened, for example, in Germany after World War Two.
By reducing business taxes we would increase income to employers. We would also be increasing demand for labour. Given that there is a fixed pool of labour there would by necessity increased prices for labour. However because employers would have more income they could afford to pay more without needing more money in the system. So to reduce tax burdens on business is effectively to vote for a wage increase.
Now it is true that one has to look at this a bit carefully. In New Zealand most businesses are family businesses and they may simply spend a tax cut on much needed "market research" at a conference in Europe or a beach somewhere. However this will simply stimulate demand which will stimulate growth. Another issue is that many of these businesses are accountants who spend a lot of their clients money rorting inland revenue. While this is good for them and their clients it is fundamentally a self-imposed cost of business in New Zealand which nobody needs. So a bit of a collapse in demand for accounting services and tax lawyers would not necessarily be a bad thing.
When Ireland cut its corporate tax to 10% its tax take actually increased. Its industry flourished and people lost interest in blowing up the British and started to make money instead. New Zealand should do the same.
Before Australia does it to us.

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