Thursday, May 17, 2007

Budget 07 - was that it?

photo: scoop

Dr Cullen has produced his eighth budget and now that it lies steaming in the road has invited us all to gather around and admire it. On the face if it, one has to say that it has some useful features. The mingy tax reduction for business and research and development right-offs are a start, while kiwisaver at least starts to deal with our horrendous lack of saving. Its just that they should have been in a budget eight years ago. All of this stuff is way overdue. Time is moving on and New Zealand's bureacrats are simply not keeping up.
First we have to recognise that the world of eight years ago has gone. We have entered a new Sinocentric world order where labour is practically valueless. Not only is labour valueless but China will rapidly develop its intellectual power as well (the number of people in China with IQs in the top 25% is more than the population of the United States) which coupled with its growing industrial muscle means it will become the pre-eminent economy in the world in about 20 years time. India, due to its democratic government and hot climate, will trail some way behind.
In such an environment we have to look at what New Zealand can contribute to the world. Our main advantages are an excellent climate for growing and an extremely low population density. This allows us to remain an effective global farm. Our size however means that if we are to maintain our living standards we will need to focus on high value-add niche products based on our own research and development. It also means we can be an attractive tourism destination for those seeking escape from the world's crowded places.
Now lets look at where we actually are.
The biggest problem faced by New Zealand at present is runaway land prices. Land prices push up indebtedness, fuel consumer borrowing and, through the knee-jerk reaction of the Reserve Bank increase interest rates. High land prices mean farmers tend to farm for capital gain rather than production, young people cannot afford to save for their retirement through leveraging off secured borrowing of an appreciating asset, and wealth distribution creates an ever-wider gulf between haves and have-nots. They mean that agriculture is becoming an industry divided into landowners, professionals and labourers.
There are two sources of runaway land prices. One is demand and the other is supply. Demand is high because the boomer generation all over the world is looking for a good place to invest its savings. Unlike many countries New Zealand is happy to absorb any money the world has to offer because it does not restrict land demand to its own residents. Land is a good place to invest in New Zealand because capital gains aren't taxed and there is a reasonable guarantee of appreciation. Supply is limited because district councils keep it that way partly because they can't afford to provide services over a wider geographical area (eg better roads and sewerage treatment) and partly because it improves the rateable value of properties in their catchment and hence their own income.
The second biggest problem in New Zealand is the cost of development. Building anything in New Zealand has become extraordinarily expensive. In planning the rights of property owners have been eroded to the point that they almost don't have any, while in building the legislation has effectively become a means to creating a closed shop. In the trade-off between community and owner interest currently the community seems to have rather too much say in the way owners can spend their own money. Even the Government is finding that matters in the national interest it can be effectively stymied by a small but determined group of placard wavers who can impose costs out of all proportion to the merits of their arguments.
So what should we do?
Well first I'd rebalance the tax system so that production is rewarded and sitting on appreciating assets wasn't.
That means a capital gains tax of about 12.5% on realised gains. That would be balanced with a drop in the company income tax rate to 10%. Costs of business would however no longer be deductable. In Ireland that actually led to the Government taking in more tax because all the companies that had spent up large on accountants simply switched to paying taxes instead. It would also improve the competitiveness of firms in New Zealand so that more employment could be retained here. The company tax would be channelled back to fund local government. The capital gains tax would be retained by central Government. Rates would be discontinued.
I'd also introduce a flat tax of 33% in the dollar. However ( and this is a very big however) I would introduce a zero tax zone of one half of the annual average wage. Thus if the annual average wage is $38,000 you would pay no tax at all on the first $19,000 of it. This would mean that the bottom 1.5 million earners in the population would not need to trouble the Inland Revenue Department at all and reduce the administrative overhead for both themselves and the Government. It would mean that tax rates always rose with inflation, would eliminate the poverty trap whereby more is gained by staying on a benefit than by working and would provide an incentive for top earners to increase their income.
To encourage development that was clean and green (and more important to silence our European food miles critics) I wouldn't bother with emissions trading. Instead I'd introduce a series of carbon taxes and eliminate the petrol tax. The carbon tax on liquid fuels would be based on a rate of $40/tonne carbon (same as current petrol tax), but apply to diesel, jet fuel and marine fuel as well. For gas and coal I'd start at $10/tonne CO2e and escalate it $1 every year until 2037. That would provide long term certainly and achieve parity about the same time that cars start running on electricity. There would be no tax on methane, we do not need to impoverish our farming sector.
The next radical proposal is to reorganise local government (again). Essentially this would mean amalgamating district councils into regional councils but increasing the representation and influence of wards in regional government. This way big issues are dealt with by large bodies and patty issues are dealt with by small bodies. This would necessitate a re-write of the Resource Management Act and the Local Government Act. The purpose of the RMA would be changed to one of sustainable development rather than sustainable management and the department in charge would be switched from the Ministry for the Environment to the Ministry of Economic Development. The Environment Court would be elevated to a senior court.
Naturally all of this is very radical stuff but its objectives are simple: to create a tax system that encourages making an income; a tax system that encourages regional government to support enterprise rather than kill it; a system that provides an incentive to work; and eliminates unnecessary hindrances to productivity.
The only problem with this plan? The armies of accountants, real-estate agents, and lawyers, who rely on Government being obstructive would suddenly find themselves out of work and would fight in bitter opposition to the end.

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