Five Reasons why it is stupid to oppose new taxes

Geoff SimmonsTax and Welfare, Uncategorized

Whenever the Morgan Foundation mentions a new tax (such as the Comprehensive Capital Income Tax, or water charges, or a junk food tax), the inevitable response appears – No New Taxes!

This response tends to come from people who have a regressive, kneejerk opposition to change or a vested interest in opposing change. Either way, the public should not be persuaded by their arguments.

The fact is that the current already incentivizes certain behaviour, and discourages others. If we get the design of these incentives wrong (which we have), it can hamper our economy, health and the environment. Depending on how the revenue is spent, new taxes can make us richer, healthier, and reduce pollution.

If you tax it, people will do less of it

The basic rule of tax is that if you tax something people will do less of it.

At the moment we tax income, so people arrange their lives to get less income than they otherwise would. This is a change in behaviour that we don’t want – a distortion – that isn’t great for our economy.

The best way to overcome this is to make sure our tax system is as broad as possible (i.e. taxes as much different stuff as possible), but using a low rate. This reduces the distortionary effect of the taxation.

New taxes can help reduce distortions in a few ways. Firstly, they can help broaden the tax base, reducing other tax rates and thereby reducing the distortions that they cause. However, some taxes are even better than that – they are a win/win, because they can raise revenue while also reducing behaviour that is damaging to the economy, environment and our health.

New taxes can be used to reduce existing taxes

The first statement from the anti-tax brigade is often but we pay enough tax already!

And if they pay PAYE then they are right; the majority of wage and salary earners bear far too much of the tax burden in this country.

The fact is that half the wealthiest people in New Zealand don’t even pay the top rate of income tax. The reason they don’t pay much tax is because they are making use of the tax loopholes that exist around the income generated by wealth. That is why the Labour and Greens plans to increase the top rate of income tax would generate such a paltry return.

Those who criticise new taxes aren’t thinking about the other side of that equation – how the revenue would be spent. The answer to those who think they pay too much tax is simple – we can use the revenue from new taxes to reduce the tax paid elsewhere.

For example, to compensate for a new tax we could drop income tax rates to ensure that most PAYE earners are better off from a new tax. When combined with tax cuts, new taxes like the Comprehensive Capital Income Tax or water charges would be hugely progressive.

New taxes can be good for the economy

Where there are tax loopholes, the money will flow. And so it is in New Zealand, where the tax loopholes around housing have led to us overinvest. Thanks to the easy availability of mortgage money this increases our exchange rate. This in turn is a double whammy for the productive sector, which simultaneously faces a high exchange rate and is starved of the money they need to grow.

Closing tax loopholes levels the tax playing field. This means that investment will go to where it generates the best return, instead of where it will get the best tax treatment. A tax on housing would see New Zealanders finally facing up to the reality that we can’t get rich buying houses off each other – we actually have to produce stuff the world wants.

New taxes can be better for the environment

Often the actions of private individuals have much wider social costs. In economics we call these externalities. Where these go untaxed, private individuals tend to do more of the bad stuff than they would if they paid the true cost. One of the prime examples in New Zealand is dairy farming, which has created many negative impacts on water quality. If they had to pay for the water cleanup, there would certainly be less dairy farming around to create the problem in the first place.

The OECD argues that taxing negative externalities can actually make us all better off, in two ways. Not only can they reduce pollution giving us a better standard of living, but they can also encourage industries to operate in less polluting ways – a win-win for the environment and economy.

New taxes can be better for our health 

Finally, taxes can be used to encourage healthy behaviour. We already see the benefits of this with smoking and alcohol excise taxes, however now junk food is as big a threat to our health as smoking is. A tax on junk food could either encourage people to consume less junk food – reducing the long term health bill – or if they keep consuming it acts as a form of user pays for the future health bill.

Five Reasons why it is stupid to oppose new taxes was last modified: May 18th, 2016 by Geoff Simmons
About the Author

Geoff Simmons

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Geoff Simmons is an economist working for the Morgan Foundation. Geoff has an Honours degree from Auckland University and over ten years experience working for NZ Treasury and as a manager in the UK civil service. Geoff has co-authored three books alongside Gareth.