Taxes not low when Tax Freedom Day’s in May

Last Tuesday was Tax Freedom Day.

That’s the notional day when the Business Round Table calculates that the  average New Zealander stops working for the government.

Executive director Roger Kerr said:

 . . .   the calculation of 11 May was based on central government core expenditure, which is forecast to be 35.5 percent of gross domestic product (GDP) in the government’s December 2009 Half Year Economic and Fiscal Update.

 “Tax Freedom Day in 2008 and 2009 fell on 10 and 11 May respectively, according to revised data. However, it arrived two weeks earlier in 2007 (27 April). The big delay in the arrival of Tax Freedom Day since then reflects the rapid growth of spending during the last term of the previous government. The present government’s forecasts indicate little relief for taxpayers in the next three years. Mr Kerr said that the Business Roundtable regarded government spending as the best measure of the overall tax burden because almost all government spending ultimately has to be financed from present or deferred taxation (borrowing). It ‘looks through’ periods when the budget is in deficit or surplus.

The growth in spending in the previous government’s last term shows how expensive the 2005 election was and how much of our money was used to win it.

The dead rats National had to swallow before the 2008 election and the response to the world recession has kept state spending higher than it ought to be.

There’s little comfort in the finding that Tax Freedom Day here is earlier than the OECD average of June 14.

This reflects the sharp expansion in spending by many OECD countries, partly in response to the global financial crisis. It highlights the need for “large scale fiscal adjustment” as countries recover from the economic downturn which is recommended by the International Monetary Fund.

A comparison with those countries  came up again last week with a report showing that our tax wedge – individual tax as a percentage of labour costs – is amongst the lowest in the OECD.

However Kiwiblog  points out this report isn’t comparing apples with apples:

This is not a measure of the overall level of taxation in the economy. It is a measure of the difference between gross pay and net pay. There is a huge difference.

 Macdoctor also noticed that report  didn’t take account of consumption taxes, compulsory superannuation and employers’ contributions to social security.

Back to the Business Round Table report which noted:

 A number of fast-growing Asian and other countries have levels of government spending, and hence tax burdens, that are well below the OECD average. Their advantage has increased as they have not generally increased spending to the same extent as developed countries.

 If the tax burden is measured as a ratio of taxation to GDP instead of spending, the picture of New Zealand as a highly taxed country is accentuated. The latest OECD figures show that the ratio of ‘general government total tax and non-tax receipts’ to GDP for New Zealand is 40 percent for 2010, well above the average OECD ratio of 36.6 percent and much higher than Australia’s ratio of 33.1 percent.

Kerr isn’t suggesting there should be no tax:

“While soundly based government spending on public goods and a safety net is justified, economic research suggests that beyond a certain point government

spending and taxation are harmful to economic growth.”

Finance Minister Bill English has given pretty strong signals we’ll get tax cuts in Thursday’s Budget.

That in tandem with measures to improve public service efficiency and economic growth gives some hope that Tax Freedom Day will be earlier in future.

That will provide security for essential public services while allowing us to retain a bit more of our own money.

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