Deciding what we want to be

Colin James’s speech to the Tax Conference, Christchurch, 15 October 2004

Tax is a three-letter word. Tax is the ultimate expletive-deleted. Tax fuels much passion. So you folk have a special place in our hearts. Whichever side of tax gathering you are on, you command our estimation and our love. You are right up there with dentists.

Tax is big in our lives. It makes holes in our bank balances and it plugs holes in our society. It makes most of our politics. A great deal of what we argue over can be phrased as a tax issue. And we are right now in the middle of a long and important argument about the sort of country we want. That is what I want to talk about tonight.

I am, of course, not talking about paying tax, even though it is a hot topic in the cabinet today. Paying tax is not usually a pleasant activity, though it can be made less painful if the numbers IRD produces are intelligible (they are not) and relate more or less to one’s accounts, if there is a kindly tax accountant who knows the law and applies it, values accuracy and doesn’t play games with the department and if once the payment is done that is the end of the matter as it is when we buy a steak or a car. Those of us who want to pay the tax we owe efficiently and without fuss — and I count myself among them — should never be bamboozled — and I count myself among the bamboozled by IRD’s arcane accounts, even though I am reasonably numerate. I also fail to see why businesses should be forced into gathering personal income for the IRD and then subjected to threats for mistakes.

But that is all I am going to say about paying tax. Anecdotes, grizzles or wailings are not my business here tonight.

Instead, I want to muse about what tax represents in the big changing picture.

Let’s start with the old notion that tax is the Queen’s ransom. In Shakespeare’s day, when the monarch needed some loot for a war or for a wedding or just for high living, the poor and middling people got dunned and often done as well. In America revolutionaries put a stop to that 228 years ago. In other democracies since then the royal tax prerogative has been whittled away.

Now in democracies tax is a sort of social compact. There are three parts to this compact: (a) agreement that the government should do things and provide services; (b) agreement that the government may levy taxes to pay for what it does and individuals will pay those taxes; and (c) agreement on what the government should do and what services it should provide.

A very few libertarians stand outside the first agreement. Rather more interpret the second one liberally and chisel away at their obligation. That is partly a matter of individual psychology and also in part because of the very nature of the third agreement, which, being derived from the political process, is rough and ready and creates large minorities of dissidents and because of that is in constant flux, constantly renegotiated.

That is at the heart of our politics: just what should the government do?

Part of the problem is that tax is not just a payment for services. It is also, among other things an economic instrument, an instrument for transferring funds and an instrument of social adjustment.

Take the first: an instrument of economic management. Governments overcharge and undercharge to achieve economic ends for good and ill.

President George Bush’s tax cuts are a classic example of undercharging to stimulate economic activity. The certainly did stimulate consumer spending but they also have stored up longer-term problems embedded in a federal budget deficit that will take years to correct — and that correction will be a drag on the economy. Moreover that boost in consumer spending has contributed to a balance of payments deficit that is destabilising and distorting the world economy. The United States motors along only because Chinese and other east Asians, for reasons of their own, are willing to fund its twin deficits and thus American consumers’ dangerous debts. Americans, in other words, are living a delusion. That is fine for Mr Bush’s re-election bid but not for the rest of the world, including this far-flung outpost.

Michael Cullen’s fiscal surpluses, on the other hand, are a classic example of overcharging. His surpluses are intended (a) to prove fiscal prudence so businesses will have the confidence to invest — a necessary political demonstration in the wake of Sir Robert Muldoon’s wildly irresponsible deficit financing of the early 1980s — (b) to contain debt, the interest on which takes funds which could otherwise be spent on services and (c) to build up reserves (such as the super fund) for foreseeable and unforeseeable future events and eventualities.

How did Dr Cullen get his surpluses? In part, by luck. He has happened to be Finance Minister at a propitious time. Revenues have run ahead of projections as a result of the improvement in the economy as a result of the 1980s and 1990s reforms (which he calls the “failed polices of the 90s”), high commodity prices and a housing bubble which has encouraged households to rack up debt and spend lavishly on consumer goods — that is, to spend more than they have been earning.

In a sense, that dissaving by households is the obverse of the government’s saving — notably the Cullen super fund. But households cannot go on for ever spending more than they earn. The house market’s slowdown signals the end of that spree. This should not be a problem for the government in the next election because employment and wages are rising, especially in the sickness and ignorance industries (nurses and teachers) and the Budget’s tax credit and family assistance programme will still be working through, all of which should more than offset the impact of interest rate rises (although oil remains a worry). But longer term it is a bother because the chronic balance of payments deficit we have lived with for 30 years or more tells us we are not saving enough.

A horrible shock would fix this habit. So might the government axing the Cullen fund and so frightening people into worrying about their old age. Instead Dr Cullen has turned to tax to do the trick: the Harris committee’s idea that you can use the tax system to skim money off employees’ wages and salaries unless they opt out, which might possibly — I say might possibly — lift overall savings. That illustrates the second use for the tax system I mentioned above, as a sort of funds transfer mechanism for the likes of child maintenance and student loan repayments. This could easily be extended: why not for electricity bills or credit cards?

If you think I am joking, ponder this: the tax system has long been used to transfer funds from some individuals to others, from some groups to others and from one generation to another. That is, tax is a instrument of social adjustment and change.

It is this function that is the most contentious. Why? In part because if there was less social re-engineering, there would need to be less tax. A classical liberal such as Don Brash or Rodney Hide would add: there would also be faster economic growth which would lift overall welfare. That, too, is contentious and depends on the imprecise meanderings of the Laffer curve Dr Cullen talked about this morning.

The core of this argument is liberty versus freedom. These are not the same thing.

Liberty, Stephen Franks of ACT would argue, is the absence of constraints, especially arbitrary action by governments. Mr Franks’ tough law and order approach is founded on liberty: we have, he says, a right to preserve our liberty to go about our daily lives in the way we see fit, provided we do not trespass on the liberty of others. Criminals who beat us up or steal our possessions trespass on our liberty. We are entitled to lock them up to stop them. The same goes, it seems to me, for those who don’t pay their due tax, since that requires all of the rest of us to pay more than we would otherwise have to — though I think Mr Franks’ leader has another view.

Stephen Franks’ liberty is essentially equality before the law. We have heard a lot about this in the context of the Treaty of Waitangi, to which I will return later: “one law for all”.

Freedom, on the other hand, is the word preferred by social democrats. They argue that people cannot be free if they do not have the wherewithal to realise their potential. This was the thinking that drove the 1972 Royal Commission on Social Security and got us a social welfare system that many see as burdensome and some see as unworkable or counterproductive — the antithesis of liberty, a sort of imprisonment of those who fall under its spell.

For the social democrat, being free requires access to education — and to that sort of teaching that gets us to learn, whatever our background. Too many teachers have presumed large brown kids in their classes cannot learn, so, of course, they haven�t learnt; Professor Stuart McNaughton’s pilot programmes in South Auckland are turning that around.

A social democrat like Steve Maharey would also say that to be free we must have access to good health care, good housing and good food. If we are hungry, live in damp and overcrowded houses and are sick, we are not free and cannot be full citizens.

Moreover, Mr Maharey would add, we must be free to know and live our culture, whatever it is, and have it fully acknowledged and respected in our society. That has fuelled a lot of the fire in the Treaty arguments over taniwha, powhiris and mandatory consultation of iwi.

Bring that back to tax. Freeing people from hunger, ignorance and cultural alienation costs a lot of money. And, the modern social democrat would argue, only the state has the requisite power to ensure that cost will be met. Which it does through the tax system.

The social democrat would also argue that this social re-engineering — investment, Michael Cullen called it in his address to you this morning — is a vital contributor to everyone’s freedom � indeed, our liberty.

This is not an easy calculation. Let’s go back to the compact I talked about before: the rough agreement we work out through the political system about what the government is to do. We can fairly readily agree we need some defence forces and a police force, though we will disagree about the structure and size of them — and in passing I note Don Brash’s fiscally rash promise to spend whatever it takes to get a police force big enough to stop crime. We can also fairly readily agree on spending from which we, as individuals or families or groups, get some benefit, such as education and health care. But we are much less likely to agree — so studies of voters tell us — on spending on the unemployed and solo mothers and so on.

That is the challenge to the social democrats: how to get us to agree, with the tax burden high as it is, to their social re-engineering.

Social democrats would argue that using taxes to reduce inequalities and relieve financial burdens on specified groups is more likely to create a cohesive society. So, even if some taxpayers get only a fraction of their taxes back in services, social democrats would argue, they benefit by living in a more harmonious, or at least less fractious, society.

Moreover, the social democrat will argue that the state does many things better and more equitably than individuals or non-government organisations, including companies, can. This applies, the social democrat would argue, to most health care, most education, most social welfare, much infrastructure development and maintenance and almost all preservation of our natural, historical and cultural heritage.

So this is a taxing government. It gives up no gains, except here and there at the technical margins. Hence someone with average earnings now pays 33c at the margin and 10 per cent are paying 39c. United Future says this should be fixed by raising the tax thresholds, preferably in line with inflation. Dr Cullen addresses it by complicated tax credits and other assistance which builds the state as a big factor in the lives of otherwise relatively self-sustaining households.

Dr Cullen has also not shrunk from raising new taxes, such as the carbon tax, or increasing existing ones, such as on petrol and cigarettes, or whacking on new or increased mandatory charges, which are in effect taxes.

So, to reiterate, this is a taxing government. It justifies its hunger for your money by pointing to criticisms of the social services and the infrastructure and, more recently, by arguing, as Steve Maharey does, that spending to get beneficiaries into sustainable employment, which is not cheap, is actually an investment because it produces a return in the form of taxes later.

The classical liberal would argue the contrary: that society will be all the better for expecting and trusting people to work out things for themselves. So there should be tax cuts and much greater flexibility in education, health and other social services and infrastructure development. We will, the classical liberal will say, be all the richer both financially and psychologically for being more at liberty.

That brings me to aspirations.

Social democrats don’t talk much about aspirations, except in the sense of the state having aspirations for its citizens which it then helps them realise. And to some extent the state can help. Good teachers can rescue a youngster from low or zero aspirations in a substandard home life. But to expect teachers universally to do that is optimistic. All too often the state seems to have excused poor parenting and low aspirations: the result can be seen in the young people in our courtrooms. Those who have low aspirations will, like as not, live up to them. That is a worry.

The classical liberal does talk about aspirations and the importance of family in imparting high aspirations. John Key — who is far and away the brightest star in the National party and a future leader — is a product of that process: he had to live in a state house after his father died but was imbued with the example of his Austrian Jew mother who was determined to get her own house and did. Interestingly, John Key’s memories of state house living have made him a centrist man of the right, not a strict classical liberal. In my view he is nearer the essence of what will turn National back into a party of government than Don Brash the classical liberal is. And John Key knows the immense value of high aspirations.

Mr Key’s experience is hugely at odds with large and probably growing numbers of those who now live in state houses, especially those who are Maori or Pacific island Polynesian. They live in a culture of defeat. If at this point you are tempted to ask, so what? ponder this: They will be a growing percentage of those of workforce age over the next generation or two. How do we get a rich country if a growing proportion of the population underachieves? We need as many of our fellow citizens to have high aspirations as possible. That requires a change of culture.

And maybe a change is just beginning.

For 30 years the focus of the Maori leadership and in Maori policy has been on rights: redress of injustices, the recovery and reassertion of the culture and the reclamation of a significant role in decision-making. An almost revolutionary change has been wrought by the political elites of both main parties over the past 20 years. Moreover, we are now beginning to see Maori and island culture influencing mainstream culture in a real, not just tokenistic, way.

But now, as the reaction by the public and by the cabinet to Dr Brash’s Orewa speech has made clear, the rights-based push has reached high tide — at least for now. The policy focus henceforth will be much more on educational and economic development. The government’s hui taumata in March — which John Tamihere, a development-oriented minister, has been driving (and for that reason he would be a great loss to the nation if he has to go in the wake of the latest drama) — is no accident of timing.

And, as it happens, this refocusing is coming at a time when a growing number of Maori in their 30s are putting their emphasis on and energies into development. I have only anecdotal and some focus group evidence for this but that evidence has been building over the past few years. It won’t be starkly evident for maybe another 15 or 20 years but I sense that we are on the verge of a new phase and I think it is a cause for optimism.

Which brings me back to the compact I talked about at the beginning. This compact, as I said, is under constant criticism and renegotiation. That is especially true now, after the revolution in the 1980s and 1990s and the revolution the place of Maori in this society, economy and polity.

One period when there was not much renegotiation of the compact was in the 40 or so years after the second world war. During that time the compact was fairly settled: built around the guaranteed job, firm social security and a large state presence. That compact was, however, shattered in the revolutionary period. We are still negotiating the new compact.

To see what might be in this compact, we should pay attention to the under-40s who lived none of their adult lives under the 1945-85 compact. My very rough reading suggests that as they become the majority and able through their numbers to determine the compact, it will emphasise more liberty, more self-reliance, more choice, variety and customisation and more reciprocality — obligations in return for state assistance.

The big political question at the heart of the debate is which major party will command that debate. For the moment, Labour is strongly positioned in public opinion and, under Helen Clark, it is bent on establishing itself as a mildly reforming small-c conservative long-run government dominating the next 15 or 20 years, as National was and did from 1949 to 1984. But the 50-somethings who run Labour are not in tune with the under-40s on liberty, customisation and reciprocal obligations.

That is not to say they won’t get there: Helen Clark is very determined to stay in office, very brainy and listens hard to the electorate. But 30-somethings and 40-somethings John Key, Katherine Rich, Simon Power and Bill English — all of the National party — are much closer to the rising generation in their attitudes and thinking. If Helen Clark and Co falter, it may be this lot that redefines the compact and defines the next true long-run government. We shall see.

What it means for you is that tax will be renegotiated as part of this new compact. Of course, there will be myriad technicalities for you to make your various livings out of and to bamboozle us lesser beings with — and isn’t that fun for you and hell for us? But there will also be large changes which may shape your working lives rather differently over the next generation.

Tax, as I said, is at the heart of our society. My fervent wish is that a generation hence this society will have changed in such a way that we see you less as dentists and more as kindly agents of our wellbeing. Good luck.