Steven Joyce’s well foreshadowed reshuffle last Thursday of tax thresholds, rebates and allowances tells us there is unfinished business from the Ruth Richardson era.
That business is not yet more deregulation and trimming of the state nor another “mother of all budgets”, Richardson’s 1991 attempt to drive Sir Roger Douglas’s revolution to new heights, or depths, depending on your perspective.
The National party conference the weekend after that budget was in tumult. That left a lasting impression on Bill English, then a puppy on the back benches. Radicalism, he now explains, must be incremental, not all-at-once.
Richardson’s more measured contribution was what she stayed on as a backbencher to see through into law after being fired when National’s vote plunged 13 percentage points in the 1993 election.
She had put on the table a Fiscal Responsibility Act, later incorporated by Michael Cullen into the Public Finance Act, requiring governments to set out a fiscal strategy, explain how the strategy’s targets are to be met and explain later its success or failure.
Joyce’s contortions last Thursday suggest there is scope for some additions to that legislation — or, some would add, for a harder look at a universal basic income (UBI).
Joyce faced two problems.
The simple one is that as wages and salaries rise, people pay more of their income in tax as some income, then more, rises through thresholds and attracts higher tax rates.
The thresholds were last reset in 2010. So there have been seven years of that “fiscal drag”.
Joyce lifted the bottom threshold, below which the tax rate is 10.5%, from $14,000 to $22,000 and the second, at which the rate is 17.5%, from $48,000 to $52,000, above which the rate is 30%. To the annoyance of business and ACT’s small-state ideologues, the top threshold, above which the rate is 33%, was left at $70,000.
Business and the ideologues also grumped that company tax stayed at 28%.
The threshold adjustment was the easy part. Then Joyce had to deal with the complex, intersecting effects on take-home income of Cullen’s Working for Families rebate, the independent earner rebate introduced by Bill English and accommodation allowances.
Joyce lowered the threshold above which the Working for Families rebate is phased out from $36,350 to $35,000, upped the phase-out rate from 22.5% to 25% but raised the payout for children under 16. He dropped the independent earner rebate. He upped the accommodation allowance and student accommodation benefit.
But these thresholds will now stay in place until some future finance minister gets around to adjusting them. So, more fiscal drag, more complexity, more unfairness.
One option would be to pick up a past United Future idea and require in the Public Finance Act periodic adjustment of thresholds by the movement in wages, say, every three years. Finance ministers could not then raise taxes or cut aid by stealth through inaction, then in election years play Santa Claus.
Santa Claus could be brought to earth if the Public Finance Act was also changed to require budget projections to be discounted by population growth and price rises. This would vary from portfolio to portfolio but would call out ministerial claims of generosity.
But why is there a Working for Families rebate in the first place? Because wages are too low.
That has had some from both the right and left (including, tentatively, the Labour party) calling for a (taxed) UBI, paid to everyone, arguably including children, thereby in theory ensuring no one has to be in poverty.
This could be simply administered through the tax system and would remove the complexities tax rebates, special allowances and abatements of benefits add. It would also remove the punitive effective marginal tax rates some pay as they navigate thresholds and abatements.
On Friday the Organisation for Economic Cooperation and Development (OECD) issued a short paper on how a UBI could work in a number of countries. It said Ontario is actively exploring it, Finland is experimenting and the French Senate recently recommended an experiment.
The OECD concluded that a “modest” version “could be desirable if the main aim was to more equally share the benefits of globalisation or technological progress”, a major factor in the rise of populism.
But, its study showed, a great deal depends on the rate, the retention or not of some targeted benefits such as for rent, the equity issues between couples and individuals (such as sole parents) and the transitional gains and losses, some possibly large, for different groups.
It could affect the willingness of some to work (but that is a factor of the existing complex system). To work well, it would require a lift in the tax rates. It would be difficult to keep it “budget-neutral”.
In short, the OECD said, a UBI is not as simple as it looks.
But if not a UBI, more election-year Santa Claus budgets are likely. Has the time come for a “fiscal responsibility” upgrade?