Tax Cuts for 2023 election? Start with GST Mr Luxon

When Christopher Luxon announced his tax cuts proposal earlier this year it was widely scorned because, despite costing $1.7 billion, analysis showed most of the money would go to the wealthy.

A person on the minimum wage for example would get just an extra $112 per year while someone on a median salary of $55,000 would receive about $800 per annum. However, those on the highest incomes would get the lion’s share with Luxon himself taking home a whopping $18,000 extra per year.

Despite the negative feedback to Luxon’s proposal National seems determined to press on with a tax cut proposal. If they do, then the focus should be on cutting GST.

GST is a “regressive tax” which means it takes most from those on low and middle incomes and little from the very wealthy. A cut in GST would benefit those facing the toughest times.

Already Aotearoa New Zealand’s tax system is heavily weighted against those on low and middle incomes.

Wage and salary earners pay the highest rates of tax because they pay tax on every dollar they earn and every dollar they spend and for those on the lowest incomes the tax rates are particularly savage. The lowest 10% of income earners spend 14% of their net income on GST while the top 10% spend less than 5% of their income on GST.

Some countries, such as Australia, have exemptions for GST on such things as basic foods, medical and health care products. We have no exemptions.

Considering GST and income tax together, a minimum wage worker pays nearly 30% of their income in tax which the super-rich will typically pay less than 10% of theirs to the government.

In tax talk this is politely expressed as “the income sources of the super-rich do not attract tax as other activities do”. In other words, there is a lot of freeloading going on.

For example, in the 2014 tax year the HWI (High Wealth Individuals) unit of Inland Revenue found that 87 of the 212 New Zealanders with net wealth over $50 million were declaring incomes of less than $70,000 for income tax purposes. They were not even in the top income tax bracket!

If “tax is love” as economist Shamubeal Equab says then there isn’t much love to go around at the top of the income pyramid.

So why does GST affect those on low incomes the most? Simply because people on low incomes spend every dollar they earn but those on higher incomes are able to save and therefore pay a smaller share of their income on GST.

We have what can only be described as a bizarre and immoral tax policy which says the more unearned wealth you gain, the lower your overall tax rate will be. It’s as though the Sherriff of Nottingham designed our tax system. It wouldn’t look out of place in medieval Europe.

Why on earth should we allow those on the lowest incomes pay the highest rates of tax?

What our main political parties know is that their big political donations will quickly dry up if they propose the wealthy pay their fair share of tax. They have allowed themselves to be held to ransom on even the most basic changes to the tax system.

We are already an outlier amongst countries we like to compare ourselves with by having a low top income tax rate and a capital gains tax which is easily avoided.

We have been repeatedly told by politicians from the major parties that the best features of our tax system are its broad base and low rates. It sounds fair but in fact this is the very problem – it is the key driver of income and wealth inequality.

We need a fairer, more progressive tax system which taxes every dollar equally, no matter how it is earned.

And it’s time we got rid of GST altogether.

The $26 billion to replace it can easily be found by taxing the unearned incomes and unearned wealth of the wealthy and super-wealthy. If the 1% pay their fair share in tax the rest of us will all be better off.

So let’s have this debate about tax cuts – starting with proposals to slash GST.

Bring it on Mr Luxon!