Tax reform should be pro-worker, pro-poor

Commentary: Omar Hamed, Socialist Aotearoa (Wellington)

The typical underpaid New Zealand worker is someone who spends their days cleaning rooms in a hotel, washing patients in a hospital, restocking shelves in a retail store or cooking burgers in a restaurant. They might even do a couple of these jobs to make ends meet. They work hard, pay their taxes and hope that the rich and powerful who run the businesses they work for and the Government give them a fair go. What they don’t expect is that the Government will in the short time it has been in office increase the amount of GST they have to pay, their ACC levies and slash the contribution their employer makes to their Kiwisaver scheme in half. They might even think it is a bit hypocritical that the Government will then go and give the richest 7% of New Zealanders a tax cut from 38% and 33% to 30%. They are probably worried too that they will be the ones paying for the proposed land and capital gains taxes through higher rents.

An underpaid worker would greatly benefit from improvements in our tax system to make it fairer and more progressive. Progressive taxation plays an important part in ensuring that the state has enough resources to fund social services and that all members of society contribute an amount of tax proportionate to their wealth. In a capitalist economy where the employing class profits of the labour of working class New Zealanders underpaid workers do not receive payment for their full value to society through their wages. One good example of this has been the recent release of the report by the UK based New Economics Foundation A bit rich: Calculating the real value to society of different professions. In the report the authors found that some of societies highest paid jobs actually destroy social value while low paid workers like hospital cleaners create immensely more social value than they are compensated for. For example, “While collecting salaries of between £500,000 and £10 million, leading City bankers to destroy £7 of social value for every pound in value they generate.” Capitalism is not a fair or just system for the distribution of resources and work across society however that should not stop us from demanding that the state’s taxation system be designed as much as possible to reduce social inequalities, poverty and hardship from society.

The following constellation of tax refoms could be instituted as a viable alternative to the tax reforms proposed by the Tax Working Group.

1. Extend the Independent Earner Tax Credit to all workers earning under $24,000pa regardless of whether they receive benefits

Possibly the best and only good part of National’s tax cut package delivered after the election was the Independent Earner Tax Credit (IETC) which gave childless earners on between $24,000pa and $44,000pa a $520 tax credit each year. The question that should be asked is why the IETC is not credited in full to workers on less than $24,000pa, or workers who also receive benefits such as a student allowance or unemployment benefit. This question is particularly valid as unemployment continues to grow and many low wage workers also study or top up their wage through an unemployment benefit as a result of high unemployment levels.

2. Keep the ACC earners levies to 2009 levels for earners of less than $50,000pa via a tax credit of the same amount.

The Governments increases in ACC earners levies on 1 April 2010 will hit low income workers again, illustrating that what National gives workers with one hand they take with the other. If the Government was serious in its commitment to ease the tax burden of hardworking New Zealanders-they would retain ACC earners levies at 2009 levels for workers earning less than $50,000pa through a tax credit to the same value as the April 1 rises. For a worker who earns $30,000pa this would mean they would receive a tax credit of $90 to cover the rise in their Earners' Account Levy from $1.70 to $2.00 per $100 earned.

3. Scrap plans to cut the top personal tax rates and make the In Work Tax Credit available to children of beneficiaries.

Plans to cut the top personal tax rates from 38% and 33% to 30% represent enormous tax cuts to those wealthy earners in the richest 7 percent of New Zealanders. However a better idea would be to increase the tax paid on company profits and make it progressive in the same way that personal tax rates are. At the other end of the scale the Government should end the discrimination against the children of beneficiaries and allow their parents to receive the In Work Tax Credit. By allowing the $60 a week tax credit to be paid to workers on benefits, who between them raise 200,000 children, on sub-liveable benefits. As Janfrie Wakim of the Child Poverty Action Group said, “We ask the new Government to make the IWTC available to all low-income families with children, regardless of whether they are working, or how they lose their jobs. This would be the best anti-child poverty, anti-recessionary spending the Government could do.”

4. Reduce GST to 10%, remove it from food and institute luxury goods tax.

Raising GST levels would hit workers hard in the pocket at the checkout counter, paying bills and filling up their cars. The current proposal to raise the GST workers pay on our toilet paper, fruit and vege and marmite spread would be to just cover the costs of giving the richest New Zealanders more disposable income to spend on luxury cars, overseas holidays, fine dining and expensive goods. Instead the Government should reduce GST to 10% and remove it from food to give hardworking Kiwis a break from rapidly rising food, utility and petrol prices. We could offset this tax cut by instituting an additional 10% tax on luxury goods such as expensive cars and boats, First-class airfares, sales at luxury hotels and designer jewellery.

5. Bring in capital gains tax and strong rent-control rules.

While the proposal by the Tax Working Group for a capital gains tax is long overdue in the housing sector, to dampen property speculation and increase tax revenue from an area of the economy that has become increasingly profit driven, the risk to low income New Zealanders is that landlords will pass on the tax costs through rent increases. The way to prevent this from happening is to bring in rent control in high density, high demand urban areas such as Auckland, Wellington and Christchurch similar to in San Francisco that only allows annual rent increases of 60% of the CPI, up to a maximum 7%, including when a tenant vacates a property.

6. Close the tax loopholes for big business and the rich.

As the Tax Working Group discovered, “an Inland Revenue sample of 100 of the highest wealth individuals in New Zealand, data indicate that only about half are paying the highest marginal tax rate on their income.” Alarmingly also, “The ability to shelter income in trusts cost the government roughly $300 million in tax revenue in 2007.” However a better option than reducing all personal tax rates to 30% is to create a commission of inquiry to come up with recommendations for closing these tax loopholes. The $300 million or more each year which is being fraudulently kept by the rich could then be used to fund breakfast in schools programmes for children in low decile schools or even better-restoring funding to budgeting and accountancy night classes for workers.

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The above suggestions are offered up as an alternative pro-poor, pro-worker tax reform package to the one currently being debated by the elite media and business commentators. As Richard Wilkinson and Kate Pickett the authors of The Spirit Level: Why More Equal Societies Almost Always Do Better, remind us, "almost all social problems which are more common at the bottom of the social ladder are more common in more unequal societies". Thus reducing inequalities through a fiar and just taxation system is good for all New Zealanders.

We shouldn’t kid ourselves that any of these proposals would be considered by either the National or Labour parties but we should be clear in our ideas that the current tax system, whilst needing modernisation and reform should be modified in the interests of promoting reduced inequality, broadening the tax base for increased social services and lessening the financial hardship for New Zealanders struggling to make ends meet.