Hodgson Pete: Taxation (Urgent Measures and Annual Rates) Bill — First Reading Second ReadingText is incorporated into the Bound VolumeHodgson Pete: Taxation (Urgent Measures and Annual Rates) Bill — First Reading Second Reading[Sitting date: 09 December 2008. Volume:651;Page:94. Text is incorporated into the Bound Volume.]Hon PETE HODGSON (Labour—Dunedin North): I was not going to take a call in this debate but a few things have occasioned me to. The first is that there has been a very long gap between National speakers; they are not showing up to defend this legislation and I am not sure why. That will not stop this Opposition laying out why we think this package is wrong in the wrong time and designed in the wrong way. The second reason I got to my feet is that I have just heard the speech from the ACT member Sir Roger Douglas and that is a speech I have heard for 20 years. That is a speech I have heard for 20 years—where the member says that he cares for the low paid and then votes to put up the taxes compared with what they would be in law already on our law books. This is a man who says he cares about the working classes and when he was Minister of Finance and was followed on by Ruth Richardson this country saw the biggest rate of increase in inequality in the Western World. As measured by the Gini coefficient we became the second most unequal country in the world behind the United States.So when the member for the ACT Party gets up to say he is going to vote down more progressive legislation—as far as low-paid people are concerned—and vote for something that does low-paid people in the eye and he is going to justify that by saying that low-paid people are actually very rich and that they are part-time spouses of very rich people then I think that that is a bewildered analysis and it needs to be laid to rest.Generally speaking people who receive small amounts of money are poor and people who receive large amounts of money are not. That is roughly how it goes. Nomatter how many times over how many decades some sort of bewildered analysis says the opposite it does not make it true.I have another reason for getting to my feet and that is that we have a global downturn coming it would seem and the question is how it will be distributed in this land. How will the downturn be distributed? Who will be taking it in the neck? Here is the beginning of the answer and later this week we will have more of the answer. We will be going after the low paid. There will be a lower tax cut for the low paid under the National Government’s plan between now and 2011 than there would have been under the Labour Government’s plan that is already on the statute book; that is already in law. So we are about to strike down law this week that would give low-paid people a better deal and high-paid people not such a good deal and put in legislation this week that will give low-paid people a worse deal and high-paid people like me a better deal—and that is wrong. It is wrong because it means that the distribution of the forthcoming recession will be meted unequally on those who can least afford to stand that decrease in their living standards.But I have another reason for getting to my feet. This legislation removes the research and development tax credit that came into force on 1 April this year. It does not reduce it; it removes the research and development tax credit that came into force on 1 April this year—and that is really really dumb. That is a very very dumb thing to do.Let us look at what the tax credit did. It said to folk that if they spent money on research and development attributable to the tax credit they would receive a 15 percent tax credit whether or not they were loss-making. If they were loss-making the Inland Revenue Department would actually send them a cheque if they undertook research and development that qualified. The reasons the tax credit was put in place are several-fold. One reason which the economic purists have to acknowledge is that research and development is risky and therefore having a 100 percent deductibility does not cut it. The second reason is that even if the research and development succeeds it tends to be taken up by firms other than just the firm that undertook the research and development. In other words it is not entirely appropriable to the firm that undertook the research and development.That is the basic economic theory behind having a tax break for research and development. That is why nearly every Western nation in some form or another has some sort of contribution by the State to a research and development investment undertaken privately. That is why nearly every Western nation does that and I am sad that the previous Government took so long to get a research and development tax credit in. We were opposed by Treasury; we were opposed by the Inland Revenue Department. Time and time again they came up with their view that the rest of the Western World had it wrong and that somehow New Zealand had it right. Finally we prevailed and I acknowledge the work of Dr Michael Cullen in that respect.The tax credit goes to those businesses that I assert are more likely than businesses in general to pull us through this downturn. Let us look at companies that undertake research and development. They are more likely to be high-growth companies; not always but as a group—there are about 3000 of them—they are more likely to be fast-growing companies. As a group they are nearly all involved in the real economy. We do not find appropriable research and development undertaken by money traders; we find it undertaken by people who are involved in information and communications technology in engineering in biotechnology or in whatever it is to be.We find that those people who work in companies that undertake research and development are more likely to be well paid. Do we not want a high-wage economy? And what is more we find that companies that undertake research and development are much more likely to be exporters. So here we have it: a rapidly growing cohort ofbusinesses a cohort of businesses that is inclined to employ people at higher wages and a cohort of businesses that is inclined to export. These businesses—and only these businesses—are to get a tax increase as a result of this legislation and that is dumb. It is really dumb.What is more these businesses as a group—roughly generally—are more inclined to want to reinvest into their company and less inclined on average to want to take the earnings out of the company. Generally speaking they are on a high growth because they have a high level of reinvestment and that level of reinvestment can go up with a tax credit which means that the growth will slow if the tax credit is removed. That is just simply the case.But wait there is more. Research and development travels. Research and development moves across borders. Research and development moves freely across borders and research and development will move freely across our border. It will go substantially to Australia—not so much in the engineering sector and to a lesser extent also in biotechnology but certainly in information and communications technology. It will go to Australia. But wait there is more. The research and development tax credit that came in on 1 April of this year was actually a little better than the one that was in Australia already so research and development was moving from Australia to New Zealand until National announced its policies. We had some movement of high-wage high-tech high-growth personnel from Australia to New Zealand and from Britain to New Zealand but no more—no more. They have stopped coming they will start leaving and we will become dumber. And what is more because our economy will grow more slowly as a result of the tax credit being removed National will have a lower economic base to tax in the first place. So this is a dumb policy. If Australasia is to ever become a smart part of the world New Zealand will become a dumb part of Australasia. It is a dumb policy. It is a stupid policy and the Government’s excuse for saying it is that it cannot afford it. Well I tell members what: when it is fully in place it will cost $332 million a year. If we divide that by 4 million people it works out at $1.60 per citizen per week available for tax cuts somewhere—$1.60 per person per week. That is what we give New Zealanders and the price we pay is a dumb economy. This bill is a bad bill for that reason alone.