Norman Russel William: Taxation (Budget Measures) Bill — First Reading Second Reading In Committee 
Norman Russel William: Taxation (Budget Measures) Bill — First Reading Second Reading In Committee 
[Volume:663;Page:11116] 
Dr RUSSEL NORMAN (Co-Leader—Green) 
: 
 I take a call to speak on Part 1 of the Taxation (Budget Measures) Bill and in particular some of the rationale for the tax cuts that are outlined in this part. We have heard some arguments from the Government as to why it is so important that it makes these tax cuts so I think it is important to examine its reasoning. 
One of the reasons given and probably the predominant one concerns growth. The Government argues that as a result of these changes we will get increased growth so it is important to look at some of the historical record and what we know in New Zealand about the relationship between tax rates and growth. We can draw on some case studies. For example we know that in 1986 we cut the top rate from 66 to 33 percent. If the argument for this tax cut was correct—that it results in increased GDP growth—then one would expect that if there is some relationship there would have been an increase in GDP per capita growth after that tax cut in 1986. In fact from the period 1984 to 1992 the average GDP per capita growth was 0.4 percent. After the tax cuts of 1986 the New Zealand economy flat-lined. So in spite of the rhetoric of the Government the evidence in fact is extremely hard to find. Many many studies from numerous countries will repeat that evidence: there is a very poor relationship between the top rate of income tax and GDP per capita growth. 
We can compare that case to the year 2000 when we increased the top rate back up from 33 to 39 percent. In the 5 years after the increase in the tax rate compared to the 5 years before GDP growth per capita doubled. So we see that the evidence for the central argument being made by the Government regarding growth is extremely thin. That evidence is not just from New Zealand; it is from the United States and many other countries. If the Government is to rely on that piece of evidence for its argument then the Government does not really seem to have a leg to stand on. 
The other argument that has been promoted by the Government is labour mobility. One of the key arguments relates in particular to Australia. The Government argues that our tax rates in relation to Australia’s result in people moving to Australia. They also argue that that is the case in relation to wages. I will get to wages in a second. If we look again at the two examples of changes in the top tax rate we see that we actually get the complete opposite result of what the Government would argue. In 1986 we cut the top rate from 66 to 33 percent. In the 5 years after we cut that top tax rate we had a net migration of 65900 people. So in the 5 years after we cut the top tax rate on a net basis we lost about 66000 people through their moving overseas. In 2000 we increased the tax rate from 33 to 39 percent. We actually had in the 5 years that followed that a net migration gain of about 84000. So if the argument is that we have to cut the top tax rate in order to keep more people in New Zealand and to attract more people to New Zealand—the labour mobility argument which is obviously an interesting argument to have—the problem is that the evidence goes in completely the opposite direction. 
Whether we look at GDP per capita or whether we look at labour mobility the evidence for the arguments that the Government is putting on the table for the cut in the top tax rate is actually in the opposite direction. That is odd. We would think that the Government with all its resources and the entire monolith of Treasury behind it in looking at tax rates and legitimising a cut in the top tax rate would make two arguments in relation to GDP per capita growth and labour mobility but the evidence in New Zealand is the opposite. The evidence is as plain as day. Anybody can go and look at that evidence; it is freely available. 
Part of the reason for all of this argument is that there is actually not a strong relationship at all. I am not arguing that if we increase tax rates we increase GDP per capita or that if we increase tax rates we increase net migration into New Zealand. In fact the relationship is not very strong. That is the fundamental truth. None of us here would be able to prove that the relationship is very strong. The relationship is not very strong so in making this argument there is not very strong evidence for the Government to rely on. 
I think that one of the arguments that ties into both of these relationships is about relative tax rates. The Minister spoke for example about the international environment and that is a legitimate argument. We have seen a race to the bottom with tax rates and particularly with company tax rates around the world but also with personal income tax rates labour has theoretically been competing and playing countries off one against the other. Supposedly we have been seeing that race to the bottom and New Zealand has had to lead that race to the bottom. We are leading that race to the bottom. That reality is unfortunate for the Government’s argument. 
PricewaterhouseCoopers and the World Bank in their  
Paying Taxes 2010 
 report compared the total tax take. When we look at the headline “Income tax rates” we know that it does not take into account everything else that goes with it. We do not know whether it takes into account a Medicare levy as in Australia; state taxes; or all the different taxes that are allocated. When we look at Australia we find that the total tax rate that PricewaterhouseCoopers and the World Bank came up with was 48 percent. When we look at New Zealand and at all of its taxes together we find that the total tax rate is 32.8 percent. So the New Zealand total tax rate is already dramatically lower than that of Australia. The problem with the Government’s rhetoric—rhetoric we hear constantly telling us that we have to do all of this to compete with Australia—is that it does not stand up against the evidence. The evidence is that Australia is much more highly taxed than New Zealand and if we look at the World Bank’s  
Ease of Doing Business 
 report which is linked into tax rates we find that New Zealand is rated right at the top of that report. 
In relation to both of the key levers that the Government wants to use to promote economic growth—tax rates and regulation—Australia is both much more highly regulated and much more highly taxed. One could make an argument if one wished to that there seems to be a correlation—if we compare Australia with New Zealand—between higher rates of GDP growth more regulation and higher tax rates. 
This part of the bill is justified on the basis that lower tax rates will result in higher GDP growth but we see very poor evidence for it. To the extent that there is evidence if we compare ourselves with Australia we know that New Zealand has much lower tax rates than Australia does. Some of the members opposite disagree with that but I ask them to go and read the PricewaterhouseCoopers and World Bank report  
Paying Taxes 2010 
 which compares the numbers. It may be that the Government does not believe the World Bank and PricewaterhouseCoopers but although I do not agree with them on everything I think they do have a point: compared with Australia New Zealand is a much lower taxed environment. So the arguments for this part—the arguments based on GDP growth labour mobility and international comparisons—do not have strong evidence. 
We have to wonder why this bill is being brought into the House with justifications for which there is not strong evidence. Surely we should have an evidence-based approach to legislating. Just as we should have an evidence-based approach to medicine or to any other field we should have an evidence-based approach to making decisions about taxation. But the truth sadly is that the evidence does not support the Government’s position. 
The CHAIRPERSON (Lindsay Tisch) 
: I am sorry to interrupt the member. There is a lot of noise over on the Government benches. It is difficult for me to concentrate on hearing what is being said. If members want to talk that is what the lobbies are for. 
Dr RUSSEL NORMAN 
: Those arguments go on top of the other arguments in respect of this part which of course are about equity and avoidance. I have already addressed those issues. The issue of equity particularly has been done to death in this debate; clearly these are regressive tax changes. The issue of avoidance is basically about rewarding avoidance behaviour rather than closing loopholes. Thank you.