Labour is going to party like it's 1999

"They say two-thousand-zero-zero party over. Oops out of time. So tonight I'm gonna party like it's 1999"

-       Prince (1999)

So the long awaited Labour Party 2020 election tax policy was released earlier today.  Like many people I have been waiting to see what the Government’s strategy might be for paying down the tens of billions of dollars in debt being accumulated in the wake of the COVID-19 crisis.  I wondered what grand vision it would bring as to what the economy of Aotearoa/New Zealand might look like over the next decade, what new and innovative means might be proposed to fairly raise additional tax revenue and what this might mean for a long-term debt repayment plan.

But what did we get?  Labour Party policy from 1999.  Raise the top tax bracket to 39%.  As my 16 year-old daughter would sarcastically say “oh wow……”.  

Labour’s proposal is to introduce a new top tax bracket that will kick in at $180,000, increasing the tax rate on earnings above this level to 39%, up 6% from the 33% rate that currently applies to all earnings over $70,000.  There are no changes proposed to any other tax rates or tax thresholds.  Labour advises that the top tax threshold will only affect the top 2% of income earners and therefore 98% of the population will see no change in the amount of income tax that they pay.  This increased tax rate is forecast to raise $550 million of additional tax revenue and will presumably apply from 1 April 2021.

In addition to this, Labour has pledged not to introduce any other new taxes during its next term of Government, should it win the election (which looks extremely likely as at the time of writing).  So no changes to GST, no capital gains tax (after Labour’s big backdown from a CGT last year), no wealth taxes, no inheritance taxes, no RFRM taxation and no land taxes or stamp duties.  They are simply introducing a top tax rate of 39%, which is what the Clark/Cullen Government did upon its election win in 1999.

So let’s think about where the country is at right now.  Additional COVID-19 related borrowing is up to $48 billion and counting, with an additional $14 billion approved in this year’s Budget which remains unspent (but you can bet that it soon will be).  I’ve seen other figures suggesting that over the coming decade, the total true amount of additional COVID-19 related borrowing may approach $140 billion.

The additional taxes will raise $550 million a year.  This is a drop in the COVID-19 borrowing ocean.  Minister Robertson at today’s press conference loudly proclaimed that “we all have to pitch in”.  However all that seems to be happening is that 2% of the population will be pitching in a bit more and everyone else is doing exactly what they were doing before.

It is nonsense to claim that taxes from the increased marginal tax rate will meaningfully pay down some of the COVID-19 debt.  It is simply too small an amount in the context of the mountain of debt we are accumulating.  In addition, the big gap that will be created between the 39% top personal income tax rate and the 33% trust rate and the 28% company tax rate (which also applies to savings in PIE vehicles) will incentivize high income earners to consider how and where their income is earned, particularly those who are running their own businesses and have some control over the structures through which they operate.  This is simply good old fashioned Labour Party policy – they want to tax high income earners more by introducing a more progressive tax system.  They did this 20 years ago and also went into the 2014 election with a near identical policy (although back then the proposed top tax rate would only have been 36%).

What is more disappointing though is the promise to rule out any other sort of tax reform over the next few years.  Surely with the sky-high polling numbers that the Labour Party and the Prime Minister enjoy, something more innovative could have been proposed.  We had an excellent document produced by the Tax Working Group last year.  While its recommendations did not proceed, we are now in a different world.  The economic assumptions on which that report was based have dramatically changed.  Further, when the Prime Minister made her pledge last year never to propose a capital gains tax again while she leads the Labour Party, this was a pledge made in a pre-COVID world.

What would have been inspiring to see is a pledge to take another look at the Tax Working Group proposals, not just the CGT, but some of the other options that were dismissed at the time.  We need to tax another hard look at how we raise revenues in this country so that we actually have a plan to pay down our growing debt mountain.  The Labour Party’s policy is timid and a lost opportunity to use their popularity to really take a long hard look at this issue.  As much as I have been a lifelong fan of Prince, retreading a 20 year-old policy and partying like its 1999 is not good enough.  The country needs and deserves better.

Bruce Bernacchi

9 September 2020