Friday, May 18, 2007

Kiwisaver success is in National's hands

John Key expended much energy in Parliament yesterday afternoon criticising the budget from Labour's Socialists as a "money go round" Budget -- a budget in which the derisory business tax cuts* and the half-arsed Kiwisaver "tax credits" were offset respectively by a virtual payroll tax and by higher petrol taxes. Now while he's right about the give-with-one-hand and take-with-the-other Budget, in the end the criticism is as empty as Key is shallow since at the end of the day his team would do no different. There are two main areas of the Budget that are relevant here.
  1. There were no personal tax cuts. But neither are there any tax cuts on offer from the opposition -- in fact as Cullen pointed out, Billy Boy English has already ruled those out. So no difference there.
  2. The success or otherwise of Cullen's Kiwisaver scheme, a scheme devised by politicians, depends wholly on the degree to which people sign up to it (or, more accurately, don't sign out from it), and that decision will be made by savers based almost wholly on their expectation of future wealth to be delivered by the scheme including, crucially, that any wealth that won't be meddled with politically. Which means that the bureaucratic mare's nest that is Kiwisaver could be extinguished almost immediately by the simple political statement from either Key or English that if elected in 2008, they would deal to this scheme as Muldoon did to the last Labour compulsory savings scheme -- by scrapping it. Such an announcement would see future expectations of Kiwisaver wealth wither before they were born, and see Kiwisaver as a viable scheme gone by lunchtime. Which means if they really believed in their criticism of Kiwisaver, then it's within their own hands to extinguish it. But National's socialists aren't going to do that, are they, making their criticism about as shallow as Helen's bird bath.
And we can see once again that between Labour's Socialists and the National Socialists there's a difference only as slim as the thickness of a small red flag. Tweedledum and Tweedledumber.
_ _ _ _ _
* Yes, derisory. As one Newstalk ZB correspondent so eloquently pointed out this morning:
  • Most NZ businesses are sole traders or partnerships who pay tax at the personal rate. No tax cut there.
  • Limited companies generally pass their profits on to shareholders, who who pay tax at the personal rate. No tax cut for them.
  • Large corporates generally pass profits on to shareholders as dividends with tax credits attached; but those credits are then measured against the shareholder's own personal tax rate. No tax cut there either.
Or perhaps "derisory business tax cuts" is the wrong phrase. How about, "the illusion of tax cuts"?
UPDATE 1: Julian explains in the comments below why, "All else being equal, the decrease in the business tax rate will not impact on the revenue the government steals."
In an imputation tax environment, corporate tax is essentially a withholding tax. The important tax rate is the personal tax rate. Since this is not changing, then theoretically the amount of tax received by the NZ government (personal + corporate) will be unchanged. The quantity of personal tax paid to the government is going to go up. The failure of the business press to identify this is disappointing. The failure to highlight this in the budget yesterday is disgusting.
Read on for the complete point. UPDATE 2: John Boy talks hoaxes to TVNZ:
"Perhaps the biggest hoax perpetrated in this Budget was on businesses, which on the one hand get tax cuts but on the other are forced to match their employees' KiwiSaver contributions in a cruel money-go-round," says Key.
And perhaps the biggest hoax perpetrated by this opposition is that they could kill Kiwisaver with one sentence: "If elected, we will kill it and return your money." But they won't, will they. Watch him dodge that question on Close Up last night [video. UPDATE 3: Says one business owner who emailed me on this:
Incidentally, one of the questions I will be asking when interviewing a potential new employee is "Do you wish to participate in Kiwisaver? If the answer is "Yes", it is extremely unlikely they would be employed by us. How many other employers will do this? Interesting question.
UPDATE 4: Cactus Kate takes exeception to Fran O'Sullivan's description of Michael Cullen's eighth Budget as "a fiscal money-go-round that would do a Virgin Islands tax-dodge designer proud." As a designer or Virgin Islands tax dodges herself, Cactus takes "a certain professional umbrage at comparing the fiscal finesse and rounded respectability of Virgin Island tax-dodging (legally referred to in the business Fran as "taxation minimilisation specialist") to Cullen's performance as Finance Minister," and notes that:
Theft and fraud was illegal in New Zealand last time I checked. Receiving proceeds of crime was also a criminal offence. Therefore those who benefit from the surplus are created criminals from Cullen's go round. Tax dodging has far more legal credibility.

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11 Comments:

Blogger Greg Bourke said...

Seems the nation has taken thier protion of soma.

Amazing how many people I've heard interviewed take for granted that Cullen's surpluses are his not theirs.

5/18/2007 09:22:00 am  
Blogger Greg Bourke said...

protion? portion of soma.

5/18/2007 09:22:00 am  
Anonymous Anonymous said...

Why would Key kill it? Most people support it. It is incumbent of all sensible people to take up Govt initiatives that return taxpayer cash to those who pay it in the first place. It's less than ideal, but a crude start.

It is patently ridiculous to claim their is no difference between Cullen and Key - we are going to finally have someone with real world experience running this country. Teachers and trade union officials certainly do not count.

5/18/2007 02:29:00 pm  
Anonymous Anonymous said...

Here's somwthing from my economit acqaintance in Belgium FYI:

"I've been looking more closely at the details of kiwisaver and I can see it will BUY a huge ammount of votes. Basically it looks like ANY non-working person can open up an account and the Govt. will seed it with $1,000. There are roughly 1m kids in NZ so that's $1bn going to the savings industry/off the fiscal accounts right there. Plus, I am not 100% certain on this, but looks like the Govt. will also match each $ put into non-working persons accounts up to $20 per week. E.g. say you open an account for your new born child and put in $20 per week to get the maximum Govt. subsidy. After 20 years compounding $2080 contributed each year conservatively at 7.5% p.a, this account would be worth around $80k, the govt's contribution being slighly over 1/2 of this.
Two things parents fret about are the ability of the kids to buy a home and fund their education. Kiwisaver already has an explicit provision to allow funds to be withdrawn for 1st home buyers. A big vote grab there. In the next election I would not be surprised to see a similar break to fund tertiary education...in time we could say good bye to student loans."

And later:

"... with further checking it looks like the subsidy for non-workers above is correct....this is BIG deal and has not been picked up in the press yet.

I suspect it soon will be."

5/18/2007 04:20:00 pm  
Anonymous Anonymous said...

That's economist and something. Must stop typing so fast...

5/18/2007 04:21:00 pm  
Blogger PC said...

One small, almost inconsequential point, Anonymous.

"The Government" contributes nothing at all. Not a cent. You and I do.

5/18/2007 04:36:00 pm  
Blogger MeSi said...

hi
PLZ Insert IM Link
http://ir30.blogspot.com

5/19/2007 02:45:00 am  
Anonymous Anonymous said...

Haha - inconsequential to WHOM?

I will save your comment as another contrarian indicator I think. Your political judgement is very poor, even after all these years...

If you want to blather about 'nationalising' kids - whatever you mean by that exactly, then getting an IRD number with a birth certificate is a hell of a lot more 'nationalising' than not being able to smack your kid upside the head whenever the whim takes you.

But we won't get anyone marching in the streets about it now, will we? Doesn't have the same appeal to the redneck. The sheep are so easily manipulated.

5/19/2007 11:20:00 am  
Anonymous Anonymous said...

I hope this Kiwisaver will focus your mind a little.

Fundamentalism and liberalism oppose one another at a level which is irreconcilable - they are too far apart for ANY cooperation. You should not entertain the notion that at some level religious tightists are allies in a common cause, or pretend that they are somehow liberal. To do otherwise is not to battle them but to surrender to the system they advocate.

Anyway I'm pleased the National Party have welcomed me and my views in a way the Libertarianz did not. I would have made a good spokesperson - much better than that silly woman you have now -- but you were only interested in my money in the end, not my thoughts.

I will start up another blog now, so I won't bother you and annoy the dittoheads anymore. Delete this if you want - I don't care.

5/19/2007 04:01:00 pm  
Anonymous Sus said...

"Why would Key kill it? Most people support it. It is incumbent of all sensible people to take up Govt initiatives that return taxpayer cash to those who pay it in the first place. It's less than ideal, but a crude start."

Isn't "government initiative" a contradiction in terms?

'Sensible' people distance themselves from statists - particularly those who claim that taking my money and returning a portion thereof is exactly the same as me holding onto it in the first place.

And as for "most people supporting it" - where's the proof? Besides, you said recently that "most people" are invariably "wrong".

A little 'contrarian' don't you think?

5/21/2007 02:01:00 pm  
Blogger Julian said...

Peter,

All else being equal, the decrease in the business tax rate will not impact on the revenue the government takes (steals).

In an imputation tax environment, corporate tax is essentially a withholding tax. The important tax rate is the personal tax rate. Since this is not changing, then theoretically the amount of tax received by the NZ government (personal + corporate) will be unchanged. The quantity of personal tax paid to the government is going to go up. The failure of the business press to identify this is disappointing. The failure to highlight this in the budget yesterday is disgusting.

Assume for a moment an extreme example in which the government changes the corporate tax rate to zero, then all else being equal, this again will have no impact on the quantity of taxes paid to the government.

All that has happened is that more tax must be paid at the personal level for there will be fewer Imputation Credits (tax credits) attached to the dividends. Investors will have to pay more tax at the personal level as the corporate tax paid will have been less with the result that fewer tax credits will have been passed to the investor.

The key words being all else being equal. A company - in order to maximise after tax cash flows to its shareholders - should alter its financial policies when doing so benefits the "relevant investor." What might happen with zero corporate tax is that companies would be more likely to adopt a zero dividend policy and reinvest back into their businesses. Investors would receive a return by way of a capital gain which are not taxed (assuming that the investor is not in the business of buying and selling shares).

However with a 3% decrease in the corporate tax rate I do not see companies altering their dividend policy greatly and so investors will end up paying more tax.

There are complicating factors as I have not introduced foreign investors nor the owners of private companies into the discussion, but I don't see this changing the conclusions.

Julian

10/10/2010 05:24:00 pm  

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