Friday, May 15, 2009

Tax changes we need

It was the classic politician's trick – John Key promised you a tax cut and delivered a tax review instead. Inquiries, discussions, investigations and reviews: the refuge of scoundrel governments everywhere.

It's not technically a Government tax review of course. Its a Tax Working Group. But since Treasury seems to be the brains behind it, you'd be forgiven for thinking it's a political animal. I don't know how important the promise of a tax cut was to National winning the election, but going by the column inches that the media devoted to it, you'd have to conclude very.

I suspect it was actually more a diffused sense of irritation that really put paid to Clark's Labour government, and anyway, National has to be commended for pulling back from any rash pre-election promises in the face of a global recession. Still, a tax review is a useful way of saying that it's the thought that counts, and they are still thinking about it.

Actually, this might turn out to be an astoundingly cunning plan, because there is a way that this review could provide a ticket to tax trimming of titanic proportions. Looking at the mug shots though, I'm not sure that the working group has the imagination.

The last tax review was the McLeod report of 2001. More than anything that report failed to take notice of the most basic 21st century reality: there are environmental limits to the economy, and they are coming up quick. There is an urgent need to transform the economy onto a sustainable footing.

One way to help do this is to make sure that environmental costs fall on those causing them. That rarely happens today. If a business can pass on costs to the environment, and therefore to the community, it usually will. This is what people mean when they talk about environmental externalities – costs fall on people external to the business causing the damage or depletion.

There are a number of ways to stop this corporate freeloading (internalise the externalities). One is to add a tax equal to the unpaid social and environmental cost. That's the kind of thing a carbon tax does – it takes the cost off taxpayers and puts it on those causing the problem. This means that the true cost is being paid, leading to less environmental bads and more environmental goods. It should also go hand in hand with cuts in income tax (that is the bit that Cullen left out of the carbon tax proposals).

The Tax Working Group is made up of corporate notables, including Rob McLeod who chaired the last review. The group has already been criticised for its uniformity, but what worries me is that there don't appear to be any environmental economists (or accountants) among them. Gareth Morgan is on the group and he seems to like nature, and is knowledgeable on things like climate change, but I haven't yet heard him connect tax policy with the environment. It would be a real tragedy if the working group is so full of 'taxation experts' that it cannot see beyond technical refinements.

Finance Minister Bill English certainly understands the benefits of internalising environmental externalities. It is one way that National could demonstrate better environmental credentials than Labour, by showing how a market based approach to solving environmental problems can be more effective than regulation. When the Greens signed their Memorandum of Understanding with the Government a month or so ago, tax policy was unsurprisingly not on it, but I'm hoping that the Greens aren't too sidetracked by the shenanigans in Mt Albert to raise the topic.

Because while I harbour fantasies of a cunning and secret plot hatched between National and the Greens to green the NZ economy, I'm not holding my breath. I am, however, hoping that sooner rather than later we get a government that understands that environmental concerns must be more than a clip-on to pretty things up after the big decisions have been made. We have to make the environment integral to our thinking at all stages, and we have to start now. Let's hope this tax review won't be another missed opportunity to do that.

(from my Waikato Times column today)

1 comment:

nommo said...

thanks Nandor. Nice to have someone expressing this so well. Shame you're not on the review!

Mic Watts