Was Ruth Richardson a Keynesian?

Keith Rankin, 31 July 1998


Patrick Caragata (see The Caragata Tax Report; a Nail in the Coffin of the Fiscal Contract), in his reply in the NZ Herald (29 July 1998) to a pro-tax article ("The fallacy of low tax as a boost to economic growth") by Susan St. John (Herald, 23 July), claims that from 1914 to 1994, there was a steady rise in the propensity of Governments in New Zealand to levy taxes. If so, that means Ruth Richardson must have been the most pro-tax Finance Minister (1990-93) in New Zealand's history. In short, she must have been one on those high spending Keynesians, like those who were blamed for inflation in the 1970s.

In fact, tax hikes took place during the two world wars and the Great Depression of the 1930s. Increased taxation was by no means a steady process. In some of the post-war years, income taxes did increase relative to GDP. That was a result of fiscal drag in years of moderate or high inflation, and a result of negative growth of per capita GDP, especially in 1967-68, 1977-78, 1982, 1986-1992.

However, it is quite misleading to think of the 1960s as a period of low taxes, and the 1980s as a period of high taxes. The main difference between the two periods lies in changes to the welfare system; in particular, changes in the ways that families received social assistance. In the 1960s, top personal tax rates and company tax were set at around 50%, much higher than the 33% from 1988.

There was, in the 1960s, a comprehensive range of income tax allowances, along with a regulated labour market that paid men a family wage rather than a market wage. The tax allowances in the 1960s were accounted for as deductions from tax, whereas most of their modern equivalents are accounted for as benefits.

As well as high top rates of income tax, the 1960s featured high levels of indirect tax (remember the black budget of 1958, and the Muldoon mini-budgets of the late 1960s?), high tariffs on imports, and death duties.

In the 1980s we were told that the kind of tax system we had in the 1960s created many economic inefficiencies because of both the high rates of tax and the "distortions" created by the many allowances and exemptions. Nevertheless, Dr Caragata, ostensibly a pro-market low-tax ideologue, seems to prefer the tax scales of the 1960s to those of the early 1990s.

To get a real comparison between the 1990s and the 1960s, we need to re-account for all tax benefits in both periods as if they were income support benefits. This also makes it possible to get a fair comparison between countries.

The best way to do this is to treat all market income as if it was taxed at the top company tax rate; ie at 50%. Almost everyone received far more than 50% of their gross income as take-home pay, however, thanks to the wide range of tax allowances, tax exemptions and subsidies. For example, persons who kept 85% of their gross incomes were receiving tax benefits equivalent to 35% of their gross income. The "less tax" that we paid, on average, was really a complex mixture of tax benefits; ie of benefits paid through the tax mechanism, and administered by the Inland Revenue rather than the Social Security bureaucracy.

Once we make the necessary accounting corrections, the high growth 1960s can be seen to have been years of high taxation. Likewise, the high growth decade from 1932 was very much a high tax decade compared to its predecessor.

There are two reasons why taxes appeared to be high in relation to GDP in the Ruth Richardson years of the early 1990s. The first reason is that GDP fell. The second reason was that almost all benefits were accounted for, correctly, as benefits. This accounting was somewhat distorted, though, by the tax surcharge on New Zealand Superannuation. The surtax made it look as if superannuitants contributed huge amounts to the national coffers, when in fact the surtax was just a clawback on a benefit. Likewise, the making of all benefits taxable in the 1980s - a simple accounting exercise - meant that the total tax take appeared to increase, when really it did not.

Interestingly, Caragata implies that Mrs St. John's views on taxation were the norm in the early 1970s. Yet, in also saying that the tax burden rose by 35% from 1971 to 1994, he is implying that she was most comfortable with a tax regime that was 26% less burdensome than the regime we experienced under Mrs Richardson.

Caragata is concerned about "low-quality" government spending. It is clear from his emphasis that he sees welfare payments as being the majority of such "low quality" sending, despite Susan St. John's point that welfare benefits are in fact spent by the recipients, and not by the government. If we can claim that the spending of beneficiaries is low quality, then it's only a short step to claiming that the spending of waged workers is low quality, and that wages should therefore be slashed.

Patrick Caragata's misplacement of the years 1988-1994 amount to little short of dishonesty. By ignoring the 1988 tax cuts and emphasising "Bill Birch's tax cuts in 1996" as "pioneering the way down the tax mountain", he has managed to put those years of negative growth into his group of high tax years (1971-1994). In fact, the 1988-94 period provides excellent evidence that tax cuts slow down economic growth.

The 1988 tax cuts were real tax cuts (company tax came down from 48% to 33%), whereas, under the accounting system we need in order to make legitimate comparisons, the 1996 and 1998 tax cuts were no more than increases in tax benefits, meaning benefits administered by Inland Revenue. The tax cuts of 1996 and 1998, really benefit increases, were functionally identical to increases in the social welfare benefits that he condemns as low quality expenditure. Indeed Mr Birch (NZ Herald, 24 July) considers increases in "independent family tax credits" (IFTCs) - unambiguously a benefit increase - as a central component of the 1996-98 "tax cut" package. From Dr Caragata's point of view, the IFTCs are simultaneously the problem and the solution.

When the problem of the "tax burden" is formulated properly, the problem simply disappears. Taxes, like wages and profits, are a burden to those who pay them and an income for those who receive them. Taxes, like all other costs, represent an income. Taxes are in fact the income of the sovereign, and in a democracy the people are the sovereign. Taxes are a part of all of our incomes. Some of our tax revenue is retained by the government, an agent in our employment to organise the supply of the public goods that we demand. Some is used to service and repay public debt. And some is received by us as cash incomes - social welfare benefits, tax benefits, subsidies. The size of the agent we call government is not determined by the size of the public revenue base.

The argument that the income of the sovereign is a burden to society may have made sense in the era of absolute monarchies. But King Charles I lost his head 349 years ago. Today, the idea that the income of the people is a burden to the people is sheer nonsense.

The present movement to cut income tax is a cynical attempt by a number of privileged people, who benefited from tax reductions in 1986 and 1988 (and tax benefits in 1996 and 1998), to justify further tax benefits for themselves. These people use the high tax burden faced by low income earners to justify further tax concessions for high income recipients.

Ruth Richardson was not a Keynesian. The idea of portraying her as such is absurd. About as absurd as Caragata's conclusion that tax benefits to the rich should replace social welfare benefits to the poor.


© 1998

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