New Zealand's decrease in income tax and increase in GST is unlikely to stimulate the economy
Debate Rounds (3)
I shall wait for a opponent before beginning my main points.
Unlikely = Not likely to happen
stimulate = Encourage interest or activity in.
(1)http://www.ird.govt.nz... is the values of the decrease in GST
As long as one accepts the dominant economic model (capitalism, free markets, central banking) as "sine qua non", shifting some of the burden from a progressive tax to a regressive one will have a positive effect on the economy. This measure alone will most likely not singlehandedly return the Kiwis to the first echelon of growth, but it is a step in the right direction.
Your point is true about there being no guarantee that it will work but my exact argument is that it is more unlikely then likely to work.
The recent change in taxes after a 7.1 magnitude earthquake hitting Christchurch, the largest city in the south island leaves (ref 1)17000 people unemployed. The intention of these tax changes are to increase disposable income (income - savings) hence increase consumption of goods and service stimulating the economy but this will lead consumers into larger debt/financial trouble such as these unemployed. There is also as many as 9 out of 10 homes on the city level becoming water damaged, and The Earthquake Commission (EQC), the state-run insurer, had received 4,164 claims for damages as of the night after the earthquake and a estimated 10% of households being uninsured. All these values contribute to the million dollars in damage and increases in homeless which will lead to doubts that the tax changes will even have a positive effect on the overall economy as consumption will not increase as the income tax decrease intended. It is also reported that many business have been destroyed and with these increased costs will lead to shutting down off businesses and laying of staff meaning a decrease in the contribution to GST and unemployment. The government will find itself having to issue more transferred payments and receiving less revenue this will lead to a budget deficit , not healthy with New Zealand's already large overseas debt.
The intention of these tax changes are to increase disposable income (income - savings) hence increase consumption of goods and service stimulating the economy. This increase in demand will lead producers to bid up there prices and will stimulate inflation. Of course with the increase in GST from 12.5 - 15% all prices will increase for goods and services. This due to the increase in cost of production being shift to the consumers hence there becomes a large raise in inflation. According to reference (3) A person in a wage of $30,000 annum will receive $5.19 weekly. I am sure this will not cover the inflation caused by the two tax actions. Reference (3) also says someone on $120,000 will be $52.78 better off. This makes it easier for the richer to cover the increased cost hence becomes a situation of rich get richer, poorer get poorer.
'Consider the relentless upwards march of what we dish out for essential goods and services, and it is easy to see why. Along with the GST rise, there have been increases to ACC levies, the Emissions Trading Scheme has pushed up electricity costs (costing an average household $165 extra a year), petrol stations are charging 7c/litre more this week, because of the rise in GST combined with a 3 cent fuel tax, and mortgage rates have been increasing through the year.' This is a quote that shows that there is many stacks of costs which have lead to inflation. Although the GST has only raised by 2.5%. The market are putting out large increases in price.
1. The local situation, made even more dire by the earthquake is described, introducing doubts that the tax changes will even have a positive effect on the overall economy as "consumption will not increase as the income tax decrease intended". However, we are also being told that only 10% of households are uninsured and the state insurer is making payments. Though an earthquake and its damage are going to have a negative impact on the economy, such an effect is undoubtedly temporary. Furthermore, the PRO observes that the budget deficit is bound to increase anyway, making the option of the Government just handing out cash unwise.
2. In his second argument, the PRO states essentially that the "intention of these tax changes are to increase disposable income (income - savings) hence increase consumption of goods and service stimulating the economy", but the "increase in demand will lead producers to bid up there prices and will stimulate inflation". This idea is further emphasised in PRO's last paragraph, where numerous other inflationary pressures outside the control of the government are being presented.
It seems that the PRO is in fact conceding that the tax changes will actually stimulate the demand which in turn will stimulate the economy, but fears that somehow the positive effects will be eroded by inflation. However, in an economy governed by the ideas enumerated in Round 1, it is not the government's job to tackle inflation, that is the Central Bank's role, effected through monetary policy. The government, through its fiscal policy (taxes and budget / spending) can at best stimulate demand and the PRO is conceding that the tax changes are doing just that. Whether inflation will erode economic gains remains to be seen, but it is unlikely, as fighting inflation is a job Central Banks have been perfecting for decades and have gotten quite good at. It's deflation that's far scarier. Boosting demand through tax policy is the only thing the government can do in dire times and it is precisely what the government its doing. To do nothing or to refrain from doing the right thing out of fear that things could go wrong or that it might not work is silly, neurotic and downright ridiculous.
3. "the rich get richer, the poor get poorer" - while this, according to the World Socialist website the PRO is quoting an article from, appears to have been happening in most countries in the past decade or so, it is neither true nor relevant to our topic, as the economy could be improving even while the poor are getting poorer. Though sad and undesirable from a social and political perspective (at least in a democracy), this discrepancy in incomes is what makes capitalism "tick" and the economy advance. In contrast, socialist economies tend to "redistribute wealth" without creating it, until there is no wealth left to redistribute, everybody is worse off and disaster ensues (e.g., Zimbabwe).
By way of constructive argumentation, I will now show why I believe the aforementioned tax changes are good for the economy.
I. Building on 3), I believe that wealth is not a zero-sum game. It is most often created without being taken from someone else. We live today in societies that are far better off than just a few decades ago and also far more complex. Evolutionary psychologists claim that our fears of economic policies that may increase wealth more for those on top are motivated by two limitations of our monkey brains:
a) We find it difficult to believe that wealth is created and not just "moved around", even though we use amenities that our grand-grandparents have not even dreamed of and
b) Whenever we engage in explicit commercial transactions where money is exchanged we get the implicit message that we are not loved: we expect to get stuff for free as a sign of our importance to others.
These often subconscious beliefs are obviously erroneous. Our ability to live and thrive in a capitalist or pseudo-capitalist system (pure capitalism does not exist) is given by our ability to manage the conflicts created by these beliefs.
II. Progressive (income) taxation is worse for the economy than regressive (sales) taxation, so shifting tax burden from sales tax to income tax will have a positive effect on the economy as seen in many other countries.
Situations similar to New Zealand's are seen all over the world. Here in Canada (Commonwealth FTW, eh?), upon being elected in a minority government, the federal Conservative party has taken the opposite step, reducing the federal sales tax (GST) by one percentage point. This measure was widely criticized at the time as being populist, opportunist and hurtful to the economy:
"nearly all members of the Canadian Council of Chief Executives (a group composed of 150 of Canada's top CEOs) want the federal government to hike the GST to combat the deficit"
"increasing the GST would create the revenue needed to reduce other, more damaging taxes (i.e. those on income and capital gains) that would dramatically improve Canada's competitiveness"
"While all taxes are economically damaging, economic research is clear that consumption taxes like the GST are among the least damaging. The key to improving Canada's competitiveness is either to reduce damaging types of taxes or to change the tax mix to rely less on damaging taxes."
"Income taxes have proven to be much more economically damaging than the GST because they act as a penalty on productive activities such as work effort, savings, investment, risk-taking and entrepreneurship."
When the previous Conservative government introduced the GST more than a decade ago, the voters reacted angrily, virtually wiping this party off the legislature and bringing in a solid Liberal majority. The measure to reduce the sales tax was a way for the new Torries to make amends and break with the past, even at the expense of sound economic policy.
Informed voters know very well that progressive income taxes are a socialist, revolutionary tool to facilitate the transition to Communism. <
Luckily, today more an more people understand the folly of such "isms". As early as May of this year, voters of Arizona approved an increase in sales tax. In July, the IMF recommended that Japan imposes and gradually increases its sales tax as well to tackle its ballooning debt. For anyone who accepts and understands that capitalism is far better and creating and maintaining wealth for the entire society, a shift toward "regressive" sales taxes away from "progressive" income taxes is definitely beneficial for the health of any economy.
In conclusion, the PRO has failed to present an alternative course of action that the government could have taken and as such, it appears that the shifting of the tax burden is best.
Goo.gl /r3BF /QJz0 /WqtH
limitedmoon forfeited this round.
The decision to rely less on progressive taxation and more on sales taxes is indeed a wise decision, one of the very many the New Zealanders seem to be taken. :)
I would like to thank limitedmoon for offering me the opportunity to battle his arguments.
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