New Zealand's Income Tax in the Rollercoaster

Muldoon Years: 1967-84

Paper for Asia Pacific Economic and Business History Conference, Hamilton, New Zealand, 13-15 February 2014.

Keith Rankin, Unitec Institute of Technology,

Auckland, New Zealand

Economy and Politics: 1967-84Economy and Politics: 1967-84Consistent low, deteriorating terms of tradeConsistent low, deteriorating terms of trade– except for dramatic 'spike' 1972-73; chart

• pastoral export prices increased well before oil pricespastoral export prices increased well before oil prices– NZ debt profile – intersectoral balances

• foreign and central government balances: foreign and central government balances: chart• deficits all arounddeficits all around• balance of payments was policy focusbalance of payments was policy focus

NZ politics dominated by one man; NZ politics dominated by one man; Robert Muldoon: known for his abrasive political style

– Minister of Finance 1967-72 inclusive– Opposition Finance spokesman 1973-75– Opposition leader: mid-1974 to 1975– Prime Minister and Minister of Finance : 1976-84

New Zealand Terms of TradeNew Zealand Terms of Trade

Foreign and Government Balances Foreign and Government Balances

Universal Welfare (Fiscal) StateUniversal Welfare (Fiscal) State

'Public Equity' approach'Public Equity' approach– Reflection of mid-20th century capitalist governance

• taxes, including social security tax, required to fundtaxes, including social security tax, required to fund– collective goods such as defence, education and health-care– public investment including public-private partnerships– giving something back to everyone in a national community

(NZ Inc.?) of stakeholders• high levels of taxation became acceptable after two high levels of taxation became acceptable after two

world wars and a 'Great' depressionworld wars and a 'Great' depression

Income Tax formula 1954-68Income Tax formula 1954-68– large tax-free allowances, percentage rebates– capable of short-term fine-tuning– not well adapted to inflation

example: 1968-69 tax year plus first reform 1969-70

first, see 2013 4-step scale

2013 NZ Income Tax Scale2013 NZ Income Tax Scale

NZ Income Tax Structure 1960sNZ Income Tax Structure 1960s

late-1960s' examples:late-1960s' examples:1968-69

Taxation Review and ChangeTaxation Review and Change

Changes in wake of Ross Committee report:Changes in wake of Ross Committee report:– Ross Committee convened 1966; reported 1967– equitarian values, in line with Muldoon's own core values– looking to some expansion of indirect taxation

• also recognition of need to facilitate export diversityalso recognition of need to facilitate export diversity– new interim scale in 1968 Budget

• merged Income Tax with Social Security Income Taxmerged Income Tax with Social Security Income Tax– new scale in 1970 Budget; addressed top marginal issue

• introduced 1971, but with a 8-month 10% surchargeintroduced 1971, but with a 8-month 10% surcharge• inflation worry; innovation: controversial payroll taxinflation worry; innovation: controversial payroll tax

1972 – election year1972 – election year– terms of trade relief; welfare report; 10% tax rebate

scalesscales

Labour interregnum: 1973-75Labour interregnum: 1973-75

Buoyant 1973: Reformist BudgetBuoyant 1973: Reformist Budget– Bill Rowling, Minister of Finance (PM from Sept 1974)– explicit new fixed-amount tax "rebate"

• really a 'non-refundable tax credit' of $125 per yearreally a 'non-refundable tax credit' of $125 per year– contrast "refundable tax-credit" as a negative income tax

• paid in full to anyone earning at least $690 per yearpaid in full to anyone earning at least $690 per year• to replace allowances and percentage rebatesto replace allowances and percentage rebates

– more explicitly equitarian; a specific amount given back• required 'plateau' scale; 18% tax on first dollar earnedrequired 'plateau' scale; 18% tax on first dollar earned

1975: inflation and terms of trade collapse1975: inflation and terms of trade collapse– tax credit raised to $155– bottom rate raised 18% to 20%; top, 50% to 60%

• 1974-75, 1976-77 income tax scales with tax credit

Muldoon return: 1976-84Muldoon return: 1976-84

Universal Pension ('Super') & 1977 recessionUniversal Pension ('Super') & 1977 recession1978 Budget: new priorities and pressures1978 Budget: new priorities and pressures

• expansionary for economic and political reasonsexpansionary for economic and political reasons• tax cuts required and tax tax cuts required and tax simplificationsimplification accepted accepted• new emphasis on marginal rather than average ratenew emphasis on marginal rather than average rate

– Rowling tax credit abolished to fund lower marginal rates• effective end-of tax-free income zoneeffective end-of tax-free income zone

McCaw Task Force Report 1982McCaw Task Force Report 1982– fiscal drag (bracket-creep) with renewed high inflation– recommendations implemented on cutting personal tax

• extended second-bottom marginal tax rateextended second-bottom marginal tax rate– "temporary" surcharge on three top rates (top up to 66%)

1979-87, income tax scales

End of Muldoon EraEnd of Muldoon EraMuldoon out 1984; Rowling out 1982Muldoon out 1984; Rowling out 1982– Muldoon's approach did not fit the global paradigm shift1984-90 Labour Government approach1984-90 Labour Government approach– shift from equitarian to neoliberal policy principles

• included rapid finance and state sector liberalisationincluded rapid finance and state sector liberalisation– surcharge on high incomes retained for 2 further years– top two rates removed from scale in October 1986

• exchanged for a comprehensive 10% GSTexchanged for a comprehensive 10% GST– goods and services tax

– top rate cut to 33% in 1988, after 1987 financial crisisabsence of zero-tax income zone entrenchedabsence of zero-tax income zone entrenched– Labour Party in Jan 2014 abandoned resurrection policy

1988/89 NZ Income Tax Scale1988/89 NZ Income Tax Scale

2013 NZ Income Tax Scale2013 NZ Income Tax Scale