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Pay or Tax?

Entry 142, on 2005-03-10 at 13:27:33 (Rating 2, Politics)

There is a debate going on here in New Zealand regarding the economic direction we should take, now that the economy is doing so well. On the right we have the low tax, less government, privatisation team (or what's left of it), and on the left we have the high tax, more government team (with more of the right team creeping in its direction every day - see previous blog entries).

As is often the case in politics, neither are really right. The best solution lies somewhere between the two extreme positions, as is always the case. Its been trendy in the last decade or two to support the right, but their doubtful success after 20 years is pushing people back to more traditional more socialist agenda, or at least towards the center of the political spectrum.

The specific issue this time is a wage claim for 5% being put forward by a major union here. Some commentators are using this as a chance to push their low tax ideas instead. After all, wouldn't they be better off with a tax cut instead of a wage increase? Since tax cuts tend to apply to everyone, the answer is almost certainly no.

Let's do some simple maths. The worker gets $30,000 per year, and his boss (thanks to extravagant increases while everyone else got nothing) is on $100,000 per year. Let's cut tax by 10%. The worker will get about $2000 extra per year while his boss gets $6000 extra (these numbers of total guesses but in the right general area). Is that fair? The person who needs it less gets the most.

But its even worse than that. Because the government has less tax take it has to reduce services such as welfare, education, and health. Everyone will need to spend an extra $4000 per year just to compensate for this. The worker didn't even get that much from his tax cut, but the boss is better off. Oh yes, that's fair.

The fact is, tax cuts benefit the rich. The worker is much better off getting the salary increase of 5% or $1500 per year and the government can maintain its tax-funded services.

I am very aware that the situation is more complex than this, and that my numbers are just estimates, but the idea works in principle. Why do you think the rich want to cut tax? They aren't there to make the workers' lives easier, they are totally focussed on themselves, that's how they got rich in the first place. Generally, I would recommend doing the exact opposite of what business leaders and the richest want. That's the only way to improve the situation for everyone.

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