Taxation (Annual Rates and Urgent Measures) Bill

I just want briefly to thank all parties for their granting of leave for this part of the bill to be included. It deals with the equalisation of wine tax. Everyone, of course, realised that the Australian tax came as a bit of a shock to the New Zealand wine industry when it was announced in the Australian Budget some time ago. We have an agreement with the Australian Government, and we need the legislative means in New Zealand to implement that agreement, which is incorporated in this part. Again I thank members for their support on that matter.

I thank the Minister for that acknowledgment, which meant that he did not have to talk about the bit in this part that really matters, which is in clause 5: the change in the thresholds and abatement regimes for the child tax credit. There is an interesting history to that. I am sure I cannot recall every twist and turn, but clause 5 should really be called the “Michael Cullen Back-down Clause”. As the Committee will remember, Dr Cullen announced the Working for Families package under a certain set of fiscal conditions, and then he was forced at a later time—not long after the Budget, actually, in 2005—to announce a much more generous Working for Families package. The fiscal conditions had not changed dramatically or even significantly, but the political conditions actually had.

This is how it went. Dr Cullen announced in his 2005 Budget what he believed to be clearly an important and a large-scale family tax package. It was greeted with derision—there is really no other word for it—around the country. I think the Dominion Post headlined it—

💬 Darren Hughes: The original one?

—sorry, it was not the original one; it was after the 2005 Budget—as “Is that it?”. I take the member’s correction; Working for Families was announced the year before that. But in 2005, when there was an expectation that many more people would benefit from it, no one did. Instead, they were given the “chewing gum” tax cut. So the provision in clause 5 of this bill came along after Dr Cullen had realised just how badly he had miscalculated in a political sense.

I would like Dr Cullen to explain, given that he had put so much emphasis on the surplus and the fiscal conditions, how he could suddenly afford a much more generous family tax package not long after the Budget that he could not afford at the time of the Budget. What had changed? I think if Dr Cullen explained that, we would see at least some of his fiscal argument for what it is. Dr Cullen has calculated that he can defend the surplus, which enables him to have enough expenditure to keep the Labour Party’s various constituencies happy. He will probably be reluctant to say that he misjudged the Budget, that the whole Labour caucus and the Prime Minister came down on him pretty hard, and that in the run-up to the election he was therefore forced to increase the thresholds for abatement, forced to increase the child tax credit, as he has done here, and, just as important, forced to drop the 30c abatement rate down to a 20c abatement rate.

The simple reason for that is that a large chunk of middle New Zealand income earners with children were going to be faced with very substantial marginal tax rates that gave them the feeling—and, I have to say, the reality—that it was not worth trying to get ahead. That, of course, is one of the fundamental problems with regard to the way Dr Cullen thinks about these issues. He is a Minister of Finance who believes incentives do not matter, and who believes that people do not really respond to them when it does not suit him. Well, of course, they do respond to incentives. But if the marginal tax rate is high and the net gain from an extra hour of work is minimal, people will not go out and do that work.

Dr Cullen may also like to explain to us just how he intends to maintain the complexity of the package Labour now has in place, of which this tax credit is part. When one looks at the accommodation supplement, the family tax system, and the fast-growing complexity of support for children in early childhood education, one sees it will be impossible for a Kiwi family to understand what benefit there is to it from doing an extra hour of work. There is now a plethora of different thresholds, different abatement rates, and accumulating marginal tax rates that are hard enough even for a bureaucrat to understand. A Ministry of Education bureaucrat will have real trouble understanding how the 20 hours’ free support—

Firstly, on the last point, could I tell the member that he is factually wrong. We have not introduced any new complexity in the system. The only structural change that has been introduced since 1999, which comes into force in April next year, is to replace the child tax credit introduced by National with the in-work payment, which is actually significantly simpler because, for the vast majority of families, there is no relationship to family size. Whereas under the child tax credit, of course, it was more whether families had three children, or two children, or one. Whether families have one, two, or three children makes no difference to the size of the in-work payments. It is a great deal simpler.

The rest of the structure is exactly the same. The abatement levels, the thresholds, and the levels of payment are all that have changed. The levels of payment have been substantially increased, the thresholds have been raised, and the abatement rate has been lowered. That does not make it more complex at all. It means that more people are entitled to targeted tax assistance; it does not make the system more complex in that regard.

The choice to pay all these payments universally, as the member will know, is vastly expensive. We could not possibly afford to pay a fully universal tax rebate for children at the level of the family support payments—that would run into some billions of dollars of additional expenditure.

I come to the issue of why the change. I indicated immediately after the 2004 Budget, when we announced the Working for Families package—in response to questions and in response to some issues raised, particularly by United Future—that I would, at the earliest opportunity, address the issue of abatement rates and seek to lower the 30 percent single level of abatement rate that was being introduced as part of the Working for Families package. Again, we simplified it from two thresholds, to one single abatement rate and a single threshold. We actually simplified the system, compared with the system that National had in place during the 1990s. The Pre-election Fiscal Update indicated a growth in revenue that had not been anticipated at Budget time. That was exactly the amount that was therefore translated into the two things in this legislation.

Firstly, lifting the threshold from $27,500 to $35,000 means that for a lot of families on lower incomes there is no abatement at all. Secondly, lowering the abatement rate from 30 percent to 20 percent is a significant reduction, for quite a large number of families, of the effective marginal tax rate—some 100,000 families having a lower effective marginal tax rate. Of course, 60,000 families have a higher marginal tax rate because they now qualify for family support targeted assistance, which they did not previously qualify for.

This bill helps a lot of New Zealand families with children, particularly low to middle income families. We make no apology for that, at all. Fiscally, the result has come out at almost the same as the Budget night fiscal forecast, in terms of the operating surplus and the fiscal stimulus over the next 2 to 3 years. Beyond that, of course, it does represent some further fiscal loosening by about year 4 of the forecast period.

It is a simplified package, compared with the package we inherited. There is a single abatement rate, a single threshold, and for most families there is no longer a two-tier system, with the in-work payment not related to size of family.

Finally, of course, in terms of childcare, the 20-hours-free policy will take a lot of people out of the targeted assistance. It will reduce, for a large number of families, the level of targeted assistance, which they were previously dependent upon. Also, as the member might be aware, we changed the accommodation supplement rules so that there is not a doubling-up of the abatement regimes around some aspects of that.

Does this work? Yes, it does. Look at the result. We have the highest labour-force participation rate in the developed world—not just the lowest unemployment rate, but the highest labour-force participation rate. Have people stopped working because of the 39c rate? No, they have not. Has the economy stopped growing? No, it has not. Have the participation rates gone up? Yes, they have. Has growth been good? Yes, it has. The National Party argument is just wrong on the facts. It is not what has happened. Did the National Party stop working after 1999 because the top tax rate went up? Yes, it did. Did it affect those members’ incomes? No, because they are on a salary. Did it affect the election outcome subsequently? Possibly, because they lost both the subsequent elections. They, in their own private little world, may have demonstrated their own theory, but the rest of New Zealand carried on working, carried on earning, carried on getting better off, and feels very good about the results.

Part 2, which implements the Government’s expanded Working for Families package, deserves real scrutiny. This expanded Working for Families package will bring 60,000 more New Zealand families into a policy that I would call, instead of Working for Families, “Working for Government”. Let me explain why I would call this package “Working for Government”.

Let us take the example of—once this package is implemented—people who are on the domestic purposes benefit but seeking to get off it through working more and more hours to earn more of their own keep and their families’ keep. Once a person on the domestic purposes benefit with three children earns a wage or salary to the tune of $10,000 a year, from there to $25,000 a year he or she pays tax of 92.2c in the dollar on every extra $1 he or she earns. I will repeat that: 92.2c in the dollar. I see the Minister of Finance shaking his head. I am quoting Inland Revenue Department figures. I have the department’s official tables right here. The tax rate for a single adult with children who is moving off the domestic purposes benefit—

💬 Hon Dr Michael Cullen: That was the case when you were the Government.

Dr the Hon LOCKWOOD SMITH: These are the latest figures, provided by the Inland Revenue Department in the last couple of weeks. Once this package is fully implemented, for income earned from $10,000 to $25,000, a woman with three children who is trying to earn a bit more money to help her family pays Dr Cullen 92.2c out of every $1. Why does he hate women with children so much? Why does he destroy their hope? Where is the hope? I see that little fellow over there, Darren Hughes, laughing. Does he understand how many extra hours of work that is for a woman on the minimum wage? How many extra hours of work a week will it take before she gets off that 92.2c tax rate? It will take 30 hours of extra work a week, at $10 an hour.

I want to know how the Minister justifies that. It is the same for a family trying to move off the unemployment benefit. In fact, a woman who is trying to move off the domestic purposes benefit does not keep more than half what she earns until her salary is over $100,000 a year. Then, finally, if that woman has three children, her marginal tax rate comes down to 39c in the dollar. Until that point she pays 60c or 54c, except for a wee window at $30,000 of income when she pays a 22c marginal tax rate. Apart from that, her marginal tax rate, for income from $10,000 onwards, is 92.2 percent for a $15,000 range of income. For 30 hours extra work a week, at $10 an hour, she keeps, out of every extra dollar she earns, 7.8c.

💬 Darren Hughes: Would the member answer a question?

Dr the Hon LOCKWOOD SMITH: I want Darren Hughes to tell this Committee why Labour thinks a woman with three children, two children, or one child should, when she is trying to earn more money for her family, give him and Dr Cullen 92.2c out of every extra dollar she earns, so that she keeps just 7.8c out of every dollar.

💬 Darren Hughes: Does the member need a tax cut?

Dr the Hon LOCKWOOD SMITH: I want Darren Hughes to explain why, if that woman is independent of the benefit system—not on a benefit but on a similar income range—and she earns an extra dollar, she has to give Dr Cullen the lot. Someone who is independent of the benefit system, under this Working for Families package—and I say “Working for Government”—gives him the lot. In fact, 3,500 more families will come into this regime now, according to Dr Cullen’s officials. One thousand families are caught in it this year; once Working for Families is fully implemented, 4,600 families that are independent of the benefit system will find that, for every extra dollar they earn in the income range from $10,000 to $20,000, they give Dr Cullen the lot. Their marginal tax rate will be 101.2 percent. If they earn another dollar, they will give all of it to Dr Cullen.

These are our lowest-income families. I do not blame Dr Cullen for having established this regime—actually, it was established when he was in Government in the late-1980s—but it is time to do something about it, and this “Working for Government” package should relieve those low-income people of that burden.

Dr Lockwood Smith goes on about this topic ad nauseam in the Finance and Expenditure Committee. If a householder had tuned into the radio while Dr Smith was giving his speech, he or she may well have wondered what was happening in the world, and may be seeking out Dr Cullen and wanting to put him in jail for stealing money from families. But, in fact, if any rational person chose to check the situation out, that person would find out that this has always been the case, and that, at the margins, these sorts of things always happen in a taxation system because there has to be a cut-off point. At that cut-off point, at the margin, there is always a problem of this nature. Dr Lockwood Smith knows that, but he does not tell people that. In saner moments, in the Finance and Expenditure Committee, he acknowledges that, and, furthermore, he acknowledges that he does not know what to do about it, either, as I am sure people would realise.

The fact of the matter is that New Zealand First supports this part of the bill. The next question is why we support it. We do so because it helps people at the lower end of the economic tier.

Dr the Hon Lockwood Smith: How does paying 101.2 percent in tax help people?

R DOUG WOOLERTON: It does help people. Dr the Hon Lockwood Smith knows that and he chooses not to say that, which is not a good thing for him to do. There may be a technical issue, but the question is whether the measure helps lower-income people. Yes, it does. Would we prefer to see these things have some universality, or should they be targeted? Of course, everyone would love these things to have universality, but they cannot. They must be targeted, and that is where this problem comes in.

We have a clash of ideologies here. To argue ad infinitum that this measure hurts families, and that that is something that should not be gone into, is simply not sustainable, and I do not think the National Party should perpetuate that myth.

That was a very impressive speech from Lockwood Smith, our member from Rodney, who gave a very impressive outline. It was followed by a speech from a member of New Zealand First, who just came in behind, saying the Government spiel. It was quite interesting to see what New Zealand First was like during the campaign. It was quite a different story. Now that it is in Government it is backing Labour to the hilt. I say to Doug Woolerton that it is amazing how things have changed.

I think taxation is the key thing, because that was Dr Cullen’s biggest weakness during the election campaign. National was given a chance thanks to Dr Cullen’s Budget, which just did not deliver on taxation. Everybody in the country had built up expectations that there would be tax cuts, and they did not come. People out there wanted tax cuts.

This policy sends three signals to people. First, it sends the signal that for people on things like the unemployment benefit there is not much incentive to go to work. Secondly, the policy shows that if people are on the Working for Families package, there is no incentive to do overtime, or anything like that, because they will lose some of their hard-earned money. Thirdly, the policy means that people will be reluctant to take promotions and pay rises, and reluctant to get that education and do that training in order to get better incomes and jobs. Those are the wrong signals, but they are the signals that this Government intends to send to hard-working New Zealanders through this legislation.

So National members cannot support this bill. It sends the wrong signals and provides the wrong incentives to hard-working New Zealanders.

I want to talk about the Working for Families part of the Taxation (Annual Rates and Urgent Measures) Bill, and I admit to having some real problems with it. My predominant concern is that it is Labour’s interpretation of what it means to be a family. How does the New Zealand public feel about the description of “working families” that Labour has termed under this bill?

The bill states that tax relief will be delivered to working families via enhancements to the Working for Families package. Labour has stated that it has targeted tax relief to 160,000 working families. But they can be called families only if they have dependent children of a certain age and if they fit certain criteria. And yes, those criteria are set by the Labour Government, which defines what “family” means and decides who gets to have the targeted tax relief. In order to receive this benefit, one needs to have dependent children. That is an insult to all working people without dependent children. What about young people who are trying to save in order to establish themselves financially before establishing a family? What about single people without children? What about those whose children have grown up and who are now saving for their retirement? All working New Zealanders deserve to have tax relief.

Let us look at an example of how discriminatory this bill is. The example is that of an average company in Auckland, where there is a small team of employees who do pretty much the same job and produce the same level of outputs and results for that company, but who have very different personal circumstances. One employee has two children aged 7 and 10, and both she and her husband are on average incomes. One employee has been working for 30 years and has three adult children. That couple has had the good times and the struggles, and is now at the stage of saving for retirement. The other employee is in a same-sex relationship, has never had children, and intends to never have children. Who is being discriminated against? This Government, which purports to ensure that there is equality and spouts on about equality for all, is blatantly discriminating against those who do not have dependent children. That is wrong.

This tax relief makes beneficiaries out of normal, everyday working New Zealanders who are trying to get ahead and just want to be given a fair deal. It blatantly ignores those without dependent children who are working equally hard and just want to get ahead. We received many letters during the campaign period from people who supported our across-the-board tax cuts. Those people stated they would sit next to someone in their working environment who would be doing the same job, with the same effort, and through the Working for Families targeted tax relief each person would receive extremely different levels of income in his or her pocket. That is what targeted relief does. It discriminates against those without dependent children. It is not fair and not equal. Universal tax cuts across the board are the only way to support the New Zealand public and incentivise people to get ahead.

This bitsy legislation, which caters only to a minority of New Zealanders, is simply not fair. The only way to deal with people fairly is by lowering taxes across the board. For example, a tax rate of 19 percent for people who earn between $38,000 and $50,000 would incentivise those people to work harder and move ahead, and would put more money into their pockets, so that they could choose how to spend it.

Thank you, Mr Chairman, for earlier guidance—I note that the wine equalisation tax provisions that I mentioned are in Part 2, as opposed to Part 1.

First of all, as a member of the Finance and Expenditure Committee I thank the committee for its work and note the almost unanimous support its members gave to the wine equalisation tax provisions. They put New Zealand growers into pretty much the same position as Australian growers—essentially, they bring Australian tax law into New Zealand. I raise a caution there. I wonder whether, in fact, that is the thin edge of a wedge, because the Australianisation of all things New Zealand—regulation, law, and statute—is something that I think Parliament needs to address in the coming years.

One of the great things about the bill is that it transfers all risk, foreign exchange, cash flow, and interest rates, etc., to the Australian distributor or importer of New Zealand wine. Being the MP for one of New Zealand’s greatest wine-producing regions, I am very happy to support that area, and I am sure that the various ratepayers of Napier have done a good job. I also note that the change has come about after pressure from our wine industry. Politicians from the National Party forced a change. Well done, I say. Sadly, I note that New Zealand apples are still not allowed into Australia, even though we have made just as much noise on that issue.

I move to the Working for Families package. During the election campaign somebody said that the package was a form of tax relief. Well, goodness gracious, who does that tax relief come from? It comes from those who have imposed too much tax in the first instance. As I keep saying, the Government should not take any more than it needs. Essentially, the Working for Families package is a way of controlling the net wage of New Zealanders, regardless of what their gross income is. There is no clearer evidence of that than the effect of some of the rebates, which have a marginal tax rate of 102 percent. When a person earns $1, Dr Cullen receives $1.02. Why would one bother? Why would a person get out of bed to try to get ahead? I would like someone to tell me how that will affect aspirations to break out of the welfare cycle and dependency of so many families—particularly Māori families, whose income in the Hawke’s Bay is $3,000 per annum less than non-Māori households. How will a marginal tax rate of 102 percent help those families to break out?

So many members get up in this Chamber and rave on about breaking the dependency cycle, etc., etc. We should be brave, be staunch, and take a stand. Pita Sharples also noted that point the other day, but he still reluctantly gave his party’s support to this bill. That is not good enough. It is a trade-off that sacrifices the future, the incentives, and the aspirations of so many New Zealanders for the sake of small-time political gain. That is why so many politicians have such a bad name. Who else supports this bill? I note that Mr Woolerton—

💬 Hon Member: As part of the Labour Party.

CRAIG FOSS:—as part of the Government, said in response to my good colleague Lockwood Smith’s speech that this has always been the case. Well, yes. Is that a reason not to challenge it? Is that a reason not to address it? If you have always worn the same Y-fronts, then get into some briefs. You must challenge the status quo.

The CHAIRPERSON (H V Ross Robertson): You must not bring the Chairperson into the debate.

I apologise. I move back to Working for Families. An earlier speaker, in relation to the Working for Families provisions, supported this bill because, that member said, it would help people at the lower end. Why not then give those people a million bucks? This bill will not help the people at the lower end of the spectrum. It will help their net income in the short term, but it will cap their future and lock them into exactly where they are right now. It sends a message to them not to bother to get out of bed—not to even try to break out of the cycle. I do not understand how so many members of this Parliament can give rhetoric about breaking out of the dependency cycle, etc., and can go forth and vote for this bill. I really do not understand how they can look themselves in the eye.

I move, That the question be now put.

There are two issues in Part 2. I will deal briefly with the proposals in relation to the wine industry, then turn my mind to the Working for Families package, which is, of course, another example of economic insanity. First of all, let us look at the Australian wine producer rebate. I basically endorse what my friend the member for Tukituki said. It is a scheme that is probably well overdue. New Zealand can be very proud of its wine industry. One can think back to the earliest days in, for example, Marlborough, now represented by Mr King, the MP for Kaikoura. From a very low base in 1973, the New Zealand wine industry has built up magnificently. The industry exports products to some of the finest destinations in the world, and New Zealand can be very proud of what has been done. People like Peter Hubscher, who did such a great job to build up Montana Wines, and George Fistonich, who built up Villa Maria, are great New Zealanders who deserve all the support they can get.

I endorse, however, the comments made by the member for Tukituki about the gradual integration of New Zealand into the Australian regulatory regime. I wonder whether that sort of thing should be done in an episodic way or whether we need to have a general national discussion about it. We have in this bill the integration of the New Zealand tax regime into the Australian tax regime, and I wonder whether it is a foretaste of what is to come with other statutes, such as, for example, the Securities Act and the Commerce Act. But that can wait for another debate. With that caveat, I endorse what the member for Tukituki said.

As for the Working for Families package, much has been said before, particularly by Ms Bennett. It is a system that destroys incentives and, worse than that, creates a super-class of beneficiaries that, in the worst possible way, creates middle-class welfare. I ask the Minister in the chair, the Hon Pete Hodgson, whether he is aware of any other country in the Western World where citizens can be earning over $100,000 yet still be on some form of welfare. It is simply an absurd way to organise an economic system. That, coupled with the student loan scheme and the holding of tax rates at the current level, is really very distortionary and very harmful to the New Zealand economy.

Ms Bennett raised a number of very important matters, and I hope the Minister will comment on them—not simply address them, as he does when purporting to answer questions, but actually get down to the nitty-gritty, because these are very important points. I would like him—[Interruption] I would like the member for Otaki for once in his life to be quiet. I would also like the Minister—

💬 Hon Member: Who’s being very sensitive?

I am not a sensitive member; I am just a member who has some very cogent and compelling points to make, and who wants the member for Otaki to do something in his life that he has probably never done before—that is, to learn something. If the member for Dunedin South were here, I would ask him to do something with one of his tennis balls.

The essential point that I want the Minister to address is the unfairness of this scheme for single people. What is his answer to that unfairness? I do not want some kind of half-baked, half-pie call that it is good for the country in general, but I ask what it does for single people. What does it do for couples who do not have a child—perhaps because they cannot? What does it do for couples with one child? This is discriminatory legislation; it is unfair to large sections of New Zealanders—and for other New Zealanders it is legislation that enslaves them in middle-class welfare. So let us try to have an answer that is not parroting platitudes.

💬 Hon Damien O'Connor: You don’t believe that.

I do believe that the member for West Coast - Tasman is a sensible person from a sensible family, and I am sure that he believes the same thing. The legislation destroys incentives, and I would really like the Minister to address, in a fairly rational way, the points we have been raising, because they are very important points. Unless we get it right, we will inhibit growth in this country and cause fundamental damage to the New Zealand economy.

So I appeal to the Labour Government to take a good hard look at this, and try to get away from the point where it is Dr Cullen contra mundum because Dr Cullen knows best. The Government should answer the questions that Ms Bennett has asked, through the Chair, of the Minister, look at the essential unfairness that happens when a superclass of beneficiaries is created that covers some sections of the community but not others, and ask what it does for single people. The Government should answer that.

I move, That the question be now put.