Sir Roger Douglas’ economic plan

Now I won’t say I agree with every detail of his plan, but Douglas certainly seems to understand why we are in the mess we are in better than any other politician.

As voters, we seem to have bought the false notion that we can all be made wealthy through government. Elections have become an opportunity for politicians to promise they will take more money off you, only to give it back to you in another way – a gold card for superannuitants, a tax credit for working families, or an interest write off for students. If we each pretend that we can be made wealthy through taxing others, then we’re destined for poverty. We are increasingly relying on others – be they foreign lenders or domestic taxpayers – to sustain our way of life.

You don’t hear that sort of straight talking every day from politicians!

Douglas’ plan is to set up an alternative taxation system that you can opt into – with low taxes but you must pay for your own health care and superannuation – or you can stay in the current system. There would certainly be practical problems with maintaining two separate systems alongside each other (such as having some people eligable for state-funded healthcare while others are not), but it is an intriguing idea, and a good contrast with National’s plan. Read his full plan here.

On the tax side, he is proposing a tax-free threshold of $30,000 for individuals, $50,000 for families, and 15% taxation above that, with a flat 15% tax rate for business. That would really draw industry back into the country.

But there is a big “marriage tax” in there – note that if you have two single incomes your tax-free threshold is collectively $60,000, while if you marry it is now only $50,000 (plus a certain amount per child). It would be far better to have a $60,000 tax-free threshold for families, and not incentivise family breakdown. You should never subsidise something unless you want more of it.

On the welfare side, he is proposing:

To ensure that families are able to adequately provide for themselves, there will be a guaranteed minimum income for families. The guaranteed minimum income will ensure that, should they find themselves earning less than the tax-free threshold, families will receive a tax credit to boost their income.

The problem with this is that there is little incentive to work at all – it is unclear but reads like you have a guaranteed tax-free income of $50,000 (inflation adjusted to boot), which you can live on quite comfortably especially if you don’t have the expenses of having a job (fuel to get to work, work clothes etc). Even if you have to be doing some work to get it, there is little incentive to work more than a couple of hours a week. It is only for families, but if you don’t have to be married to call yourself a family it could be claimed by flatmates – this is far higher than the student allowance!

A guaranteed minimum income is a simple way of providing a welfare safety net, however having it set so high is likely to be a strong disincentive to work. Or you can work, and still get your free money. Consider this scenario.

  • You have no job, and are surviving on government handouts.
  • A farmer takes pity on your family, gives you free accommodation in a spare house, free use of a work vehicle and as much produce as you can eat.
  • Out of gratitude you “help him out” on the farm.

It’s a win-win situation:

  • You get almost all your expenses for free and pocket most of your welfare money, effectively earning far more than most farm workers.
  • The farmer gets a cheap worker.

It is impossible to completely avoid such fraud, but it would help if the “guaranteed minimum income” were set at a level of basic subsistence, to provide for those out of work while encouraging them to actually get a job. Requiring a couple to be married to qualify would help the money go to genuine families, although people could marry just to get the cash. Giving part of it in food or accommodation vouchers would help to discourage fraud, although not prevent it. It would also help if you only lost 50c of your tax credits for every dollar you earned – meaning even if you can only get a part-time job you will still end up with more cash in the hand, rather than working hard and ending up with the same pay as if you did nothing.

So Douglas’ plan needs some work, in my opinion. But it offers a good alternative perspective to National’s current big spending plans, and I hope Key is willing to listen and incorporate some of Douglas’ ideas.

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5 Responses to “Sir Roger Douglas’ economic plan”

  1. Sb Says:

    “That would really draw industry back into the country”

    For that to work you would have to address the culture of chronic underinvestment that permeates new Zealand business!

    If a low tax rate resulted in better investment strategies that would be good but if all that happens is the boss buys a larger car then ……….

    Sb

  2. Mr Dennis Says:

    Sb:
    Ireland boomed during the 90’s because of very low corporate taxes (10% guaranteed for 10 years or something like that), that attracted many multinational companies into the country. They moved from a backward, poor country to one of the richest in the world in a very short time. Reducing corporate tax rates really does boost the economy enormously, and rapidly.

  3. 123 Says:

    You should join ACT.

  4. Mr Dennis Says:

    :)

    Cowardly anonymous one, post using a real email address and I’ll tell you why I haven’t.

  5. David Barber Says:

    If SB’s specific concern is to encourage investment in capital equipment, you might want to consider applying accelerated depreciation rates on that equipment along with the reduced tax rates. Accelerated depreciation was an integral part of ‘Reaganomics’ that turned around the U.S. economy in the 1980s.


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