Why Tax Cuts Are Good for Growth

  • Economic growth involves a number of factors, which are often difficult to isolate. Tax cuts are no silver bullet on their own, but research shows they can have a significant positive impact on economic growth.
  • Tax causes people to make different economic decisions than they otherwise would – such as whether to start work, work longer hours, acquire new skills or expand their business.
  • These changes in behaviour can be measured and are known as ‘deadweight losses.’ This is the amount of money that is lost from the economy, on top of what the government actually collects in revenue. Studies show that taxing labour costs the economy at least $1.20 for every $1 raised.
  • In New Zealand’s case, the large amount of extra tax paid since 2000 means that at least $4 billion of potential wealth has been sacrificed (at the most conservative estimate).
  • Productivity is a key issue for economic growth. Lower tax can help by giving firms more leeway to invest in capital, training, and research and development. It would also encourage risk-taking and entrepreneurship by making such activities more rewarding.
  • Getting people into the workforce is another key to economic growth, but New Zealand has some of the worst incentives for people moving off benefits into work – particularly for sole parents. Tax combined with benefit abatement means that many people face an effective marginal tax rate of 91%.
  • Governments around the world use tax as a competitive tool to attract investment and skilled workers.
  • Over the past decade New Zealand is alone in going against the OECD trend of lowering taxes.
  • Flatter and lower tax rates are better for growth than tax concessions because they reduce distortions and allow the market to function better.
  • Substantial tax cuts are affordable through the Budget surplus and controlling future expenditure. The cost of tax cuts is likely to have been over-estimated.

Phil Rennie is a Policy Analyst with the New Zealand Policy Unit of The Centre for Independent Studies.