DPF criticises the Herald editorial for the blasphemous suggestion that the rebuilding of Christchurch be funded via a tax levy on middle and high income earners, instead of the government’s preferred option of cutting government spending:
But now let’s dissect the Herald’s economic argument. They say a tax increase will strengthen the faltering economy. It will not. In fact it will do the opposite by sucking money out of taxpayers, meaning it can’t be spent . . . it would be economic stupidity to increase taxes as we recover from the earthquake.
I think the logic here is that when individuals spend their money they spend it productively, stimulating the economy, and when governments take the money off them in tax they then burn it so it gets sucked out of the economy forever. But the reality is that government spending flows into the economy, so if you cut it you’re going to have basically the same impact as raising taxes. Actually the taxes would have a greater stimulus effect, since a non-zero percentage of the money would have been spent by individuals on things like overseas holidays or importing luxury goods, while the levy would be directed solely at rebuilding Christchurch’s economic productivity.
But the other reality is that a city is a piece of infrastructure – it has a high return on investment, it has a lifespan measured in centuries – and the sensible way to fund infrastructure is to borrow. The real issue here is that the last round of ‘fiscally neutral’ tax-cuts have left a huge hole in the government’s books and the earthquake has aggravated the fiscal situation. The government wants to cut spending to make up the shortfall. The opposition parties want to cancel the tax cuts for high income earners. Everyone’s using the earthquake as an excuse to argue for economic policy that they supported before it happened.