Question 17: How did the tax and benefit changes in the 80s and 90s affect the incomes of wealthy individuals and corporations?

29 Oct

As a result of the changes tax system there was a huge transfer of income and wealth from the poor to the rich under both the Labour and National governments from 1984-1996

The 1984-90 Labour government lowered the top corporate and personal tax rate from 66 cents in the dollar to 33 cents. A regressive consumption tax (GST) of first 10% then 12.5% on all goods and services was imposed which hits working people hardest. In 1981 24% of tax came from indirect sources. By 1991 it was 33%. Tax on business as a percentage of total taxation receipts went from 29.2% of the total in 1971 to 6.6% in 1990/91.

The flattening of tax rates led to a transfer of wealth from middle to high incomes, while the regressive nature of the universal GST redistributed the tax burden to the poor. According to Victoria University lecturer in economics and public policy Rob Stephens, changes in the tax structures between 1982 and 1988 meant that effective average tax rates including GST for couples on average earnings with two dependents increased from 18.7 percent to 24.1 percent. Average tax rates for similar couples on three times the average income declined from 40.3 percent to 34.9 percent.

The promise that wage earners would be compensated for the rise in consumption taxes and user charges by a cut in direct taxes proved to be a lie for most. Between March 1985 and March 1991 the average income tax rate for the bottom 20% of full time wage and salary earners increased from 15.7% to 18.3%, the middle 20% went from 25.1% to 23.6% while the top 20% went from 31.8% to 25%. It seems clear that for the big majority of wage and salary earners the tax changes would have made them worse off.

Economist Brian Easton wrote that the 1988 tax reform reducing the top rate from 48 to 33% resulted in a “substantial increase in the incomes of those on high incomes. Typically those in the top tenth of income recipients were about 25 percent better off.” Easton calculated that in 1988 the top 10% of disposable household incomes (adjusted for size of household) averaged twice the average income. In 1991 they averaged 2.5 times the average largely due to the 1988 Douglas tax cuts.

From 1984 to 1998 the top 10% of households increased income by 43% and the bottom 50% of households decreased income by 14%.

A Statistics New Zealand report for the period 1982 to 1996 found that the gulf between rich and poor in New Zealand grew significantly. The wealthiest 10 percent of households increased their share of the country’s after-tax income from 20 percent in 1982 to 25 percent in 1996. The middle 70 percent of income earners share dropped from 71 percent to 66 percent. The bottom 20 percent never earned more than 9 percent of total income.

A paper by Paul Dalziel of Lincoln University documents the actual experience in a paper titled: “New Zealand’s Economic Reforms: an assessment”. The charts below are from that paper. Dalziel wrote:

“There was a substantial shift in New Zealand’s income distribution during the reform period. First, the lowest income deciles suffered a large loss of income during the depths of the recession in the early 1990s. The average income of the lowest decile in 1991/92 was 21.6% lower than in 1983/84, and that of the second decile was 10.3% lower. These two groups shared in the post-1991/92 recovery, but by 1995/96 their average incomes were still 8.7% and 4% lower than in 1983/84. Secondly, half of the New Zealand distribution had lower real incomes in 1995/96 than before the start of the reforms, and for 40% of the distribution the loss of income was greater than 3%. These data support reports by a wide variety of community groups in New Zealand during the 1990s that poverty and social exclusion have caused widespread problems, particularly among low-income households with children (confirmed by Stephens et al., 2000, p. 31). Finally, Table 4 [ renamedTable 2 above - ed] shows that large gains were made at the top end of the income distribution during the recovery that peaked in 1995/96. Compared with 1983/84, the average income of the top 10% had increased by more than one-quarter (26.5%).

Table 2

“Note carefully that this result does not simply say that the income distribution in New Zealand widened during the course of its economic reforms. As is well known, income distribution dispersion is a global phenomenon (see, for example, Dixon, 1998; Easton, 1996). In New Zealand, however, it appears to have been accompanied in the 1980s and 1990s by a significant fall in the absolute amount of real purchasing power by the lowest-income groups. At the beginning of the reform process in New Zealand, a government-sponsored Economic Summit Conference (ESC) agreed unanimously that the costs of economic adjustment ‘should not be borne by the relatively disadvantaged’, but ‘policy should aim to minimise the impact of social and economic dislocations on vulnerable groups and communities’ (ESC, 1984, p. 304). The data reveal that these objectives were not achieved.” (See Table 2 + 3)

Table 3

(Part of a series of extracts from “Exposing Right Wing Lies” by Mike Treen, Unite National Director)

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