Labour makes a clever move

After a rough few weeks, Labour can be reasonably pleased with the manner in which it announced its tax policy last week. We now know that, under a Labour government, the top rate of income tax will increase from 33 cents to 36c. This is a smaller increase than was threatened in the last election, which should help it to reposition as a moderate party.

Not that I think that raising taxes is the way to go, mind you. While the well-off can certainly afford to pay more, raising taxes in a free economy is often self-defeating. This is because doing so discourages investment and productivity.

This dynamic is not always obvious to those who are salaried professionals in the public sector or who work in very large firms where the risks of investment are not keenly felt.

That being the case, a real-life illustration of the principle may assist.

About 60 years ago, the broadcasting of fights increased the earning potential of top boxers. However, it was also an era of very high marginal tax rates. Taking these two factors together, a defending champion might make a lot of money from one fight in a tax year; but a second fight would see him net only a small amount of additional income.

That additional income had to be earned through sweat and bruises involved in preparing for and participating in a heavyweight boxing fight. Furthermore, each fight carried with it the very real chance of losing the title. So why bother agreeing to more than one bout a year? Not surprisingly, few did - and championship matches became very much an annual event.

Things changed after president John F Kennedy's income tax cuts were implemented, however. The year after the cuts went into effect, there were two title fights. The next year, there were five. Top boxers were clearly more willing to put their titles and bodies on the line when they knew they would be able to keep more of the reward.

In other words, higher taxes had operated as a drag on boxers' productivity. When they were cut, activity increased. That was to the benefit of everybody in the sport and the industries that serviced it.

This translates into the rest of the private sector economy. Those risking their own capital by investing it do so in expectation of a reward. We can't force them to do this, however, and reducing the reward means people will be less likely to undertake the risk. We all suffer when that happens.

So I can't get behind Labour's instinct to hike taxes. However, I can at least agree that the party managed the politics of the situation well.

You can judge this by looking at the reaction of those urging Labour to the Left. At the generally pro-David Cunliffe The Daily Blog, a clearly perturbed Chris Trotter wrote that the proposed tax hike was "risible" and lacking in "excitement and inspiration". He even went so far as to say that the "refusal to give effect to the confiscatory fiscal impulses of Labour's membership is emblematic of everything that has gone awry with Cunliffe's leadership".

I do not agree. I think it was a clever move by Labour.

Maybe Labour could get away with the higher taxes its base is braying for (Trotter's position). Maybe any increase in income tax is a bad move (mine). What is more important, however, is the narrative Labour lays down by choosing a middle path.

Last week, expectations were that Labour would pledge to reinstate the "envy" rate of 39c. After all, that is what it had promised in 2011 under the more moderate Phil Goff. Moreover, David Cunliffe had been positively gung-ho about punishing higher earners with taxes during the Labour leadership contest.

So when the proposed rate of 36c was announced, Labour was seen to have softened its stance. It appeared to be confirming it is a party committed to gradual change. This allows party leadership to counter the narrative that it is dominated and cowed by its activist base.

The fact that this causes anxiety in true believers like Trotter only serves that purpose further.

At the same time, Labour's opponents are forced to acknowledge that it has moderated its stance (however grudgingly). Those targeted by the tax will inescapably feel at least some relief because they probably expected worse. Both lose some of the high ground given that Labour has reduced its demands by 50 per cent.

But for all that spin, the Labour Party has retained its demand for significant tax increases. Now there is just the small matter of turning the election campaign around. This won't do that, but it can't hurt morale within Labour to see that some political competence survives in the party.

Manawatu Standard