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Dr Muriel Newman

Free Markets Under Attack

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Pope_FrancisTo the surprise of many, the Catholic Church’s Pope Francis has begun attacking the free market, going so far as to declare it a “new tyranny”. This week’s NZCPR Guest Commentator, Allister Heath, the Deputy Editor of Britain’s Telegraph newspaper and a graduate of the London School of Economics, picks up the story:

“There can be no doubt that Pope Francis is a devoted and selfless man who has dedicated his life to serving others. A phenomenal theologian, he abhors war and poverty and is an inspiration to hundreds of millions of believers; he has gained widespread respect even among those who disagree with the Roman Catholic church’s teachings.

“So it is with great sadness that I must take exception to the Pope’s views on economics and business. His hostility to capitalism, shared by the Church of England, is tragically misplaced. He has repeatedly savaged free markets and aligned himself with the views of Thomas Piketty, the far-Left intellectual who obsesses about inequality and advocates crippling taxes on income and wealth.

“At the height of Pikettymania, and before many leading economists punched holes in the French economist’s thesis, the Pope took to his Twitter account to state, without any caveats or context, that ‘inequality is the root of social evil’. He was clearly referring to differences in financial outcomes and wealth – and crucially, not to poverty or to inequalities of opportunity, both very different concepts.

“The logical conclusion of the Pope’s tweets is that it is ‘evil’ for the likes of Sir Richard Branson to have been allowed to keep the money he earned by providing the public with goods and services, and that we need immediate equalisation through punitive taxes. Such an extreme view could have catastrophic consequences, annihilate incentives to work, save and invest and halt the progress of human civilisation.”

But before you start thinking that here in New Zealand we are relatively immune from any such radical influence on public policy, you might consider the similarities between Pope Francis and David Cunliffe. Divineness is not one of them – radical socialism is; one needs only read the Labour Party’s Policy Platform, a high level document that sets out the non-negotiable principles that bind the Party and the Caucus.[1] It states, “Our vision of a just society is founded on equality and fairness. Labour says that no matter the circumstances of our birth, we are each accorded equal opportunity to achieve our full potential in life. We believe in more than just equal opportunities—we believe in equality of outcomes.”

‘Equality of outcomes’ is an ideological notion based on the concept of ‘fair shares for all’, a modern version of Karl Marx’s, ‘to each according to his needs, from each according to his ability’. Taken to its extreme, it means that in any free society, instead of individuals being able to benefit from their earnings and wealth, confiscatory taxes would be used to redistribute the proceeds to those deemed by the ruling elite to be in greater need. To put it into the context of the FIFA World Cup, equality of outcomes would be a draw in every game – a tournament with no winners or losers. It would not be much of a spectacle, or draw a crowd, and nor would it encourage excellence in sport.

Labour’s Policy document identifies a commitment to solidarity: “Solidarity is the value underpinning the social contract that affirms our acceptance of mutual rights and obligations for the good of society as a whole. Labour is fundamentally committed to collective rights and responsibilities. An essential Labour value has always been people having a fair share of the national wealth.”

The document further reveals that while free markets are recognised around the world as the foundation of economic prosperity, “Labour holds that government must play an essential role in managing and developing the economy. We reject the notion that free markets on their own will deliver either long-term prosperity or just distributional outcomes”.

It is these principles that underpin Labour’s election agenda of higher taxes and more government spending – the same policy mix that caused New Zealand’s recession in 2008, several months ahead of the onset of the global economic crisis.

While Labour is using the argument that inequality is rising to justify their more aggressive tax regime, the problem is the evidence does not support their assertions. In Parliament in March, the Minister of Finance explained that Treasury data showed, “New Zealand income inequality has been roughly flat for the last 3 or 4 years and is getting slightly better. The assertion by the Labour Party that the rich are getting richer and the poor are getting poorer is wrong.”[2]

This was backed up by a Social Indicators report, released last week by the OECD, which found both income inequality and poverty in New Zealand are falling.[3] The report covered the period during the recession and the global financial crisis – from 2007 to 2011 – showing that New Zealand is one of only six countries out of 33 in which both market income inequality and disposable income inequality (the gap between the disposable incomes of the top and bottom 10 percent of income earners) were flat or slightly improved.

While disposable incomes for the top 10 percent of income earners in New Zealand were hit harder in the global financial crisis than the bottom 10 percent, the opposite was the case across the OECD, where the bottom 10 percent of disposable incomes fell by twice as much. This result demonstrates the success of the National Government’s policy objective during that period, of protecting the most vulnerable from the worst effects of the global financial crisis.

The OECD study also reported on relative income poverty, which they define as the share of people with less than half of their country’s median income. The report shows that in New Zealand, the share of households in relative income poverty fell from 11 percent in 2007 to 9.8 percent in 2011.

During their six years in office, National’s approach to economic management has featured lower taxes, less regulation, and a reduction in the size of government. While this has led to less inequality, stronger growth and a return to surplus, the recovery is still very fragile. While some parts of the country are doing well – especially those based on construction, mining, and agriculture – in many other regions, businesses are struggling and unemployment remains high.

That’s why Labour’s plan to introduce more progressive tax policies aimed solely at making the rich poorer, is so senseless. Not only does it ignore the fact that under the present lower tax regime, inequality has not been rising, but it also fails to take into account the lessons of history that show that policies that make the rich poorer will also make the poor poorer.

The former British Prime Minister Margaret Thatcher explained this during her final address to the House of Commons in 1990: “The hon. Gentleman is saying that he would rather that the poor were poorer, provided that the rich were less rich. That way one will never create the wealth for better social services, as we have. Yes, he would rather have the poor poorer, provided that the rich were less rich.”

Labour’s faith in steep progressive taxes and income redistribution is based on a belief that there is only a finite amount of wealth to go around, and that the government knows best how to carve up the economic pie so the rich get less and the poor get more – making society a ‘fairer’ place. The problem is that such ideas are misguided. Society is actually ‘fairer’, when those who work hard to improve the wellbeing of their family, are able to reap the rewards. Whether they spend it, invest it or give it all to charity, is their own private affair. Forcing people to give up more of what they earn, to finance payments to people they don’t know for purposes they may not approve of, is neither moral, nor just, and acts as a strong deterrent to hard work and enterprise.

The reality is that higher income New Zealanders already pay enough tax. At the present time, only two percent of New Zealanders earn over $150,000 a year, and they already pay 20 percent of all income tax. When considering households, Treasury has estimated that the top 15 percent of households by income – those that earn over $150,000 a year – will pay 49 percent of all income tax this year. When benefit payments, Working for Families, paid parental leave, and accommodation support are taken into account, these 15 percent of households pay 74 percent of all net income tax in New Zealand.[4]

After accounting for these income support payments, households earning under $60,000 a year – which is just under half of all households – will pay no net income tax at all, since the $2.5 billion income tax they are expected to pay this year will be more than offset by the $7.3 billion they will receive in income support.

Labour plans to substantially increase the tax burden on families to fund new spending. If they become the government, they will introduce a new progressive tax rate of 36 cents in the dollar on income over $150,000. They will raise the trust tax rate from 33 percent to 36 percent. In addition, in spite of the fact that a capital gains tax already applies to anyone who invests with the intention of resale, Labour will introduce a new capital gains tax of 15 percent. While the family home will be exempt at this stage, by affecting all rental property sales, the new tax will push up rents. It is also expected to have a significant impact on small businesses and KiwiSaver.

By imposing higher income tax, trust tax, and capital gains tax, Labour will undermine the competitiveness of Kiwi businesses and drive away investment in New Zealand’s growth. Not only that, but their commitment to punishing taxes, means that Labour has failed to recognise one of the most fundamental aspects of human nature – when individuals are free to pursue their own hopes and aspirations, they will create wealth, and by helping to grow the economy, everyone at every level of society will become better off.

In his iconic book Free to Choose, Nobel Prize winning economist Milton Friedman explained it this way, “A free society releases the energies and abilities of people to pursue their own objectives. Freedom means diversity but also mobility. It preserves the opportunity for today’s disadvantaged to become tomorrow’s privileged and, in the process, enables everyone, from top to bottom, to enjoy a fuller and richer life”.

High levels of income mobility have always existed in New Zealand. A 2012 Treasury study on income mobility found that after seven years, three quarters of the families who had been in the bottom 10 percent of family incomes, were no longer there, while less than a half of those who had been in the top decile, were still there. Of the people who had been on a low income for the whole of the seven years, less than a third had experienced “deprivation”.[5]

The main recommendation of that Treasury report was that government policy should be designed with mobility in mind. In other words, if individuals and families are given an opportunity to improve their circumstances, most will do so. This means putting in place policies to encourage wealth creation and grow the economic pie, so all families have the chance to get ahead. The worst thing that governments can do is introduce policies that would stifle growth, by crushing freedom and entrepreneurial aspiration.


Do you support Labour’s plan to increase the tax burden on New Zealanders?

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1. Labour Party, Policy Platform
2. Parliament, Oral Questions 4 March 2014
3. OECD, Society at a Glance 2014 Highlights: New Zealand Social Indicators
4. Parliament, Oral Questions 26 June 2014
5. Treasury, A descriptive analysis of income and deprivation in New Zealand