National's tax policy and the goals of government

In my ECONS102 class, we talk in the first week of class about decision-makers' goals. The goal of people is to maximise utility (satisfaction, or happiness). The goal of firms is to maximise profits. So far, so good. 

The goal of government is not so straightforward. The starting point is that the goal of government is to maximise the wellbeing of the population. When we're talking about markets, that translates into maximising economic welfare (what economists refer to as allocative efficiency). However, we must always remember that government is made up of legislators who are people, who have their own individual goals (they are trying to maximise utility). One way that legislators may maximise their own utility is by maximising their chances of getting re-elected. Maximising re-election chances may not be consistent with maximising the wellbeing of the population. That tension is one of the key insights of the theory of public choice.

One example where political goals trump allocative efficiency is when some of the economic welfare generated by a market goes to non-voters. Since, by definition, non-voters don't vote, legislators may feel much less inclined to protect those market participants from harm. Taking that point even further, if government can find ways of capturing welfare from non-voters and transferring that welfare to voters, that might be a good option for the legislators themselves, by increasing their chances of re-election.

Now, consider National's new tax policy proposals in light of this. As this article in The Conversation from earlier this week, by Jonathan Barrett and Lisa Marriott (both Victoria University of Wellington), notes:

The National Party’s newly released tax package makes a clear and politically prudent play for the middle-income vote. Proposing to alleviate the financial pain of this “squeezed middle”, it may be key to determining who forms the next government...

To ensure the package is revenue neutral, four new taxes will be introduced. If the policy is aimed at those who vote, then three of the new taxes are aimed at shifting the tax burden to those who cannot vote.

The Foreign Buyer Tax (FBT) will be levied at a flat rate of 15% on residential properties worth more than NZ$2 million bought by non-residents.

A second stream of revenue will come from a tax on offshore gambling.

And a third will be from cost recovery from immigrants to cover public spending on the immigration system. To be competitive, charges will not exceed 90% of corresponding Australian immigration charges.

These proposals would cost voters very little, but increase the tax revenue generated from non-voters. Additional financial benefits can then be transferred to voters:

National has announced four key initiatives as part of its tax plan, with implications for those on middle incomes, as well as those at the top and bottom of the income spread:

• shifting income tax brackets to compensate for inflation

• expanding tax credits to reach more modest income earners

• introducing the “FamilyBoost” childcare tax credit (while ending Labour’s extension of 20 hours’ early childhood education for two-year-olds that was scheduled to start in July 2024)

• increasing Working for Families tax credits for working families (from July 2024).

It will be interesting to see how well these proposals are received by the electorate. An overall package that costs voters little, but benefits them financially, could be a winning strategy. Of course, there are limits to how much tax non-voters are willing to bear, but National may not care so much about that. On the other hand, there are other issues with the proposal, and the foreign buyers tax has come in for specific criticism already. Ultimately, we'll find out how successful this strategy is on Election Night in October!