For several years the Business Roundtable has been publicising Tax Freedom Day. This year we calculated that it fell between April 23 and May 17, depending on the measure used.

Our preferred measure of the true tax burden is the ratio of government spending to gross domestic product (GDP). This is in line with the practice adopted by organisations such as the Americans for Tax Reform Foundation. They refer to the day when the average person stops working for the Government and starts working for themselves as the Cost of Government Day.

Working from tax figures rather than government spending figures can give a slightly misleading impression of the cost of government.

This can be easily seen in a New Zealand context by considering the Muldoon period. In the 1970s and early 1980s, governments ran large budget deficits because they did not tax as much as they spent. But the result was growing public debt which had to be repaid by later governments running budget surpluses and selling Crown assets.

So taxation in the Muldoon era understated the true cost of government. Government borrowing is simply deferred taxation, since Governments cannot keep increasing debt indefinitely.

Similarly, when Governments tax more than they spend and run surpluses - as is the case in New Zealand at present - the cost of government is overstated. Governments don't run surpluses for ever (even if they adopt tax-smoothing schemes such as the Cullen superannuation fund).

There are also other differences between tax-based and spending-based measures of the cost of government. For example, some government spending is financed by user charges, some of which are equivalent to a tax.

Hence, economists such as Nobel laureate Milton Friedman have advocated government spending as a more accurate and stable measure of the cost of government and the underlying tax burden.

On this basis, Tax Freedom Day in New Zealand fell on April 23 if central government core expenditure, which currently accounts for around 31 per cent of GDP measured on the Generally Accepted Accounting Practice basis, is used.

It fell on May 17 if total government spending, including central and local government, is taken into account. This calculation is based on OECD comparisons which allow for variations in government structures. The OECD estimates general government spending in New Zealand is more than 37 per cent of GDP.

The merit of calculations of Tax Freedom Day based either on total spending or total tax revenue is that they abstract from the tax structures of different countries, such as the nature of their income-tax scales and the balance between direct and indirect taxation.

Thus on either a spending or taxation-based calculation New Zealand is a more highly taxed country than Australia or Ireland, even though their top income tax rates are higher.

Why does Tax Freedom Day matter?

First, as the Americans for Tax Reform Foundation explains, a lower cost of government means that more of the money produced by workers, investors and entrepreneurs is left in their hands. That expands personal choice.

Second, a lower cost of government increases incentives for work, savings, investment and entrepreneurship. Hence the reward for these activities increases, and the end result is expanded economic growth and opportunity, with more jobs and higher personal incomes.

Third, many government programmes waste resources.

The evidence is clear that, beyond a certain point, high levels of government spending and taxation harm economic growth and worsen social outcomes.

OECD countries with smaller government such as the United States, Australia, South Korea and Ireland are outperforming the high-tax states of Europe.

A recent study by a leading economist found that tax largely accounts for the 30 per cent output (and hence income) gap between the United States and France.

No OECD country has achieved per capita growth rates of 4 per cent or more a year on a sustained basis with total government spending and taxation at New Zealand's level.

It follows that this ratio must be reduced if New Zealand is to achieve the Government's goal of getting back into the top half of the OECD income rankings within any meaningful timeframe.

As the Australian Financial Review commented in an editorial on this month's Budget, New Zealand's tax burden is too high and New Zealand must regain a taste for reform if it is to match the faster pace of growth in Australia and other Asia-Pacific countries.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz