Keith Rankin Analysis – Tax Cuts: 1982 and 2024

Analysis by Keith Rankin.

Today is ‘tax cut day’. The present round of income tax cuts has been controversial, despite the fact that they are not ‘real’ tax cuts, only bracket adjustments which partially compensate for CPI inflation this decade.

(Here is an interview today with University of Auckland economist Susan St John, which suggests the context of the controversy: Some may be worse off due to tax cuts: expert, RNZ, 31 July 2024. Here is what I wrote earlier this year: Tax Cuts? Evening Report, 25 March 2024. And here is my analysis from last year: Income Tax and Common-Sense: the Aotearoa New Zealand case, Evening Report, 17 July 2023.)

The official context here is that the income tax scale has been subject to ‘bracket creep’, meaning that average tax rates have increased because of rising price levels; bracket creep benefits the government’s coffers at the expense of wage workers.

There are sub-contexts, though: namely that this nominal tax cut is taking place in a time of recession and inequality while giving least to those who most need more spending power; and that various indirect taxes have also been cut, and for reasons of sectional interest – beneficiaries being mortgaged landlords, Auckland motorists and fuel retailers, and tobacco companies – rather than in any recognition of the wider fiscal constraints which have otherwise been to the fore with this National-led government.

My focus here is on the official context, and in doing so I want to look at an important historical example of tax cuts undertaken for the same reason.

The Second Muldoon Tax Cut: 1982

In his term as both Prime Minister and Finance Minister, Robert Muldoon introduced income tax reduction packages in 1978 (an election year) and in 1982 (following an election year). Both were far-reaching. And both took place in a political environment when Muldoon was losing favour with his hitherto right-wing backers. (And the political right did prove to be Muldoon’s nemesis in 1984, even though his right-wing successors rode to power in a left-wing waka.)

By the 1981 to 1984 third term of the Third National Government, Robert Muldoon was subject to much criticism for many reasons, one of those being that he did not take advice. But, in 1982, he openly and willingly accepted the advice from the McCaw Report (Taskforce on Tax Reform, 1982). Muldoon had already acknowledged bracket creep (known then as ‘fiscal drag’), and between 1979 and 1982 had made several micro-adjustments, on a similar scale to today’s changes.

The context was the high CPI inflation, especially in the 1978 to 1981 period, and the fact that even workers on the average wage were finding their average tax rates going up markedly; offsetting this, however, was the fact that the 1981 census showed that gross real wages in the twentieth century peaked in 1981. Muldoon wanted to give more spending power to ordinary workers without there being a need for employers to increase wages. Muldoon wanted to break the wage-price spiral without reducing workers’ living standards; an honest assessment of 1980 to 1984 would show that he succeeded.

The 1982 tax package proved to be relatively uncontroversial, despite it heavily favouring those on higher incomes, and despite certain radical aspects. This was a necessary redressing of imbalances created by bracket creep, an imbalance that most severely affected people in higher-income deciles (or ‘quintiles’, as the statistics of the time portrayed; this income distribution measure was quietly dropped in the late 1980s). A particular feature was the second taxation band (see tables below) which covered almost the full range of ‘blue collar’ wages. Further, the highly taxed first band also minimised the impact of bracket creep; this was a much flatter tax scale for wage workers than just about anywhere else in the world.

However, Muldoon performed an economically wise manoeuvre, so as not to be seen as overly favouring the rich. Unfortunately, it is the legacy of this manoeuvre that – in the subsequent propaganda-informed narratives of the Muldoon years – that has contributed to the Stalinisation of Muldoon’s reputation. (Think of the absurd ‘Polish shipyard’ metaphor that became a meme for the propaganda put out by the senior politicians of the post-Muldoon Fourth Labour Government.)

The manoeuvre was a temporary ten percent surcharge on the new third, fourth and fifth tax brackets. This helped to offset (but not eliminate) the huge gains made by higher income recipients. In particular, the 60 percent top tax rate – not an excessive top rate in western liberal democracies – was temporarily raised to 66 percent. In the subsequent propaganda narrative, this 66% rate – subsequently milked for a few years by the successor Labour government – has come to characterise ‘Muldoonist’ tax policy.

The Tax Scales

Tax rates before and after the 1982 income tax package: (source: New Zealand Official Yearbook 1981and 1983)

Some context, for comparing with today, is that prices have increased five-fold since 1981. So the $38,000 top threshold is comparable to the present $180,000 top threshold. For people in 1983 and 1984 not affected by the top tax bracket, the surcharge only increased the second-top marginal tax rate from 55 cents in the dollar to 56.1 cents.

The Political Coup

The 1982 cuts were a policy masterstroke which failed to gain Robert Muldoon the kudos he deserved. The coming political assassination of Muldoon was already too far advanced. And the temporary raising of the top tax rate further inflamed the coming coup; a political coup carried out by the new neoliberal right – then known as the New Right (ie the Thatcherite right) – with the full acquiescence (much of it naïve in the extreme) of the political left. We may call the coup, when it happened, as a left-right coup, with the New Zealand Party playing as important a role as the Labour Party; and we also need to recognise that the Social Credit Party – whose main policy platform was low-interest-rate monetary policies – was as much a target as was Robert Muldoon. (And we note that, among the first overt shots of the coup that ended the Savage to Muldoon policy era, was the 1983 ousting of Bill Rowling [and his ‘A-team’] from the Labour Party leadership.)

History is told by the winners. The Thatcherites, and the ‘progressive left’ who bought into the escalating historical narrative which ignored the many achievements of the Third National Government (and its National predecessors), were happy for many of the liberalisations promoted and implemented by the Muldoon government to seep into our consciousness as achievements of the successor Fourth Labour Government.

The 1975 to 1984 New Zealand National Government does have a substantial and positive legacy of achievement in economic policy during a time when corrosive neoliberalism – much of it inspired by the writings of Ayn Rand, especially Atlas Shrugged – was rapidly advancing in the United States, the United Kingdom, and in New Zealand’s public service and academia. And when other countries with similar economic histories to New Zealand – especially those in South America – had responded to the economic challenges of those times by descending into actual fascist dictatorships. (I felt that deeply – including when travelling there in 2016 – because the main victims of the atrocities of the late 1970s and early 1980s in Chile, Argentina and Uruguay were young men and women born around the same time that I was born.)

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.