We publish below a talk given by Philip Ferguson at a recent Christchurch Workers Party forum. It is an expanded and updated version of an article originally published in the Spark in 2005 available here.
Most of the parliamentary parties favour tax cuts both for individuals and companies. Indeed, under Labour there has been a small cut in company tax and also tax credits for companies investing in R&D - and, in the latest budget, some personal tax cuts. Although the personal tax cuts are presented in a populist way, as if they would benefit workers, these parties vigorously oppose measures such as substantial increases to the minimum wage, serious across-the-board wage rises and increases in welfare payments to keep up with inflation, let alone living real wages and incomes for people on benefits. And all the parliamentary parties oppose the abolition of GST.
During the upcoming election campaign, one of the minimum platform points of the Workers Party will be demanding the abolition of GST, something that would be done by any government with even a token desire to make life a little easier for workers, especially the poorest workers.
GST was first introduced in NZ by the fourth Labour government, back in 1986. At the time it was set at 10 percent. Whereas a similar tax in Tory-ruled Britain, VAT, excluded basic family items, the only things Labour here excluded from GST were financial services, real estate transactions and the operations of very small firms.
The imposition of GST significantly raised the level of indirect taxation. The proportion of government income derived from indirect tax rose from 22.5 percent before GST to 33.2 within just the first two years of the new tax. In 1988, the fourth Labour government slashed the top personal tax rate from 66% to 33% and, the following year, 1989, GST was increased to 12.5 percent and imposed on all goods and services.
Victoria University economist Bob Stephens has pointed out the overall effect in the 1980s of the partial replacement of income tax by indirect tax. Between 1982 and 1988, “effective average tax rates including GST for couples on average earnings with two dependents increased from 18.7 percent to 24.1 percent. Average tax rates for similar couples on three times the average income declined from 40.3 percent to 34.9 percent.” So we can see that indirect tax means less tax on the wealthy and more tax on workers, especially the poorest.
This becomes even more clear if we compare how on the dole and a top company CEO. If an unemployed person is getting $200 a week on the dole and they buy something which costs $100 plus GST, then they are paying $12.50 in indirect tax and this is 6.25 percent of their total weekly income. If the Telecom CEO - and I’m working off figures for Theresa Gattung when she occupied that position - buys the same item for $100 and pays the same GST, her indirect tax payment only makes up about 0.0002 percent of her weekly income.
When GST is accompanied by reductions in direct tax - income tax, in particular - then it’s not hard to see why the rich favour indirect tax such as GST.
Around a third of the tax people pay is indirect tax, and corporates pay only one fifth of the tax take. Here’s the figures for the past financial year:
Other Indirect (alcohol, petrol etc): $4.8b
Before the introduction of GST the taxation system was progressive. In fact, for a long time NZ had very low personal tax rates - in fact many workers paid little or no tax - and relatively high company taxes. Over the last half-century the weight shifted, first with big increases in income tax on workers and then small cuts in company taxes and then, with the fourth Labour Government, large cuts in company taxes and the imposition of GST and increased weight for other forms of indirect tax. Overall, the weight has shifted in recent decades, with a big chunk of tax being regressive and squeezing workers.
What’s behind the shift in taxation? Why do the employers and parties which want to cut income and company tax so vigorously defend maintaining fairly high levels of indirect tax and, in particular, why do they totally defend and maintain GST, even on essentials like food, clothing and shelter?
To answer these questions it is necessary to understand how capitalism works and how different forms of taxation fit into the way in which all the value produced in society is divided between the different classes in capitalist society, especially the exploited class (the workers) and the exploiting class (the capitalists), but also the middle class.
The single most significant feature of capitalism is the way in which commodity production becomes dominant: that is, goods and services increasingly are produced with the purpose of being sold on the market for the realisation, and maximisation, of profit. Under capitalism, workers’ labour-power becomes a commodity and, like all other commodities, its value is determined by the socially necessary labour that goes into creating it. Basically, this means that the value of workers’ labour-power is the value that is required to house, cloth, feed and otherwise maintain the worker in a sufficient state to turn up to work each day to produce profits for the employers. If that value translates into $500 a week, this is what the worker needs to be paid. The worker, however, can create a value much greater than this - say a thousand dollars worth of goods or services. The extra $500 is surplus-value, and in the hands of the boss. In good times, and with strong organisation, the tax on workers’ wages has to come out of surplus-value and therefore lessens the amount of surplus-value that the boss can convert into profit. In other words, the worker takes home the value of their labour-power ($500) and the amount paid in PAYE is actually a deduction from the additional $500 - that is, from the surplus-value.
During boom periods, the bosses are OK about this because they have so much surplus-value and they are prepared to buy peace with the working class. However, when capitalism goes into slump, the capitalists want to cut down on anything which reduces the amount of surplus-value they can convert into profit. They do this in a number of ways - eg, by cutting government expenditure on health and education, since this is financed out of surplus-value and by shifting tax from being a deduction from surplus-value into being a deduction from the value of labour-power - so now, a part of the tax paid by workers comes out of the $500 which is the value (and price) of their labour-power. Indirect tax is a useful weapon for doing this.
Now, instead of the worker getting the $500 value of their labour-power per week and, say $150 tax coming out of the $500 surplus-value, there may be only $100 direct tax coming out of surplus-value and $50 tax coming out of the worker’s $500 wage. Or, with personal tax cuts and increases in indirect taxation, like GST, it may be that $100 direct tax is coming out of surplus-value and $50, in the form of indirect tax, is coming out of the worker’s $500 wage. In either of these cases, the employing capitalist gets hold of an extra $50 in surplus-value per worker.
What has happened is that the worker’s share of the $1,000 has fallen from $500 to $450, while the bosses’ share has risen from $350 to $400, and the government continues to get $150. (I’m leaving out of the equation company taxes, purely to make the example simpler; however, periods of recession tend to see reductions in company taxes as well so, again, the bosses benefit.)
Moreover, GST allows the bosses to immediately pass on costs. In this sense, it doesn’t really cost the bosses anything. If they pay GST on some item they need for their factory or office, that cost is factored into the cost of their finished product. For instance, if a capitalist buys a machine that cost a million dollars and they then have to pay 12.5 percent GST, that cost is simply part of their constant capital (the fund spent on machinery, raw materials, plant etc) and its value is passed into the goods the machine produces.
Workers, on the other hand, cannot simply ‘factor in’ GST to their incomes, because they don’t set the price of their labour-power. There is no GST added to workers’ wages! And imagine the furore from capitalists if workers had have said, “OK, you’re paying 12.5% more for your machines and energy and so on, and you’re getting that back from simply adding it on to your prices, but we have to pay 12.5% more for food, shelter, clothing and just about everything else, so we’re adding 12.5% to our pay bill for you.”
Further reductions in tax, even if the reductions are on the wages of the low-paid, mean less money is coming out of the surplus-value that is in the hands of the capitalist class. In other words, the capitalists get to hold onto more surplus-value. This is also why capitalists prefer reductions in the tax rate over wage rises. Tax deductions leave more profit in the hands of the bosses, whereas wage rises can cut into profits. The fact that tax deductions also leave less money for the state to spend on public services is fine by the bosses. After all, they want more and more public services to be privatised and turned into businesses to make profits anyway.
While the Workers Party calls for the abolition of GST, we are not suggesting that tampering with the tax system can deliver significant improvements for the working class. That is an illusion promoted by social democrats and populists. Moreover, whereas Keynesians, including Keynesians who think they are Marxists, put forward progressive taxation as an alternative to indirect and regressive tax, and argue that redistributive policies at the level of taxation can improve equality, put more money into the economy and solve economic problems, we explain this is not how capitalism works. Higher company taxes and higher taxes on the rich actually deepen the economic problems of a capitalist economy when that economy is in a recession - this is because such higher taxation means even less surplus-value can be converted into profit. So what happens is that capitalists cut back even more on jobs and wages. This is what happened during the Muldoon era and paved the way for “Rogernomics”.
The people who will pay the price for that are workers. Under capitalism there is simply no way out for workers.
The only way to escape the inherent problems of a capitalist economy is to abolish that economy - that is, through workers taking control of the means of production, distribution and exchange and organising a new kind of society, one based on planned production for human need rather than anarchic production for profit.
Capitalist governments in New Zealand are simply not going to abolish GST because of the way it fits into the capitalist economy which all the parliamentary parties are committed to managing. Moreover, even if GST were to be abolished in the context of the existing economy and power relations between the social classes, capitalists would try to increase their prices to take advantage of this. So a product that is $112.50 - $12.50 being GST - might be reduced to $110, with the capitalists being the prime beneficiary.
From a pro-worker and anti-capitalist perspective there are three key considerations:
1. As the creators of surplus-value, the basis for profits, workers are already the people who create the wealth of society, a chunk of which is expropriated from them by the capitalist class which exploits their labour-power. Workers therefore should pay no indirect and/or regressive tax - no GST, no petrol tax, no road tax, no rates, nada, nothing.
2. Workers’ struggle. If workers’ struggle forced changes in GST then such mobilisations of workers could be used to try to stymie capitalist attempts to simply profiteer more from such changes. Moreover, while we call for the total abolition of GST and all forms of regressive and/or indirect tax, we are more in favour of workers’ struggles for wage and benefit rises and for a living income with no worker having to work more than a 40-hour week. In fact, in the 21st century we should really have much shorter work weeks than were achieved last century.
3. Thirdly, when we call for the abolition of GST, we explain how indirect and regressive forms of taxation fit into the overall capitalist economy and that it is not the tax system but the capitalist economy itself which is the problem. So, for us, calling for the abolition of GST is primarily a way to educate people about the nature of capitalism and to mobilise people around challenging the economic system.
So, again, we are back to the fact that income inequality simply cannot be solved by progressive taxation or other ‘redistributive’ methods because income inequality is the expression of this more basic problem of the overall economic system - private ownership of goods and services which are produced by the collective labour of workers as a class. The solution to inequality is therefore social ownership of the means of production, distribution and exchange. And that will require a revolution.