(nrr) How New Zealand shrank its government by 66%*

*based on number of employees

Rolling Back Government: Lessons from New Zealand
Imprimis ^ | April 2004 | Maurice P. McTigue

If we look back through history, growth in government has been a modern phenomenon. Beginning in the 1850s and lasting until the 1920s or ’30s, the government’s share of GDP in most of the world’s industrialized economies was about six percent. From that period onwards — and particularly since the 1950s — we’ve seen a massive explosion in government share of GDP, in some places as much as 35-45 percent. (In the case of Sweden, of course, it reached 65 percent, and Sweden nearly self-destructed as a result. It is now starting to dismantle some of its social programs to remain economically viable.) Can this situation be halted or even rolled back? My view, based upon personal experience, is that the answer is “yes.” But it requires high levels of transparency and significant consequences for bad decisions — and these are not easy things to bring about.

What we’re seeing around the world at the moment is what I would call a silent revolution, reflected in a change in how people view government accountability. The old idea of accountability simply held that government should spend money in accordance with appropriations. The new accountability is based on asking, “What did we get in public benefits as a result of the expenditure of money?” This is a question that has always been asked in business, but has not been the norm for governments. And those governments today that are struggling valiantly with this question are showing quite extraordinary results. This was certainly the basis of the successful reforms in my own country of New Zealand.

New Zealand’s per capita income in the period prior to the late 1950s was right around number three in the world, behind the United States and Canada. But by 1984, its per capita income had sunk to 27th in the world, alongside Portugal and Turkey. Not only that, but our unemployment rate was 11.6 percent, we’d had 23 successive years of deficits (sometimes ranging as high as 40 percent of GDP), our debt had grown to 65 percent of GDP, and our credit ratings were continually being downgraded. Government spending was a full 44 percent of GDP, investment capital was exiting in huge quantities, and government controls and micromanagement were pervasive at every level of the economy. We had foreign exchange controls that meant I couldn’t buy a subscription to The Economist magazine without the permission of the Minister of Finance. I couldn’t buy shares in a foreign company without surrendering my citizenship. There were price controls on all goods and services, on all shops and on all service industries. There were wage controls and wage freezes. I couldn’t pay my employees more — or pay them bonuses — if I wanted to. There were import controls on the goods that I could bring into the country. There were massive levels of subsidies on industries in order to keep them viable. Young people were leaving in droves.

Spending and Taxes

When a reform government was elected in 1984, it identified three problems: too much spending, too much taxing and too much government. The question was how to cut spending and taxes and diminish government’s role in the economy. Well, the first thing you have to do in this situation is to figure out what you’re getting for dollars spent. Towards this end, we implemented a new policy whereby money wouldn’t simply be allocated to government agencies; instead, there would be a purchase contract with the senior executives of those agencies that clearly delineated what was expected in return for the money. Those who headed up government agencies were now chosen on the basis of a worldwide search and received term contracts — five years with a possible extension of another three years. The only ground for their removal was non-performance, so a newly-elected government couldn’t simply throw them out as had happened with civil servants under the old system. And of course, with those kinds of incentives, agency heads — like CEOs in the private sector — made certain that the next tier of people had very clear objectives that they were expected to achieve as well.

The first purchase that we made from every agency was policy advice. That policy advice was meant to produce a vigorous debate between the government and the agency heads about how to achieve goals like reducing hunger and homelessness. This didn’t mean, by the way, how government could feed or house more people — that’s not important. What’s important is the extent to which hunger and homelessness are actually reduced. In other words, we made it clear that what’s important is not how many people are on welfare, but how many people get off welfare and into independent living.

As we started to work through this process, we also asked some fundamental questions of the agencies. The first question was, “What are you doing?” The second question was, “What should you be doing?” Based on the answers, we then said, “Eliminate what you shouldn’t be doing” — that is, if you are doing something that clearly is not a responsibility of the government, stop doing it. Then we asked the final question: “Who should be paying — the taxpayer, the user, the consumer, or the industry?” We asked this because, in many instances, the taxpayers were subsidizing things that did not benefit them. And if you take the cost of services away from actual consumers and users, you promote overuse and devalue whatever it is that you’re doing.

When we started this process with the Department of Transportation, it had 5,600 employees. When we finished, it had 53. When we started with the Forest Service, it had 17,000 employees. When we finished, it had 17. When we applied it to the Ministry of Works, it had 28,000 employees. I used to be Minister of Works, and ended up being the only employee. In the latter case, most of what the department did was construction and engineering, and there are plenty of people who can do that without government involvement. And if you say to me, “But you killed all those jobs!” — well, that’s just not true. The government stopped employing people in those jobs, but the need for the jobs didn’t disappear. I visited some of the forestry workers some months after they’d lost their government jobs, and they were quite happy. They told me that they were now earning about three times what they used to earn — on top of which, they were surprised to learn that they could do about 60 percent more than they used to! The same lesson applies to the other jobs I mentioned.

Some of the things that government was doing simply didn’t belong in the government. So we sold off telecommunications, airlines, irrigation schemes, computing services, government printing offices, insurance companies, banks, securities, mortgages, railways, bus services, hotels, shipping lines, agricultural advisory services, etc. In the main, when we sold those things off, their productivity went up and the cost of their services went down, translating into major gains for the economy. Furthermore, we decided that other agencies should be run as profit-making and tax-paying enterprises by government. For instance, the air traffic control system was made into a stand-alone company, given instructions that it had to make an acceptable rate of return and pay taxes, and told that it couldn’t get any investment capital from its owner (the government). We did that with about 35 agencies. Together, these used to cost us about one billion dollars per year; now they produced about one billion dollars per year in revenues and taxes.

We achieved an overall reduction of 66 percent in the size of government, measured by the number of employees. The government’s share of GDP dropped from 44 to 27 percent. We were now running surpluses, and we established a policy never to leave dollars on the table: We knew that if we didn’t get rid of this money, some clown would spend it. So we used most of the surplus to pay off debt, and debt went from 63 percent down to 17 percent of GDP. We used the remainder of the surplus each year for tax relief. We reduced income tax rates by half and eliminated incidental taxes. As a result of these policies, revenue increased by 20 percent. Yes, Ronald Reagan was right: lower tax rates do produce more revenue.

Subsidies, Education, and Competitiveness

What about invasive government in the form of subsidies? First, we need to recognize that the main problem with subsidies is that they make people dependent; and when you make people dependent, they lose their innovation and their creativity and become even more dependent.

Let me give you an example: By 1984, New Zealand sheep farming was receiving about 44 percent of its income from government subsidies. Its major product was lamb, and lamb in the international marketplace was selling for about $12.50 (with the government providing another $12.50)per carcass. Well, we did away with all sheep farming subsidies within one year. And of course the sheep farmers were unhappy. But once they accepted the fact that the subsidies weren’t coming back, they put together a team of people charged with figuring out how they could get $30 per lamb carcass. The team reported back that this would be difficult, but not impossible. It required producing an entirely different product, processing it in a different way and selling it in different markets. And within two years, by 1989, they had succeeded in converting their $12.50 product into something worth $30. By 1991, it was worth $42; by 1994 it was worth $74; and by 1999 it was worth $115. In other words, the New Zealand sheep industry went out into the marketplace and found people who would pay higher prices for its product. You can now go into the best restaurants in the U.S. and buy New Zealand lamb, and you’ll be paying somewhere between $35 and $60 per pound.

Needless to say, as we took government support away from industry, it was widely predicted that there would be a massive exodus of people. But that didn’t happen. To give you one example, we lost only about three-quarters of one percent of the farming enterprises — and these were people who shouldn’t have been farming in the first place. In addition, some predicted a major move towards corporate as opposed to family farming. But we’ve seen exactly the reverse. Corporate farming moved out and family farming expanded, probably because families are prepared to work for less than corporations. In the end, it was the best thing that possibly could have happened. And it demonstrated that if you give people no choice but to be creative and innovative, they will find solutions.

New Zealand had an education system that was failing as well. It was failing about 30 percent of its children — especially those in lower socio-economic areas. We had put more and more money into education for 20 years, and achieved worse and worse results.

It cost us twice as much to get a poorer result than we did 20 years previously with much less money. So we decided to rethink what we were doing here as well. The first thing we did was to identify where the dollars were going that we were pouring into education. We hired international consultants (because we didn’t trust our own departments to do it), and they reported that for every dollar we were spending on education, 70 cents was being swallowed up by administration. Once we heard this, we immediately eliminated all of the Boards of Education in the country. Every single school came under the control of a board of trustees elected by the parents of the children at that school, and by nobody else. We gave schools a block of money based on the number of students that went to them, with no strings attached. At the same time, we told the parents that they had an absolute right to choose where their children would go to school. It is absolutely obnoxious to me that anybody would tell parents that they must send their children to a bad school. We converted 4,500 schools to this new system all on the same day.

But we went even further: We made it possible for privately owned schools to be funded in exactly the same way as publicly owned schools, giving parents the ability to spend their education dollars wherever they chose. Again, everybody predicted that there would be a major exodus of students from the public to the private schools, because the private schools showed an academic advantage of 14 to 15 percent. It didn’t happen, however, because the differential between schools disappeared in about 18-24 months. Why? Because all of a sudden teachers realized that if they lost their students, they would lose their funding; and if they lost their funding, they would lose their jobs. Eighty-five percent of our students went to public schools at the beginning of this process. That fell to only about 84 percent over the first year or so of our reforms. But three years later, 87 percent of the students were going to public schools. More importantly, we moved from being about 14 or 15 percent below our international peers to being about 14 or 15 percent above our international peers in terms of educational attainment.

Now consider taxation and competitiveness: What many in the public sector today fail to recognize is that the challenge of competitiveness is worldwide. Capital and labor can move so freely and rapidly from place to place that the only way to stop business from leaving is to make certain that your business climate is better than anybody else’s. Along these lines, there was a very interesting circumstance in Ireland just two years ago. The European Union, led by France, was highly critical of Irish tax policy — particularly on corporations — because the Irish had reduced their tax on corporations from 48 percent to 12 percent and business was flooding into Ireland. The European Union wanted to impose a penalty on Ireland in the form of a 17 percent corporate tax hike to bring them into line with other European countries. Needless to say, the Irish didn’t buy that. The European community responded by saying that what the Irish were doing was unfair and uncompetitive. The Irish Minister of Finance agreed: He pointed out that Ireland was charging corporations 12 percent, while charging its citizens only 10 percent. So Ireland reduced the tax rate to 10 percent for corporations as well. There’s another one the French lost!

When we in New Zealand looked at our revenue gathering process, we found the system extremely complicated in a way that distorted business as well as private decisions. So we asked ourselves some questions: Was our tax system concerned with collecting revenue? Was it concerned with collecting revenue and also delivering social services? Or was it concerned with collecting revenue, delivering social services and changing behavior, all three? We decided that the social services and behavioral components didn’t have any place in a rational system of taxation. So we resolved that we would have only two mechanisms for gathering revenue — a tax on income and a tax on consumption — and that we would simplify those mechanisms and lower the rates as much as we possibly could. We lowered the high income tax rate from 66 to 33 percent, and set that flat rate for high-income earners. In addition, we brought the low end down from 38 to 19 percent, which became the flat rate for low-income earners. We then set a consumption tax rate of 10 percent and eliminated all other taxes — capital gains taxes, property taxes, etc. We carefully designed this system to produce exactly the same revenue as we were getting before and presented it to the public as a zero sum game. But what actually happened was that we received 20 percent more revenue than before. Why? We hadn’t allowed for the increase in voluntary compliance. If tax rates are low, taxpayers won’t employ high priced lawyers and accountants to find loopholes. Indeed, every country that I’ve looked at in the world that has dramatically simplified and lowered its tax rates has ended up with more revenue, not less.

What about regulations? The regulatory power is customarily delegated to non-elected officials who then constrain the people’s liberties with little or no accountability. These regulations are extremely difficult to eliminate once they are in place. But we found a way: We simply rewrote the statutes on which they were based. For instance, we rewrote the environmental laws, transforming them into the Resource Management Act — reducing a law that was 25 inches thick to 348 pages. We rewrote the tax code, all of the farm acts, and the occupational safety and health acts. To do this, we brought our brightest brains together and told them to pretend that there was no pre-existing law and that they should create for us the best possible environment for industry to thrive. We then marketed it in terms of what it would save in taxes. These new laws, in effect, repealed the old, which meant that all existing regulations died — the whole lot, every single one.

Thinking Differently About Government

What I have been discussing is really just a new way of thinking about government. Let me tell you how we solved our deer problem: Our country had no large indigenous animals until the English imported deer for hunting. These deer proceeded to escape into the wild and become obnoxious pests. We then spent 120 years trying to eliminate them, until one day someone suggested that we just let people farm them. So we told the farming community that they could catch and farm the deer, as long as they would keep them inside eight-foot high fences. And we haven’t spent a dollar on deer eradication from that day onwards. Not one. And New Zealand now supplies 40 percent of the world market in venison. By applying simple common sense, we turned a liability into an asset.

Let me share with you one last story: The Department of Transportation came to us one day and said they needed to increase the fees for driver’s licenses. When we asked why, they said that the cost of relicensing wasn’t being fully recovered at the current fee levels. Then we asked why we should be doing this sort of thing at all. The transportation people clearly thought that was a very stupid question: Everybody needs a driver’s license, they said. I then pointed out that I received mine when I was fifteen and asked them: “What is it about relicensing that in any way tests driver competency?” We gave them ten days to think this over. At one point they suggested to us that the police need driver’s licenses for identification purposes. We responded that this was the purpose of an identity card, not a driver’s license. Finally they admitted that they could think of no good reason for what they were doing — so we abolished the whole process! Now a driver’s license is good until a person is 74 years old, after which he must get an annual medical test to ensure he is still competent to drive. So not only did we not need new fees, we abolished a whole department. That’s what I mean by thinking differently.

There are some great things happening along these lines in the United States today. You might not know it, but back in 1993 Congress passed a law called the Government Performance and Results Act. This law orders government departments to identify in a strategic plan what it is that they intend to achieve, and to report each year what they actually did achieve in terms of public benefits. Following on this, two years ago President Bush brought to the table something called the President’s Management Agenda, which sifts through the information in these reports and decides how to respond. These mechanisms are promising if they are used properly. Consider this: There are currently 178 federal programs designed to help people get back to work. They cost $8.4 billion, and 2.4 million people are employed as a result of them. But if we took the most effective three programs out of those 178 and put the $8.4 billion into them alone, the result would likely be that 14.7 million people would find jobs. The status quo costs America over 11 million jobs. The kind of new thinking I am talking about would build into the system a consequence for the administrator who is responsible for this failure of sound stewardship of taxpayer dollars. It is in this direction that the government needs to move.

Dear Starchild;

Great Article!!! Now all's we have to do is figure out how to force or make or require each member of each state legislator and the Governors of each state and every member of Congress and President Shrub read and do the same for their states and the federal government!!!

Ron Getty
SF Libertarian

Starchild <sfdreamer@...> wrote:
*based on number of employees

Rolling Back Government: Lessons from New Zealand
Imprimis ^ | April 2004 | Maurice P. McTigue

If we look back through history, growth in government has been a modern
phenomenon. Beginning in the 1850s and lasting until the 1920s or �30s,
the government�s share of GDP in most of the world�s industrialized
economies was about six percent. From that period onwards � and
particularly since the 1950s � we�ve seen a massive explosion in
government share of GDP, in some places as much as 35-45 percent. (In
the case of Sweden, of course, it reached 65 percent, and Sweden nearly
self-destructed as a result. It is now starting to dismantle some of
its social programs to remain economically viable.) Can this situation
be halted or even rolled back? My view, based upon personal experience,
is that the answer is �yes.� But it requires high levels of
transparency and significant consequences for bad decisions � and these
are not easy things to bring about.

What we�re seeing around the world at the moment is what I would call a
silent revolution, reflected in a change in how people view government
accountability. The old idea of accountability simply held that
government should spend money in accordance with appropriations. The
new accountability is based on asking, �What did we get in public
benefits as a result of the expenditure of money?� This is a question
that has always been asked in business, but has not been the norm for
governments. And those governments today that are struggling valiantly
with this question are showing quite extraordinary results. This was
certainly the basis of the successful reforms in my own country of New
Zealand.

New Zealand�s per capita income in the period prior to the late 1950s
was right around number three in the world, behind the United States
and Canada. But by 1984, its per capita income had sunk to 27th in the
world, alongside Portugal and Turkey. Not only that, but our
unemployment rate was 11.6 percent, we�d had 23 successive years of
deficits (sometimes ranging as high as 40 percent of GDP), our debt had
grown to 65 percent of GDP, and our credit ratings were continually
being downgraded. Government spending was a full 44 percent of GDP,
investment capital was exiting in huge quantities, and government
controls and micromanagement were pervasive at every level of the
economy. We had foreign exchange controls that meant I couldn�t buy a
subscription to The Economist magazine without the permission of the
Minister of Finance. I couldn�t buy shares in a foreign company without
surrendering my citizenship. There were price controls on all goods and
services, on all shops and on all service industries. There were wage
controls and wage freezes. I couldn�t pay my employees more � or pay
them bonuses � if I wanted to. There were import controls on the goods
that I could bring into the country. There were massive levels of
subsidies on industries in order to keep them viable. Young people were
leaving in droves.

Spending and Taxes

When a reform government was elected in 1984, it identified three
problems: too much spending, too much taxing and too much government.
The question was how to cut spending and taxes and diminish
government�s role in the economy. Well, the first thing you have to do
in this situation is to figure out what you�re getting for dollars
spent. Towards this end, we implemented a new policy whereby money
wouldn�t simply be allocated to government agencies; instead, there
would be a purchase contract with the senior executives of those
agencies that clearly delineated what was expected in return for the
money. Those who headed up government agencies were now chosen on the
basis of a worldwide search and received term contracts � five years
with a possible extension of another three years. The only ground for
their removal was non-performance, so a newly-elected government
couldn�t simply throw them out as had happened with civil servants
under the old system. And of course, with those kinds of incentives,
agency heads � like CEOs in the private sector � made certain that the
next tier of people had very clear objectives that they were expected
to achieve as well.

The first purchase that we made from every agency was policy advice.
That policy advice was meant to produce a vigorous debate between the
government and the agency heads about how to achieve goals like
reducing hunger and homelessness. This didn�t mean, by the way, how
government could feed or house more people � that�s not important.
What�s important is the extent to which hunger and homelessness are
actually reduced. In other words, we made it clear that what�s
important is not how many people are on welfare, but how many people
get off welfare and into independent living.

As we started to work through this process, we also asked some
fundamental questions of the agencies. The first question was, �What
are you doing?� The second question was, �What should you be doing?�
Based on the answers, we then said, �Eliminate what you shouldn�t be
doing� � that is, if you are doing something that clearly is not a
responsibility of the government, stop doing it. Then we asked the
final question: �Who should be paying � the taxpayer, the user, the
consumer, or the industry?� We asked this because, in many instances,
the taxpayers were subsidizing things that did not benefit them. And if
you take the cost of services away from actual consumers and users, you
promote overuse and devalue whatever it is that you�re doing.

When we started this process with the Department of Transportation, it
had 5,600 employees. When we finished, it had 53. When we started with
the Forest Service, it had 17,000 employees. When we finished, it had
17. When we applied it to the Ministry of Works, it had 28,000
employees. I used to be Minister of Works, and ended up being the only
employee. In the latter case, most of what the department did was
construction and engineering, and there are plenty of people who can do
that without government involvement. And if you say to me, �But you
killed all those jobs!� � well, that�s just not true. The government
stopped employing people in those jobs, but the need for the jobs
didn�t disappear. I visited some of the forestry workers some months
after they�d lost their government jobs, and they were quite happy.
They told me that they were now earning about three times what they
used to earn � on top of which, they were surprised to learn that they
could do about 60 percent more than they used to! The same lesson
applies to the other jobs I mentioned.

Some of the things that government was doing simply didn�t belong in
the government. So we sold off telecommunications, airlines, irrigation
schemes, computing services, government printing offices, insurance
companies, banks, securities, mortgages, railways, bus services,
hotels, shipping lines, agricultural advisory services, etc. In the
main, when we sold those things off, their productivity went up and the
cost of their services went down, translating into major gains for the
economy. Furthermore, we decided that other agencies should be run as
profit-making and tax-paying enterprises by government. For instance,
the air traffic control system was made into a stand-alone company,
given instructions that it had to make an acceptable rate of return and
pay taxes, and told that it couldn�t get any investment capital from
its owner (the government). We did that with about 35 agencies.
Together, these used to cost us about one billion dollars per year; now
they produced about one billion dollars per year in revenues and taxes.

We achieved an overall reduction of 66 percent in the size of
government, measured by the number of employees. The government�s share
of GDP dropped from 44 to 27 percent. We were now running surpluses,
and we established a policy never to leave dollars on the table: We
knew that if we didn�t get rid of this money, some clown would spend
it. So we used most of the surplus to pay off debt, and debt went from
63 percent down to 17 percent of GDP. We used the remainder of the
surplus each year for tax relief. We reduced income tax rates by half
and eliminated incidental taxes. As a result of these policies, revenue
increased by 20 percent. Yes, Ronald Reagan was right: lower tax rates
do produce more revenue.

Subsidies, Education, and Competitiveness

What about invasive government in the form of subsidies? First, we need
to recognize that the main problem with subsidies is that they make
people dependent; and when you make people dependent, they lose their
innovation and their creativity and become even more dependent.

Let me give you an example: By 1984, New Zealand sheep farming was
receiving about 44 percent of its income from government subsidies. Its
major product was lamb, and lamb in the international marketplace was
selling for about $12.50 (with the government providing another
$12.50)per carcass. Well, we did away with all sheep farming subsidies
within one year. And of course the sheep farmers were unhappy. But once
they accepted the fact that the subsidies weren�t coming back, they put
together a team of people charged with figuring out how they could get
$30 per lamb carcass. The team reported back that this would be
difficult, but not impossible. It required producing an entirely
different product, processing it in a different way and selling it in
different markets. And within two years, by 1989, they had succeeded in
converting their $12.50 product into something worth $30. By 1991, it
was worth $42; by 1994 it was worth $74; and by 1999 it was worth $115.
In other words, the New Zealand sheep industry went out into the
marketplace and found people who would pay higher prices for its
product. You can now go into the best restaurants in the U.S. and buy
New Zealand lamb, and you�ll be paying somewhere between $35 and $60
per pound.

Needless to say, as we took government support away from industry, it
was widely predicted that there would be a massive exodus of people.
But that didn�t happen. To give you one example, we lost only about
three-quarters of one percent of the farming enterprises � and these
were people who shouldn�t have been farming in the first place. In
addition, some predicted a major move towards corporate as opposed to
family farming. But we�ve seen exactly the reverse. Corporate farming
moved out and family farming expanded, probably because families are
prepared to work for less than corporations. In the end, it was the
best thing that possibly could have happened. And it demonstrated that
if you give people no choice but to be creative and innovative, they
will find solutions.

New Zealand had an education system that was failing as well. It was
failing about 30 percent of its children � especially those in lower
socio-economic areas. We had put more and more money into education for
20 years, and achieved worse and worse results.

It cost us twice as much to get a poorer result than we did 20 years
previously with much less money. So we decided to rethink what we were
doing here as well. The first thing we did was to identify where the
dollars were going that we were pouring into education. We hired
international consultants (because we didn�t trust our own departments
to do it), and they reported that for every dollar we were spending on
education, 70 cents was being swallowed up by administration. Once we
heard this, we immediately eliminated all of the Boards of Education in
the country. Every single school came under the control of a board of
trustees elected by the parents of the children at that school, and by
nobody else. We gave schools a block of money based on the number of
students that went to them, with no strings attached. At the same time,
we told the parents that they had an absolute right to choose where
their children would go to school. It is absolutely obnoxious to me
that anybody would tell parents that they must send their children to a
bad school. We converted 4,500 schools to this new system all on the
same day.

But we went even further: We made it possible for privately owned
schools to be funded in exactly the same way as publicly owned schools,
giving parents the ability to spend their education dollars wherever
they chose. Again, everybody predicted that there would be a major
exodus of students from the public to the private schools, because the
private schools showed an academic advantage of 14 to 15 percent. It
didn�t happen, however, because the differential between schools
disappeared in about 18-24 months. Why? Because all of a sudden
teachers realized that if they lost their students, they would lose
their funding; and if they lost their funding, they would lose their
jobs. Eighty-five percent of our students went to public schools at the
beginning of this process. That fell to only about 84 percent over the
first year or so of our reforms. But three years later, 87 percent of
the students were going to public schools. More importantly, we moved
from being about 14 or 15 percent below our international peers to
being about 14 or 15 percent above our international peers in terms of
educational attainment.

Now consider taxation and competitiveness: What many in the public
sector today fail to recognize is that the challenge of competitiveness
is worldwide. Capital and labor can move so freely and rapidly from
place to place that the only way to stop business from leaving is to
make certain that your business climate is better than anybody else�s.
Along these lines, there was a very interesting circumstance in Ireland
just two years ago. The European Union, led by France, was highly
critical of Irish tax policy � particularly on corporations � because
the Irish had reduced their tax on corporations from 48 percent to 12
percent and business was flooding into Ireland. The European Union
wanted to impose a penalty on Ireland in the form of a 17 percent
corporate tax hike to bring them into line with other European
countries. Needless to say, the Irish didn�t buy that. The European
community responded by saying that what the Irish were doing was unfair
and uncompetitive. The Irish Minister of Finance agreed: He pointed out
that Ireland was charging corporations 12 percent, while charging its
citizens only 10 percent. So Ireland reduced the tax rate to 10 percent
for corporations as well. There�s another one the French lost!

When we in New Zealand looked at our revenue gathering process, we
found the system extremely complicated in a way that distorted business
as well as private decisions. So we asked ourselves some questions: Was
our tax system concerned with collecting revenue? Was it concerned with
collecting revenue and also delivering social services? Or was it
concerned with collecting revenue, delivering social services and
changing behavior, all three? We decided that the social services and
behavioral components didn�t have any place in a rational system of
taxation. So we resolved that we would have only two mechanisms for
gathering revenue � a tax on income and a tax on consumption � and that
we would simplify those mechanisms and lower the rates as much as we
possibly could. We lowered the high income tax rate from 66 to 33
percent, and set that flat rate for high-income earners. In addition,
we brought the low end down from 38 to 19 percent, which became the
flat rate for low-income earners. We then set a consumption tax rate of
10 percent and eliminated all other taxes � capital gains taxes,
property taxes, etc. We carefully designed this system to produce
exactly the same revenue as we were getting before and presented it to
the public as a zero sum game. But what actually happened was that we
received 20 percent more revenue than before. Why? We hadn�t allowed
for the increase in voluntary compliance. If tax rates are low,
taxpayers won�t employ high priced lawyers and accountants to find
loopholes. Indeed, every country that I�ve looked at in the world that
has dramatically simplified and lowered its tax rates has ended up with
more revenue, not less.

What about regulations? The regulatory power is customarily delegated
to non-elected officials who then constrain the people�s liberties with
little or no accountability. These regulations are extremely difficult
to eliminate once they are in place. But we found a way: We simply
rewrote the statutes on which they were based. For instance, we rewrote
the environmental laws, transforming them into the Resource Management
Act � reducing a law that was 25 inches thick to 348 pages. We rewrote
the tax code, all of the farm acts, and the occupational safety and
health acts. To do this, we brought our brightest brains together and
told them to pretend that there was no pre-existing law and that they
should create for us the best possible environment for industry to
thrive. We then marketed it in terms of what it would save in taxes.
These new laws, in effect, repealed the old, which meant that all
existing regulations died � the whole lot, every single one.

Thinking Differently About Government

What I have been discussing is really just a new way of thinking about
government. Let me tell you how we solved our deer problem: Our country
had no large indigenous animals until the English imported deer for
hunting. These deer proceeded to escape into the wild and become
obnoxious pests. We then spent 120 years trying to eliminate them,
until one day someone suggested that we just let people farm them. So
we told the farming community that they could catch and farm the deer,
as long as they would keep them inside eight-foot high fences. And we
haven�t spent a dollar on deer eradication from that day onwards. Not
one. And New Zealand now supplies 40 percent of the world market in
venison. By applying simple common sense, we turned a liability into an
asset.

Let me share with you one last story: The Department of Transportation
came to us one day and said they needed to increase the fees for
driver�s licenses. When we asked why, they said that the cost of
relicensing wasn�t being fully recovered at the current fee levels.
Then we asked why we should be doing this sort of thing at all. The
transportation people clearly thought that was a very stupid question:
Everybody needs a driver�s license, they said. I then pointed out that
I received mine when I was fifteen and asked them: �What is it about
relicensing that in any way tests driver competency?� We gave them ten
days to think this over. At one point they suggested to us that the
police need driver�s licenses for identification purposes. We responded
that this was the purpose of an identity card, not a driver�s license.
Finally they admitted that they could think of no good reason for what
they were doing � so we abolished the whole process! Now a driver�s
license is good until a person is 74 years old, after which he must get
an annual medical test to ensure he is still competent to drive. So not
only did we not need new fees, we abolished a whole department. That�s
what I mean by thinking differently.

There are some great things happening along these lines in the United
States today. You might not know it, but back in 1993 Congress passed a
law called the Government Performance and Results Act. This law orders
government departments to identify in a strategic plan what it is that
they intend to achieve, and to report each year what they actually did
achieve in terms of public benefits. Following on this, two years ago
President Bush brought to the table something called the President�s
Management Agenda, which sifts through the information in these reports
and decides how to respond. These mechanisms are promising if they are
used properly. Consider this: There are currently 178 federal programs

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