It’s not yet election year, but the political jockeying over tax cuts is underway. The Detail takes a closer look at what is – and isn’t – on the table.
A record tax take and a lower than expected deficit – the political debate over tax cuts is ramping up, a year out from the next election.
When the Government opened its books last week, it revealed the tax take topped $100 billion for the first time, while the deficit of $10 billion was half what Treasury predicted in May.
All the more reason to cut taxes, says National; but Finance Minister Grant Robertson says now is not the time.
The Detail looks at our current tax rules and how they favour the wealthy, what National will do to change them and why the Labour Government isn’t cutting taxes for low- and middle-income earners.
Under National’s plan to put money back into earners’ pockets, it says it will get rid of the 39 percent rate that kicks in above $180,000.
But it was a similar plan to cut tax for the wealthy in the UK – removing the 45 percent rate on those earning above £150,000 – that caused an economic calamity and forced a backdown by new British Prime Minister Liz Truss and her chancellor of the exchequer Kwasi Kwateng.
Tax expert Terry Baucher tells The Detail there are valid comparisons – and differences – between National’s plan and what the UK’s Tory government wanted to do.
“The underlying principal in the UK and here is to incentivise people.”
He describes it as an elaborate play on the trickle-down theory, which favours higher-income earners and those with substantial wealth or capital.
Baucher believes National’s tax adjustments at the lower end would help to tackle the cost of living crisis, as would the British tax cuts. But the cuts are weighted towards the top end, he says, and the people who are in real trouble with cost of living are the lower- and middle-income earners.
“To say they [the tax cuts] would help the cost of living crisis in only partly correct,” Baucher says.
National says its priority is to index tax thresholds to inflation, which shadow finance spokesperson Nicola Willis says is to “correct for the corrosive impact of inflation”.
Right now, each dollar earned up to $14,000 is taxed at 10.5 percent, the next bracket of earnings up to $48,000 is taxed at 17.5 percent.
The $48,000 to $70,000 bracket is taxed at 30 percent; $70,000 to $180,000 at 33 percent; and each dollar earned above $180,000 is taxed at 39 percent.
National wants to scrap the top rate and lift the other brackets by just over 11.5 percent, to match the rise in the cost of living over the past four years.
But Baucher reckons to do it properly and to make a meaningful difference to the hard-hit low- to middle-income earners, 2010 should be the baseline for inflation-adjusted tax thresholds because that was the last time they were changed.
That would lift the tax brackets by about 24 percent and mean the lowest earners would be paying the lowest rate of 10.5 percent right up to $17,400, while the 17.5 percent tax rate would go up to almost $60,000.
“The concept of fairness is a difficult one,” says the NZ Herald‘s Wellington business editor Jenee Tibshraeny.
“What’s fair for one person might not be fair for someone else.”
In its first term, the Labour government attempted to even the playing field between people who earn their income from property versus people who earn their income through wages and salaries with a capital gains tax, but it was shut down by coalition partner New Zealand First.
But in 2021, in response to soaring property prices, the Government brought in new rules for property investors, extending the bright-line rule so that investors have to pay income tax on any gains made on the value of a residential property that is not their home, if they sell within 10 years. It also removed the right of property investors to have interest on their mortgage deducted from their tax.
Baucher says the bright-line test is unpopular because it is a complicated tax that penalises property owners who are trying to help their children and grandchildren into the market.
He thinks National’s plan to reverse the interest deductibility and bring the bright-line rule back to two years would be widely popular with voters.
With a record tax take and lower than expected deficit, Tibshraeny wouldn’t rule out a move by Labour to change taxes, but says it won’t be rushed.
“Labour would be smart to sit back for as long as it can and asses a) what exactly National is going to take to the election in terms of its tax policy and b) assess the economic environment because it is very dynamic,” she says.
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