Magazine article New Zealand Management

A Fiddly Business

Magazine article New Zealand Management

A Fiddly Business

Article excerpt

Six years ago the Labour party promised 95 percent of people would pay no more income tax. Some promise. Labour's ploy was to reassure the great majority of taxpayers that it would not be an old-fashioned tax-and-spend government.

It kept the promise, more or less. But only briefly. Earnings rose. More and more taxpayers went up through the 39c barrier, just by their earnings keeping pace with inflation. Now, well over 10 percent are in that top bracket.

But the promise was also broken lower down. Within four years average earnings climbed through the $38,000 threshold at which the 33c rate kicks in. So the average earner started paying a higher proportion of earnings in tax. This is called bracket creep.

Now average earnings (including overtime) are $40,664. Tax as a proportion of that is 20.4 percent. When the average wage was just $38,000 at the end of 2002, tax's proportion was 19.5 percent.

In other words, the share of income going in tax is a full percentage point higher. To recover the lost after-tax income in real terms, the average earner would need another one percent gross income.

No wonder unions have been getting agitated. These are not the "rich". They are the people that Labour hopes votes for it.

Hence National's tax cut pitch. Hence ACT's claim that in offering tax cuts it is the "workers' party". And hence United Future's attempt in 2003 to get Michael Cullen to raise tax thresholds in line with inflation, preferably by indexing them.

After all, a number of excise taxes are adjusted (upwards) for inflation and so are pensions and benefits. Why not do the same (downwards) for income tax?

There is an administrative reason: the tax tables would change each year, which would push up compliance costs. And in any case it would not exactly compensate taxpayers, not least because average earnings rise faster than prices.

But Cullen has ruled out point-blank any adjustment. Surely, logic--not to mention justice, still less to mention that unkept 1999 promise--suggests an adjustment every two or three years.

Not if you are Labour. Bracket creep is good for the Exchequer. Without raising tax rates--a politically hazardous activity modern governments shun--the total tax take goes up and individual taxpayers hardly notice because they are, after all, getting more in the hand. …

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