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28 Apr 2016
This time last year Bill English said that a tax cut announcement may be brought forward to 2016. The PM put a dampner on that a couple of weeks ago and announced that it won’t be in 2016, so it seems probable that cuts maybe announced in the 2017 (election year) budget. Although this Government has previously made cuts effective half way through the tax year, it’s probably more likely that they would take effect on 1 April 2018. That would be 7.5 years since the current tax rate structure was implemented in October 2010.
As tax cuts are discussed, so too is the is the concept of “bracket creep”. I don’t know about you, but bracket creep creates a picture in my mind of a thief like character creeping around our homes and towns at night. And in a way, that is an apt description, because this creep eats away at our incomes little by little, year by year, hardly noticed. Another name for bracket creep is “fiscal drag”, and we could have some fun with that description too, but let’s get on with the discussion.
What happens when our incomes rise, hopefully keeping up with inflation, our incomes can be pushed into higher tax brackets. We don’t earn any more buying power, but if we’re pushed into a higher tax bracket, we pay more tax than the inflationary effect determines that we should.
So there is no point in getting excited about tax cuts, until the bracket creep effect has been fixed. Bill English talked last year about a $2.5 billion tax cut, but David Seymour of the Act Party reported earlier this month that 7 years of bracket creep has cost NZ households $2.1 billion. In other words, a $2.5 billion tax cut will only get us back to where we were in 2010.
I’ve done a few calculations on how this effects us on a personal basis. The tax brackets we’re talking about are:
Inflation (as measured by the CPI) since 2010 has been about 8%, and by the time any new “cuts” take effect, it will likely be about 10%, give or take a few points.
So to be fair, Government needs to increase the upper bracket limts by at least 10%. In other words, $14,000 should become $15,500, $48,000 should become $53,000, and $70,000 should become $77,000.
Message to Bill English: your game’s up Bill, we’re onto you. (I’ll send this article to Bill English, so as to ensure that he knows what PKF Francis Aickins’ informed readers have found out). Perhaps also a copy to David Seymour so that he knows that he’s got a bit of support out in the provinces.
“We didn’t think of the bracket creep thief in the 70’s and 80’s. He was more like a bracket leap terrorist!”
Whilst I was preparing this article, I was thinking of my kids in particular, who are being affected by the bracket creep. They’re at the beginning of their professional careers just as I was in the late 1970’s. I recall that in my first year as a Chartered Accountant I earned $8,500 pa, and paid 25% of that in tax. Inflation in that year was 18%, and my marginal, or top tax rate, quickly moved from 36.5%, to 48%. We didn’t think of the bracket creep thief in the 70’s and 80’s. He was more like a bracket leap terrorist!
The current day equivalent of my 1979 income of $8,500, is about $50,000. Today that $50,000 earner will pay an average of 16% of that income in tax, compared with the 25% that I paid. But apart from making me sound really really old, the interesting thing about that is that in 1979 my new wife and I also bought our first house in Auckland, and we did that with 3.8 years worth of my after tax salary. Although our kids now enjoy much lower average rates of income tax than their parents did, imagine trying to buy a house in Auckland now for $160,000!
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