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14 Sep 2017
Our last article on income tax brackets was written prior to the 2017 budget. We proposed that the inflation effect on tax brackets that has occurred since the current tax rates were set back in 2010, be fixed. We estimated that inflation, as measured by the CPI will have been 12.5% for the 2010 to 2018 period.
To correct the inflation effect, we proposed that the upper limits of the tax brackets be changed as follows:
The 2017 budget presented by the National Government a couple of weeks after our article proposed the following changes:
The Finance Minister clearly wasn’t listening to us!
But let’s assess how effective these changes would be in correcting the inflation effect of the last 7 years on 3 different income earners, with annual income of $33,000 (the minimum wage), $60,000, and $100,000. The inflation effect on those earners’ net after tax incomes has been to reduce their annual net incomes by $122, $873, and $1,135 respectively.
The new tax brackets proposed in the 2017 budget change the inflation adjusted net annual after tax incomes of the 3 income earners as follows:
In other words, when comparing 2018 incomes with 2010 incomes, lower earners would receive a small tax cut and higher income earners a small tax increase.
Note that these calculations are limited to the income tax proposals in the budget, and do not include the substantial changes in Family Tax Credits and Accomodation Allowances.
An argument against fixing tax rates is that it’s wrong to give tax rate reductions when there are citizens living in poverty. That’s based on the premise that taxing higher income earners more for redistribution purposes will solve poverty and all it’s ramifications. I don’t believe they will. We already have a situation whereby higher income earners contribute most of the tax take. The better way to solve poverty is through education, vocational training, jobs, pay rates, and housing. Increasing taxes won’t necessarily solve any of those problems.
The Labour Party income tax policy is unknown at this stage. The Labour Party website simply says that “Jacinda has ruled out income tax increases this election”. It is therefore unclear whether they would make any attempts to remove the inflation effect on the old tax brackets.
The larger of the minor parties (NZ First and The Greens) do not have specific policies on income tax brackets and rates.
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