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11 May 2017
A year or so ago Bill English created a great deal of excitement when he announced that tax cuts may be on the table. There’s been a few disasters since then and the new finance minister Stephen Joyce is now talking about tax bracket adjustments. There will be critics in many forms, some saying it’ll be a cut for the rich at the expense of the poor, some will say we don’t need tax reductions, or we can’t afford them, and on the other end of the scale there will be those that say we’re taxed too much anyway. Because we now seem to be talking about bracket adjustments rather than tax cuts, it is helpful for us to know what bracket creep is, how it differs from a tax cut, and why brackets need to be adjusted from time to time.
I don’t know about you, but the description “bracket creep” creates a picture in my mind of a creepy thief like person creeping around 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”.
What happens when our incomes rise, hopefully keeping up with inflation, is that 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. The slice of our incomes taken by Government becomes bigger relative to what we’re left with, and our buying power actually reduces.
There is no point in getting excited about tax cuts, until the bracket creep effect has been fixed. Bill English talked a year or so ago about a $2.5 billion tax cut, but David Seymour of the Act Party responded that 7 years of bracket creep has cost NZ households $2.1 billion. In other words, a $2.5 billion tax cut would only get us back to where we were in 2010. What we need first is bracket adjustments.
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 10.5 %, and by the time any new adjustments that might be announced in the 2017 budget take effect (1 April 2018?), it will likely be about 12.5%, give or take a bit.
So to be fair, Government needs to increase the upper bracket limts by at least 12.5%. In other words, $14,000 should become $16,000, $48,000 should become $54,000, and $70,000 should become $79,000.
The effect of this change, if your annual income is say $60,000 is a tax saving of about $900 a year (1.5%). To put that into context, it is useful to note that the total tax take in the first 8 months of the current fiscal year is 7.7% ahead of the same period last year.
Keep these figures in mind when Stephen Joyce presents his budget in 2 weeks time
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