Espiner on Tax Cuts

Heh I like satire.  Colin Espiner reviews all the reasons we have been told over the years we can’t have tax cuts:

Treasury’s books opening exercise yesterday thus took on a very familiar theme. Yes, there was more money than expected. Yes, we’re all paying more tax than ever before. Yes, those dire predictions that by now we’d be running cash deficits were wrong. Again. And no, you can’t have any of your money back. But maybe later. If we’re good. But probably not much.

Indeed the best sport to be had at the Treasury lock-up was playing a guessing game: what would Cullen’s excuse be this time for why no tax cuts?

To recap, we’ve had:

1: The country can’t afford them. 

2: The country can afford them, but it would mean slashing public spending in other areas.

3: The country can afford them without slashing spending but there are better ways of redistributing taxation, such as through Working for Families.

4: The Government can afford to do all of the above and give tax cuts but we can’t because the Reserve Bank would have to raise interest rates.

5: Tax cuts are fiscally possible without raising inflation but there is uncertainty over the US sub-prime housing market.

6: We’ll have to wait until the situation in Myanmar improves.

 OK I made the last one up but the rest are all true. Cullen surprised us with a new excuse, though. Which is:

We’ll have to wait to see whether the amounts of additional revenue we’re raking in are structural (permanent) rather than cyclical (a short-term situation).

This despite the fact that the trend has been pretty much unchanged since 1999. Since that time, the amount of tax collected has almost doubled, from around $30 billion a year to some $53 billion for the year ended June 2007.

Colin shouldn’t give Cullen ideas for additional excuses!

I get the feeling, though, that Cullen’s almost out of excuses and despite his ideological aversion to reducing taxes political necessity (or Helen Clark) is going to force his hand in 2008. The only question that remains is how big the cuts will be, and where they will be concentrated.

My pick is that the cuts will be across the board, and achieved through shifting the income thresholds at which each of the bands kick in. It’s possible, as some bloggers have suggested on this site, that Cullen could make the first $10,000 of income tax-free as a means of ensuring that lower-income Kiwis also get some real benefit from the cuts. I would imagine the 33c rate threshold would be increased from $38,000 to around $45,000 and the top 39c rate pushed up from $60,000 to $75,000 or $80,000.

I’m not going to try to estimate the costs of this here since I’ll probably get it wrong and it’s dependent on a number of factors, but suffice to say it would be between one and two billion dollars a year.

Let’s help calculate the costs of these things for Colin.

1. First $10,000 of income tax free.  Well this one won’t happen as reducing the 15% rate to 0% would cost around $2.2 billion according to Treasury.
2. 33c rate threshold moves from $38,000 to $45,000. Costs would be around $875 million annually.
3. 39c rate moves from $60K to $75K . Only $300 million cost annually.

So (1) won’t happen but a combination of (2) and (3) is quite possible.