May 21, 2008 12:01pm by David Farrar

Winston’s wish list

NZPA reports that Winston has announced the following policies for NZ First:

No tax on first $5,200 of income
GST to reduce to 10%
Superannation to increase to 68% of net average wage

Now once fully implemented, what would be the reduction in the surplus:

$14.7 billion of income would have no tax, and with a current rate of 15% would be less income of $2.21 billion
GST income would drop by $2.38 billion according to Treasury Ready Reckoner
Superannuation at 66% of average wage costs $7.29b so taking it to 68% would cost around $0.22b

So Winston is saying the surplus is large enough to be reduced by $4.81 billion a year. I suspect Dr Cullen does not agree.

I suspect Winston’s proposals would be bad for inflation – which is no surprise as Winston does not beleive in low inflation. They also do little for home affordability – in fact make it worse probably.

Cutting tax on spending instead of a tax on earning is more likely to be inflationary.

Giving every person a tax cut of $780 or $15 a week will see most of that spent not saved.

Boosting Superannuation (already the most generous scheme in the world) will see most of it spent not saved, as retired people tend to spend their savings (as they should).

My ideal package would be increase GST to say 20%, but compensate for that by a tax free threshold for say the first $20K of income. Say someone earns $25,000 on the minimum wage. They would pay $3.630 less income tax if first $20,000 is tax free. Now their current after tax income is around $20,320. Let’s say they spent $15,000 on rateable goods and services including GST. Well an extra 7.5% on that is only $1.000 so they are $2,630 better off.

Middle to high income earners would not fare so well, which is why I would also move to a a top tax rate of 30%, eventually reducing to 25%. Not got time to cost that but the extra GST would bring in $7 billion so could do a bit lowering income tax from that.

Of course the GST increase would have one off inflation issues, so timing would be important.