February 2, 2010 11:48am by David Farrar

Low-tax threshold

Most countries provide either a nil rate of tax on the lowest level of income or provide rebates and allowances that shelter such small amounts. For instance, Australia imposes no tax on the first $6000 of income earned. Canada provides a rebate for the first $1500 of income.

Only in New Zealand are all taxpayers, including children working part-time jobs, immediately brought into the tax net.

Surely the additional bureaucracy cannot be worth the small amounts of tax collected?

Introducing a small exempt-income threshold or low-income rebate in New Zealand would immediately compensate taxpayers for the small increase in GST proposed.

For instance, making the first $2000 of income exempt would provide an additional $270 to all low-income taxpayers and $420 for taxpayers on the average wage.

This is the most efficient way to ensure vulnerable taxpayers are not the losers under the tax reform proposals.

As a principle, I believe you should pay no taxation until you are earning enough to live on. Otherwise one is churning tax dollars into welfare support which is grossly inefficient.

However to do this, means a total rewrite of the tax and family support rates and policies. It is very difficult to do.

I have long advocated that Dr Cullen should have done what Peter Costello did, and increase the threshold at which you pay tax (it is zero in NZ). But instead he plowed all the money into Working for Families.

I’m not sure if I agree with his assertion that it means $270 for low income earners and $420 for average income earners. If you make the first $2,000 tax free, then it is the marginal rate for that first $2,000, which is 12.5% that counts, so it would mean $250 for every New Zealand who earns at least $2,000 a year.

According to Treasury we have 3.076 million NZers who have taxable income. The annual cost of a $2,000 tax free threshold would be around $750 million. Probably a bit less than that as benefits are calculated net, not gross, so benefit rates would adjust so the net benefit is unchanged.

As I said, I support in principle a tax free threshold. However many low income taxpayers effectively pay no tax at all – they receive far more from other taxpayers through WFF than they pay themselves. So rather than piecemeal introduce a $2,000 tax free threshold I would rather one rejigs the whole system, so that all low income earners pay no tax until they are on the minimum level needed to live on, but with far less money churned through welfare such as WFF. As I said it is a very complex thing to do, especially if you want to minimise “losers” from any change.