A possible tax cuts package

Grahame Armstrong in the SST writes:

THE GOVERNMENT is putting the finishing touches to its package of tax cuts and is now confident that low and middle income earners will have more money in their pockets – even after paying a higher GST.

The Sunday Star-Times understands the government has settled on lowering the tax rate for those earning between $14,000 to $48,000 – which represents the bulk of wage earners – from 21% to 19%.

The May budget is also expected to lower the tax rate for those earning up to $14,000 from 12.5% to 10%.

The Star-Times also understands the government will, in one hit, lower the top rate for those earning more than $70,000 from 38% to 33%, rather than doing it gradually.

So that would give up three tax brackets – 10% for low income earners, 19% for middle income earners and 33% for higher income earners.

What would be the reduction in income tax for people at various income levels:

• $26,000 – 13.8% or $590
• $30,000 – 13.1% or $670
• $40,000 – 12.1% or $870
• $48,000 – 11.6% or $1,030
• $70,000 – 6.4% or $1,030
• $100,000 – 9.2% or 2,530
• $150,000 – 10.8% or $5,030

That is pretty well targeted. Those on the minimum wage get the largest percentage increase, and everyone earning under $50,000 a year gets a double figure percentage drop in the tax they pay. And in fact, with WFF, many of these people are net tax recipients anyway, not net tax payers.

What would be the fiscal cost?

• Dropping the 38% rich prick rate  to 33% – $500 million a year
• Dropping the 21% to 19% – $780 million a year
• Dropping the bottom tax rate from 12.5% to 10% – $820 million a year

So total foregone revenue is $2.1 billion.

Now how much extra GST might people pay. Let us assume that on average people spend 90% of their after tax income, and that the GST increase of 2.5% will lead to an average price increase of 2.0% (as estimated by Stats NZ). What is the impact at each income level:

• $26k – $391 more GST and $590 less income tax = $199 better
• $30k -$448 more GST and$670 less income tax = $222 better
• $40k -$590 more GST and $870 less income tax = $280 better
• $48k -$704 more GST and $1,030 less income tax = $326 better
• $70k – $969 more GST and $1,030 less income tax = $61 better
• $100k – $1,304 more GST and 2,530 less income tax = $1,226 better
• $150k – $1,862 more GST and $5,030 less income tax = $3,168 better

So it does indeed look like no one would be worse off (even if you assume 100% of after tax income is spent).

Obviously those at the top tax brackets do best in an absolute sense, but they are also the ones most likely to be property investors, and may in fact end up worse off overall. Also worth remembering two that half of the 100 wealthiest people in NZ do not actually pay the 38% tax rate, so will not in fact benefit from its reductions – they will just not need to operate through their family trust.

I have no idea if this is the package the Government will go with, but it looks pretty workable, and affordable. Most of all, it is not meant to be about just the redistribution of any changes, but the large benefits to the economy of increasing the incentives to work, save and invest and reducing the incentive to borrow and spend – plus the shifting of incentive for investment income from property to other areas.