Bracket creep
Stuff reports:
The average household is more than $1000 worse off in tax payments since 2010 because of “bracket creep”, the ACT Party claims, amid a new push for tax brackets to be linked to inflation.
Today the party’s sole MP, David Seymour, released research showing how much the current tax brackets would have moved if they had been linked to the Consumers Price Index (CPI) – the most commonly used measure of inflation – since National cut income tax and raised GST in 2010.
Inflation has been generally low since then. However, adjusted for inflation, the top tax rate of 33 cents in the dollar would have risen to apply from income above $70,000 to above $73,571 from July 1 2014, research by the Parliamentary Library shows.
The threshold for the upper tax bracket, charging 30 cents in the dollar, would have risen from $48,000 to $50,449.
Over time, households which see their incomes rise around the level of inflation pay more tax as they are pushed into higher tax brackets, meaning their spending power actually falls.
A number of areas of government spending are already tied to inflation, from NZ Super and Veterans’ payments to social welfare payments.
According to ACT leader David Seymour, bracket creep was costing taxpayers hundreds of dollars a year.
Parliamentary Library papers showed that someone earning the average income of $51,674 was now $648.91 worse off over four years. The impact builds over time, with the average income earner $356.10 worse off in 2014 alone.
For the “average” household, those with the average income ($88,956 in 2014) had paid another $1036.07 in tax compared to what they would have if tax brackets were adjusted for inflation annually.
Due to low inflation the impact of fiscal drag or bracket creep has been relatively minor. But over time it certainly does add up, as more and more of your income moves into higher tax rates.
Seymour said this afternoon that the increases amounted to “substantial amounts” and increased tax by “stealth”.
The issue needed to be debated because taxpayers were probably not aware of the way tax was increased.
“We believe we should have the argument, rather than stealthily increasing taxes in a way that most people have never consented to and may not even be aware of,” Seymour said.
While he conceded there would be an impact on tax receipts if tax brackets were increased with inflation, he said the Government could make the change because of the range of other spending which was linked directly to inflation.
“Anyone who says the Government is unable to do this is being disingenuous.”
Speaking in the House today, Seymour asked whether the current period of historically low inflation was the “perfect time” to introduce indexing to tax thresholds.
Acting Finance Minister Steven Joyce said the Government had previously announced it would consider a tax cut package in 2017, and indexing tax thresholds could be considered as part of that.
Governments generally don’t like legislating for automatically changing tax brackets because it restricts their options for future tax cuts or spending increases.
But that is one reason I do support it. If the Government is unable to increase its tax take by having a high inflation economy, then they need to maintain tighter spending restraint and also have less of an incentive to have higher inflation.
A lot of the surpluses in the 2000s came from ever increasing fiscal drag, as households every year ended up paying more and more tax as nominal incomes rose.