O’Sullivan on fiscal drag

May 25th, 2008 at 9:47 am by David Farrar

Fran O’Sullivan says to enjoy your while you have them:

Enjoy your tax cuts – you will probably pay for much of them through .

That’s the reality for many higher income earners as Finance Minister “all but” admitted to me on Friday.

Over the past eight years, he has pocketed close to an extra $2 billion in fiscal drag, based on figures provided to me by his office.

This year it will probably be about another $250-$260 million, which will go a good way towards funding the shift in the top tax threshold from $60,000 to $70,000.

If the $60,000 “rich prick” threshold had been inflation adjusted it would already be at $74,800 (and it moves to $70,000 only this October). When the threshold moves to $75,000 in March 2010 the fiscal drag would have it at $79,400 and in March 2011 when it hits $80,000 the fiscal drag would have it at $81,600.

So Fran is right. The change to the $60,000 threshold doesn’t even compensate for inflation. Someone earning $60,000 in 1999 and having had their salary go up by the rate of inflation every year would have paid $25,100 of extra tax from 2001 to 2008.

And even from 2009 to 2012 they will pay an extra $12,500 of tax just for having been pushed into the “rich prick” top tax rate, even though they are earning no more in real terms than they were in 1999.

But the Finance Minister suggested those earning more than $80,000 (8 per cent) would basically fund their cut through the fiscal drag effect.

Cullen’s “admission” came after the Wellington Regional Chamber of Commerce’s post-Budget luncheon. He noted the top tax threshold was now cutting in at such a low level, it was even catching nurses and teachers – not his original intention.

Yes only classes of non Labour voters are meant to be targeted by it.

With 55 per cent of the total income tax of $26,373m paid by those earning more than $60,000, and 29 per cent by those earning $100,000 plus, calls are likely to increase for more cuts at higher income levels over time.

Those nasty “rich pricks”who fund the health. education and welfare systems can and are going to Australia.

18 Responses to “O’Sullivan on fiscal drag”

  1. peterwn (4,290 comments) says:

    And some of the ‘rich pricks’ voted Labour in 1999 on the basis that this tax increase was worth it to deliver extra health welfare and education. They were effectively conned. Actually I would not call anyone a ‘rich prick’ unless they were worth at least $1M and/or had an annual income of at least $100K and even that may be too low.

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  2. Redbaiter (12,013 comments) says:

    Fran is correct, and Cullen is also pocketing an enormous amount of increased taxation from fuel, which is taxed on a percentage basis. Due to the enormous gas price increases, most of the money coming from tax cuts will be used up in filling the petrol tank of the average worker’s automobile.

    (Funny really, how so many accuse the oil companies of profiteering, when they drill for the oil, and ship it and refine it and make about 4 cents a litre profit, and then Cullen takes half of the pump price for no effort and no risk, yet somehow escapes being labeled as a grasping greedy racketeer. Why is that?? -answer below.)

    Once again, in leftist circles, the reality is denied and the lie is promoted. So called tax cuts are just one more sick leftist deceit upon the working people of NZ, so many of whom support Labour because they still have the faith. When will they ever awake to the reality that Cullen and his party are just deceitful amoral illusionists, who will pull any cynical stunt upon the NZ people if it means they (Labour) can retain their obsessive hold on power, that circumstance that is really all the left ever care about.

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  3. mavxp (504 comments) says:

    This is all such a bad joke. Labour are so transparent with their purchase of votes from nurses, teachers, low skilled workers, students, artists, the [increasing number of] unemployed and welfare dependants, in order to keep these people eating out of their hands.

    We need to free the nurses and teachers from the miasma of collective bargaining mediocrity, provide incentives for the low skilled to up-skill, for students to work hard at developing skills that are in demand in the workforce so there is a return on the investment (not the long slow rot of an unpaid loan), the artists to apply themselves to demand-driven innovation, and give the unemployed some pride in leading productive and rewarding lives. And the rest of us bowed under by the weight of oppressive taxation and government interference, forced to see the work of our hands squandered on bribes to the less scrupulous, be set free to invest in the future.

    why cant we have a government that does what’s best for all New Zealanders instead of looking after its own hold on power? They are dragging us all down! Will no-one free this country from this tyranny?

    [A bit melodramatic perhaps, but the election can’t come soon enough…]

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  4. Spider_Pig (64 comments) says:

    “Those nasty “rich pricks”who fund the health. education and welfare systems can and are going to Australia.”

    My partner and I, both 27, pay over $85,000 of tax between us. And this time next year, we will no longer be paying that tax in New Zealand. This Labour government has been satisfied with mediocrity (economic growth, but anyone else think we could have done a lot better??) and punishing us “rich pricks”.

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  5. goodgod (1,347 comments) says:

    I wouldn’t call anyone a prick unless I had personally met them and knew they were, and their account balance wouldn’t even come into it. In fact I wouldn’t call anyone a prick, period. Unlike the males on the left, I have no obsession with other people’s crotches. If Cullen isn’t pointing out John Key’s prick, then he’s talking about his balls. The Politics of Envy, mixed with Homosexuality: that about sums up the Left in NZ.

    NZ has a strange fascination with political stereotyping. Not so long ago it was that anyone on the dole was a bludger. Bludger bludger bludger, if you go on a benefit it was bludging. What about those bludgers, eh? I’m sick of those bludgers. Who’ll sort out those bludgers? I’m working my guts out for bludgers!

    Now the game has switched to rich pricks. What about those rick pricks, eh? They have everything those rich pricks. Why let those rich pricks voice an opinion? Let a man earn and soon enough he becomes a rick prick -$60,000 will do it. How dare those rich pricks contribute!

    It’s plain idiocy folks. I’d like to see Cullen called on to provide proof of the apparently vast numbers in society that are certifiable pricks and earn over $60,000. There must be quite a few since he’s scared of them, around 30% + of the total vote? That’s big group to purposely alienate.

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  6. freedom101 (735 comments) says:

    Once you take into account fiscal drag, the tax cuts are not cuts at all, but reduced tax increases. So why are we all buying into the concept of ‘tax cuts’. Also, why are benefits, beer taxes etc etc, and now working for families payments all indexed, but not tax brackets? Is is so that Cullen can have a tax increase every year without announciing it?

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  7. freedom101 (735 comments) says:

    Talking of marginal tax rates, I’m involved in a company employing a lot of blue collar workers. We have more on than we can cope with, but the blue collar staff refuse to do any more work, overtime or whatever because they are on 80%+ marignal tax rates due to working for families. Why work a weekend for 20c in the dollar? I don’t blame them, but how insidious is that? Cullen, Labour have totally undermined the essence of what it is to be human – to work to advance yourself and your family. No wonder the country’s spirit is gutted. The creeping effects of communism are incalculably damaging.

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  8. Roark (46 comments) says:

    To be fair inflation affects the number of people in a tax bracket but it doesn’t absolutely determine it. Indexing the brackets to inflation doesn’t make economic sense. Indexing the bracket to income deciles would be using the absolute and best measure. In this respect the “fiscal-drag” argument is a red herring. Alternatively removing all income tax and increasing gst to provide for absolute state necessities such as defense and policing would give people direct and complete control over their own damn money.

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  9. Brian Smaller (4,332 comments) says:

    It makes me wonder what these tax and spend lefties are thinking. Eventually they wont have enough people left to tax. Then we really start planting banana plantations.

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  10. Owen McShane (1,193 comments) says:

    Some of the best legislation passed by Douglas and other reformers were those Acts which simply kept Govt honest such as the Reserve Bank Act, and the Fiscal Responsibility Act. If we had the Reserve Bank and a flat tax then no government would benefit from fiscal drag.
    But we are unlikely to get the flat tax so how about a simple piece of legislation that has a similar effect on government incentives?
    My proposed Threshold Correction Act would simply require that every year Treasury (or the Reserve Bank) re-set the tax thresholds to correct for fiscal drag (whether for rising incomes or inflation) so that the same percentage of the population stayed below each threshold.
    Once put in place it would be very difficult for any Government to repeal it. And once proposed, which political party could oppose it, and on what grounds?
    I believe Act and National should combine on this one and say that they would both propose and support such an Act if given the majority to do so.

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  11. freedom101 (735 comments) says:

    Roark – strictly correct, but far to complicated to communicate, and also to measure the exact transition between deciles. The correct policy is of course a flat tax, maybe with a tax free threshhold. That eliminates all sorts of issues, expecially if the company tax rate is the same.

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  12. tom hunter (7,728 comments) says:

    Maxvp – Why cant we have a government that does what’s best for all New Zealanders instead of looking after its own hold on power?

    You’ve partially answered your own question with the reference to holding on to political power. But it’s more than a simple lust for having power and control over other people’s lives, although that does form part of it, especially as their time in charge lengthens.

    What really lies behind this obsession can best be seen in today’s Trotter article, where he bemoans Cullen talking to the Canterbury Manufacturers Association, because of the tepid response and the resulting bad press. Instead he suggests that Cullen should have addressed:

    ….. a Christchurch Town Hall full of Canterbury trade union delegates affiliated to the Council of Trade Unions. In that audience there would have been a preponderance of workers employed by the state: nurses, teachers, social workers, prison guards, and now (at long last) railway workers. Alongside them, Dr Cullen would have seen factory workers, shop assistants, cleaners, hospitality staff. Around the walls of the town hall, the delegates would have hung their union banners. The upper galleries could have been filled with invited guests from the churches, the not-for-profit sector, Grey Power and a host of Maori, Pasifika and immigrant organisations.


    Now from a purely political point of view Trotter is correct. The majority of business people will not be voting for Cullen and Labour, and will likely go along only grudgingly with left-wing ideas (unless it involves state welfare like railways). Trotter’s imaginary audience is the true audience for a left-wing propagandist and it certainly would have forced the reporters to acknowledge “eager and enthusiastic workers ” and forced them to avoid phrases such as the “stench of political death”.

    But Trotter is revealing something far deeper than concern over a political sell job and spin and the resulting need to select a supportive audience.

    The real thrust of his argument is that Cullen should not bother talking to business people because they are irrelevant to building a progressive, left-wing society. They will always disagree but they will always be a minority and they will always submit to the will of the majority – which will force them to hand over whatever wealth is required to support fabulous progressive ideas – and beyond that, forcing them to hand over effective control of their assets and lives to the degree needed for the same reason.

    Cullen and other progressives, back to the days of Mickey Savage, don’t agree – at least on the surface. They have long realised that they do actually have to go “cap in hand” to the business community because that is where the wealth is, and the only alternatives are to either drop all the dingbat schemes or expropriate all the wealth producing devices. Neither of those extremes is acceptable, especially the latter which has gained a deservedly odious reputation for failure and misery.

    But I don’t know if Trotter really does accept that.. Intellectually perhaps, as in he knows that bad things have happened with “the workers control the means of production” and he just cannot bring himself to advocate the old communist position. Politically perhaps, as in he knows that those ideas cannot get the support required, even from the so-called ‘toilers’.

    But emotionally I don’t think he accepts it. He is still utterly convinced that the ills of our society lie with capitalism but he neither the courage nor the confidence to push for the quantum leap of a revolution.

    So, stuck between emotion and intellect, but with the old objectives still in place, he takes the ‘Social Democrat’ path: he’ll bleed the wealthy parasites dry and lever their property away from them that way – slowly, incrementally forcing society into “from each according to his ability, to each according to his needs”.

    The idea that his targets may simply run away is not believed. This was Rod Donald’s shoulder-shrug answer in a 2002 election interview with Kim Hill when she queried him about the impact on business of additional taxes: they had moaned and bitched about Labour’s tax increases too, but in the end they had paid up and were still here.

    In any case it does not matter because Trotter does not believe that they are the source of this wealth production, merely the lucky, undeserving beneficiaries of the means of production. So whether they get screwed or they leave does not matter – the means of production will remain, now available to the entire population. Truly 19th century thinking. I think the following quote best sums it up:

    What is truly empty is the value that counsels person A to live off of the wealth given to him by person B and which B confiscated from person C.

    But what is truly mindless is the notion that society progresses as greater numbers of us live as A’s or as B’s, and all the while thinking of C’s as being nothing more than contemptible cows to be milked for the “general good.”

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  13. kisekiman (164 comments) says:

    I concur with all that Owen, Roark & Freedom101 have said. As it is now, a tax arbitrage opportunity exists for anyone in business who wishes to incorporate and pay company tax at 30% rather than the 40% marginal tax for sole proprietors and salary earners. Kiwisaver also gives shareholder employees a chance to get a double tax break on their contribitutions.

    The 40% “rich prick” tax actually hits those who Dr. Cullen purports to support, those who work for a salary and wage. How cynical is that?

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  14. keithng (22 comments) says:

    Tut tut, David – counting the movement in the 39c threshold but completely neglecting the massive shift in the bottom thresholds. I did a model of inflation adjustment compared with Labour’s tax cut, National’s 2005 tax cuts and the Australian tax regime. Will have it on PA soon.

    [DPF: Oh it wasn’t aimed to be a total analysis. It was just focused on the top threshold]

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  15. Julian D (4 comments) says:


    This is a good post and it was also a good article in the Herald. These tax cuts were not really tax cuts – just a partial inflation adjustment. And this was the main story missed (ignored) by the media -until now. Not PC blogged this exact point 2 hours after the budget had been released and again the following day . It is good to see that someone in the media is finally prepared to identify that Cullen is being far from generous. Julian

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  16. burt (11,491 comments) says:

    The issue with fiscal drag is that it’s not just the top threshold effected. A person earning $38K in 1999 was paying $7,709.25 (20.2%) of their income. Using the reserve bank CPI calculator $38K in 1999 equates to $47,496.02 today. The tax paid today for that amount of money ($38K in 1999 CPI adjusted to first quarter 2008) is $10,543.68 (22.2%).

    Labour’s core voters, the ones promised that nobody earning under $60K would pay a cent more income tax are being robbed an extra 2% in tax. 2% of $47,496.02 is $949.92 – thats $18.26/week taken off them via fiscal drag. What has Cullen given them back? According to the tax cut calculator on their web site – $17/week. Tut tut.

    Labour – growing their share of your CPI adjustments since 1999. I reckon these tax cuts put us back to about 2005 – they would have been about right then to maintain the policy objectives and promises of 1999. It’s a disgrace that Labour didn’t at least sort out the fiscal drag for their key supporter base. We expect them to slap the rich pricks and scoff at fiscal drag in that context, they are socialists and proud of it, but slapping their own the same way is appalling and I guess starting to be reflected in the polls.

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  17. stayathomemum (140 comments) says:

    They thought they’d wait until election year burt, and try and get some votes out of it.
    Its called caring about your hold on power, and not caring about the people.
    Hopefully enough people can see through Labours deceit at the next election.
    And the EFA was designed to stop the true message coming across.

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  18. xenophon (25 comments) says:

    Talk to teachers, nurses, police staff and other traditional Labour voters and you will hear the views many in this blog are expressing – and when these people are deserting Labour because Cullen no longer has any credibility with them, the party has a problem. It’s too late to sack the Clark / Cullen clique so Labour is burdened with Cullen’s duplicity, and ideological blindness going into an election. I suspect the historians of the Left will judge him very unkindly.

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