The average worker should not be paying even 33%
January 21st, 2010 at 12:50 pm by David FarrarA lot of the debate at the moment is on the 38% tax rate. Now this rate was introduced in 2000 by Michael Cullen and has led to huge tax avoidance. Few on the right dispute that the 38% rate should go, or at the very least thre threshold for it increase massively.
But I want to focus also on the 33% rate. You see only should people not be paying a 38% rate, most FT workers shouldn’t even be paying the 33% rate. I’ve done a graph to make my point.
The blue line is the threshold at which people reach the 33% rate, and the purple line is the average FT income. When the top rate was made 33% in 1986, the threshold for it was around double the average FT wage.
Now since then, the average wage has increased greatly, but the threshold has only been lifted four times. The end result is that where once you had to earn twice the average wage to pay the 33% rate, under Labour it go to the point where someone earning 80% of the average wage would be paying the 33% marginal rate.
The threshold stayed constant for ten years until 1996. It then went up to around $34,000 and two years later to $38,000. Then it stayed constant for another ten years until a miniscule $2,000 increase in October 2008. National then increased it by $8,000 in April 2009.
So National has managed to get it back to around the level of the average wage. But it used to be at twice the level. So remember that if National does drop the top tax rate to 33c, so someone earning $100,000 has a top marginal rate of 33% – that back in 1986 someone earning the equivalent of $100,000 (being double the average wage) wouldn’t even be paying the 33% rate of tax.
Related posts:
- How has the average worker done under Labour?
- By request
- The cost of fiscal drag
- A possible tax cuts package
January 21st, 2010 at 1:15 pm
That is a very valid point DPF.
So basicly because the useless ID10T’s in Wellington cannot help themselves from spending OUR money on crap we get significantly higher effective tax rates than 25 years ago.
As my old man used to say about politicitans “The desire to be one should be a life ban on actually being one”
Vote:January 21st, 2010 at 1:19 pm
Perhaps Cullen was working towards a flat tax?
Vote:January 21st, 2010 at 1:20 pm
What at 40% then give most of it back to the low wage earners and bludgers.
Vote:January 21st, 2010 at 1:22 pm
This is another good point.
Others have also pointed out that the thresholds should be lifted each year according to inflation.
There are so many quirks in our tax system you could spend all year highlighting bizarre situations. Especially once you throw working for families into the mix.
Vote:January 21st, 2010 at 1:26 pm
Thank you DPF for limning what we already knew: the despised Clark & Cullen Labour government grossly overtaxed New Zealand for nine long years.
Now, it is time for Key’s government to take proactive measures to undo this mess, isn’t it? Time to cut taxes and reducing spending.
No country has ever found its way to prosperity by increasing taxes on its population; so why not start by killing the ETS and its proposed tax increases, and by taking on board some of the ideas advanced by the Tax Group? The opportunity beckons.
Vote:January 21st, 2010 at 1:36 pm
Amongst all this talk about where the threshold “should” be, are we saying that the original position of the 33% threshold (about 2x average FT wage) was holy writ, is right for all time, and anything else is “wrong”?
(Don’t get me wrong, even this leftie would much rather pay less tax than more!)
Vote:January 21st, 2010 at 1:41 pm
If you are interested in this point, you should introduce some data, rather than more talk.
Vote:January 21st, 2010 at 2:07 pm
Be my guest, then…
Vote:January 21st, 2010 at 2:07 pm
Good point, in the old days the 33% level was really aspirational. Paying the extra tax was not such a burden because it tended to come off the cream of the earnings. Now it is competing with food and mortgage payments. Bracket creep has been appalling.
Vote:January 21st, 2010 at 2:27 pm
Very interesting graph DPF, there are a few points that also should be considered however. Whilst I wasn’t exactly a consumer during that period I understand there were heavy tarrifs on imports, I have no idea how much of an impact on the tax take as a percentage this would have had but it would be interesting to consider.
Secondly it was during the 80s and early 90s that New Zealand was nearly bankrupted and turned into another Argentina, thank goodness for Douglas and latter National for stopping that outcome. However it much be questioned whether there was a sufficient tax take in that period (or if it was just a result of excessive spending on large projects / “defending the currency”).
What is expected of the state has definitely increased. Ignoring the whole “socialism bla” RB rant on that for now we do expect more in terms of what our health care providers provide, which in New Zealand is a public based system. That has to be funded somehow.
Just some considerations. I am very much in favour of moving to a flat tax structure for income tax. What we have now is definitely inefficient and plainly unfair. I don’t think Labour realises at times just how unfair it is, as its not the very wealthy paying for it, its middle New Zealand who earn their income in wages which cannot be structured in a tax friendly manner (thanks to FBT!). Those with investments, or share option remuneration packages (executives etc) can generally structure around it to take advantage of the trust / company tax rate and “capital gains”.
One thing that did interest me in the review was the suggestion to remove loading (extra 20% depreciation). This was originally introduced to encourage capital investment (and a way to give an indirect company tax rate cut) has this I guess been considered to be a failure?
Vote:January 21st, 2010 at 3:41 pm
Yes, we could’ve had a flat 23% income tax rate way back in 1987, but David Lange developed his teabag fixation. Over 20 years of lost opportunities and relative decline! We need a bold and decisive government with guts and vision to do what they were voted to do: LEAD.
Vote:January 21st, 2010 at 3:47 pm
Over 20 years of lost opportunities and relative decline! We need a bold and decisive government with guts and vision to do what they were voted to do: LEAD.
Thats why we don’t have Labour anymore. We got sick of being dictated to.
Vote:January 21st, 2010 at 4:00 pm
Jeff83, the stinking socialists couldn’t give a fat rats arse where the tax came from, be it the wealthy or middle New Zealand. Their bullshit about going into bat for the poor and downtrodden was simply a myth, the ideology was the goal and all must pay and pay and pay. I fear the Nats are now so fiscally restrained because New Zealand has passed the point of no return. I see only two ways forward, a radical tax scheme that removes the state from most of our lives ( flat tax ) or the exploitation of the mineral wealth beneath our feet. The present path offers no way out.
Vote:January 21st, 2010 at 4:12 pm
Good thinking re 33% tax rate. The government should be aiming for a top personal tax rate and company tax rate of 28%. We need to really get the economy moving into high value export mode. That means shifting resources into more productive areas. If we reduced government spending on working for families, reduce childcare subsidies and gradually raised the retirement age over the next ten years we could have much lower income tax rates and let wage earners keep more of what they earn. The move to taxing spending via increased GST is a good one – provided that income tax rates are reduced significantly. A low land tax would be a helpful contribution to broadening the tax base – provided there are no exemptions. At the moment we place all our eggs in the basket of taxing income. Why not also get Capital and Land to make their fair share of the contribution to the State spending? No wonder so many of our best people are overseas.
Vote:January 21st, 2010 at 4:16 pm
Pollies on all sides have long baulked at any suggestion to adjust thresholds to inflation.Not doing so gives them a built in increase in revenues to waste on their fruit loop schemes.
Just like expecting them to lower real government expenditure unless we held their feet to the fire whilst thrusting a red hot poker down their Y fronts they will never agree.
This is yet more evidence of their laziness and lack of will capacity and capability to deliver a value added tax system
I have long given up on them so for the past 20 years I have arranged my taxation affairs to pay a maximum of 20% flat rate using the tax and other laws.
Just as a quit residential rental property as an investment when it was obvious the little cretins had their eyes on this.
Trick is to try and stay 2 or steps ahead of the bastards.
Vote:January 21st, 2010 at 4:54 pm
ISeeRed suggests:
Depends on your definition of “lead”. As Bevan notes above, Labour did a lot of “leading”, and we can do without any more of it. A government is elected on the basis of a particular manifesto of policies which we then have a right to expect them to implement.
If they want to resile from any of those commitments due to changed circumstances, or introduce anything radically new, then they can and should consult us first and act upon our wishes.
The word “Minister” means “servant or subordinate officer” and, despite the best efforts of every PM in recent memory to convince us otherwise it doesn’t mean subordinate to them, it means a servant to us. They (and we) need constant reminding of that fact.
Vote:January 21st, 2010 at 5:06 pm
Are governments elected to lead/dictate or to represent those who elect them?
I though the basic tenet of the democratic system was that we elected representatives to do just that — represent us, our wishes, our goals and our aspirations.
To say “okay boys, you conned us into giving you our votes so we deserve whatever you throw at us” isn’t democracy, it’s serial autocrisy, and that’s a whole different thing.
Vote:January 21st, 2010 at 5:09 pm
I pay 0% tax in New Zealand.
The trick is to migrate to a first world country with a sophisticated economy.
Why waste your productive years in such a hopeless, poverty stricken country like New Zealand?
Vote:January 21st, 2010 at 6:06 pm
It’s a funny thing…
I have again been refused permission to test my LCCM in New Zealand, the Minister of Defence rolling out a list of unsubstantiated “excuses” as to why it’s not possible.
At the same time, I am being actively recruited by a foreign government to lend them my skills and knowledge to work on exactly the same type of project. They’re even promising to organise a face-to-face meeting with the minister of defence in that country.
And we wonder why some countries are rushing ahead in leaps and bounds while NZ slides ever-further down the list of OECD nations in so many areas.
Sigh!
Vote:January 21st, 2010 at 7:02 pm
OECD rank 22 kiwi – you are correct, NZ needs far more sophistication in our economy, because the fact that we are a stunning country esthetically isnt going to cut the mustard any longer…
Vote:January 21st, 2010 at 7:10 pm
Nice post DPF. I posted on this last night in relation to the argument that rental property owners were ripping off the tax man. Shows why.
Also shows why the banks ands others did the same with their rorts over interest.
It would be good to see what the creep effect is when its related to GST htresholds. They started at $50,000 in the 83, went to 60 and as far as I know that’s where they remain. Probably they should be lifted to 150k these days. remove some compliance costs and give no benefit to the cash traders that have recently become a large part of our non tax paying community.
One often wonders how it is justified that companies etc can either lease of claim interest and depreciation on expensive motor cars. Especially the type that drive to an Auckland CBD office from Remmers just to be parked in the again leased car park. Seems to me that’s a great rort that should be attacked.
won’t be though cause that would piss off the Nats. money men.
Interesting blog by Bruce Shepherd today. Puts the challenge right where it should be.
http://www.stuff.co.nz/business/blogs/stirring-the-pot/3251226/John-Key-so-much-promise-but-so-little-substance-so-far
Vote:January 21st, 2010 at 7:36 pm
Before the 2008 election a card arrived in my letterbox, signed by John Key saying he would personally guarantee a number of things including tax cuts on 1 April 2010, should National be elected to government. I took this to be a contract.”
It reads….
“If National is elected to lead the next government, I PERSONALLY GAURANTEE that WE will:
Strengthen the economy, increase after tax income and ensure that Kiwis’ can get ahead under their own steam by reducing personal taxes on 1 April 2009, 1 April 2010 and 1 April 2011.”
It reads….
“If National is elected to lead the next government, I PERSONALLY GAURANTEE that WE will:
Strengthen the economy, increase after tax income and ensure that Kiwis’ can get ahead under their own steam by reducing personal taxes on 1 April 2009, 1 April 2010 and 1 April 2011.”
Vote:January 21st, 2010 at 8:47 pm
Mr Farrar
Please get your facts right.
Dr Cullen did not introduce a 38% Tax rate, He introduced a 39% tax rate .
Vote:January 21st, 2010 at 8:56 pm
And we get the following from Jordan Carter:
“”I agree that a basic alignment of PIE, trust and personal income tax rates might be worth looking at (but of course, given the deficit and the need to restart payments into the NZS Fund, I would level them up rather than down).”"
DO NOT EVER VOTE LABOUR AGAIN AS THIS IS WHAT WILL HAPPEN.
Can tax law be entrenced like the electoral laws are so that a 75% majority is required because mark my words, when those assholes gets their hands on the tiller, us rich pricks will be paying 60% of our income to them.
Vote:January 22nd, 2010 at 6:52 am
No we won’t we will join the working class and move to Aussie.
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